Sometimes it can be quite easy for a legal practitioner to compartmentalize, avoid, and delegate all the work and decision making that goes into managing the financial records of a firm.
Working with clients, spending time on cases and chasing billable hours might arguably be the most important ways for a firm to gain income, but the only way for any of this to actually generate income—legally, operationally, and otherwise—is to execute sound bookkeeping procedures using a method of accounting of your choice.
Never before have there been so many options when it comes to legal bookkeeping.
But the truth is that not every bookkeeping style is created equally, and a fair amount of consideration should be placed not only on who is doing the bookkeeping and how they’re doing it, but also the style of bookkeeping being used.
In fact, Law Societies have long been educating their members about different accounting systems because their auditors are the ones responsible for mulling over all the financial data every time a spot audit is conducted on a legal office, which happens more often than you might imagine.
Today there are roughly five different types of legal bookkeeping styles currently used by law/paralegal firms. Depending on where your firm is in its life cycle might determine which method is most suitable.
So let’s have a look at the different kinds and where they fit in with your legal practice.
1. Manual Double Entry
This is a simple, tried-and-true, paper-and-pencil method of accounting that has been used for centuries. According to historical records, double-entry accounting was first found as far back as the Goryeo Dynasty in pre-modern Korea between the ages of 918-1392 C.E.--which was quite some time ago.
As you can imagine, double entry accounting is pretty old and perhaps regarded as outdated by many practitioners. However we have encountered a few lawyers nearing retirement who still carry around a notebook and do all their accounting as if they were still in the days of Sir Isaac Newton, the mathematician known for declaring "for every action there is always an equal or opposite reaction."
When it comes to double-entry accounting, Newton definitely got it right. Each time a transaction occurs, it is recorded and accounted for in at least two areas. Using this method gives accuracy and also creates an audit trail, both of which are important when running a business of any kind, whether you’re selling candlesticks to sailors in pre modern Europe or legal assistance to a computer company in Silicon Valley.
One of the benefits of this bookkeeping style is that it’s simple, easy to do, and inexpensive. The problem is that you’re going to be held responsible for ensuring there are no errors, and unfortunately this method has the largest margin of human error due to its reliance on a person manually filling out the information and crunching numbers.
Another downside is that it can take a lot of time, especially if you have a large amount of transactions, or plan to do so in the future. Small firms might be able to get away with this method.
As you might imagine with the name, a one-write accounting system allows the person using it to merely write a single transaction without requiring a double entry in another area.
With a one-write system, the bookkeeper does not have to post to sub ledgers because only a single journal entry is required to be filled manually by the operator.
So in this way, it’s possible a one-write system can allow for faster bookkeeping. But this isn't exactly true. As soon as a firm starts making numerous or frequent transactions, the process can seriously get bogged down and time consuming, or lead to human error. If you're a small firm, maybe this will work. Larger firms might benefit from enhanced options and abilities with a different accounting style.
3. Spreadsheet software
This is another inexpensive method of legal bookkeeping sometimes used by budget law firms or old-fashioned lawyers.
With the use of a spreadsheet, whether it’s with Google, Microsoft, or Apple, the broad strokes of most bookkeeping and legal accounting requirements for lawyers can be satisfied with this cost-effective method of accounting.
Because it’s software assisted, automatic calculations can minimize the impact of potential human error due to miscalculation. Spreadsheets can also be programmed, and with a bit of training, some automatic procedures can make a bookkeeper’s life a little bit easier using this method.
One of the greatest assets to spreadsheet software actually turns out to be one of its disadvantages, though. Improper use of formulae can create problems with figures derived by the spreadsheet, making potentially errors difficult to detect right away. Sometimes users have to rewind, months and months, potentially years, to solve an undetected arithmetic error. Depending on the situation, some bookkeepers might not even notice these problems until they get audited, in which case they’re sent reeling while searching for correct data.
4. General accounting software
Thankfully with the dawn of advanced computing, accounting software has risen to the point where it is seriously making life easier when it comes to managing ones’ own finances.
General accounting software makes automatic calculations, posts to sub ledgers, and overall it is capable of outperforming older styles of bookkeeping. It is more expensive, though many small business owners in sectors all over the map make regular use of general accounting software for their unique needs.
Overall, general accounting software is very helpful because it automatically posts to sub ledgers.
When using these kinds of software, time-consuming activities such as creating financial reports can be done on the fly with the use of programming. This is a bit of a catch 22 for lawyers, though. The reports that general accounting software creates aren’t designed with lawyers in mind, and as a result, support for trust accounting is a bit iffy.
So if your legal firm deals with trust accounting and you want to have access to financial reports—many of which are actually required to be produced by law society auditors—it might be a good idea to plan in advance with another method.
5. Legal Accounting Software
This is the gold standard of legal bookkeeping, and it’s a method that is well known by Law Societies as being superior in its delivery of the basics of accounting as well as some of the more advanced bookkeeping requirements to be a practitioner in jurisdictions across Canada.
Since legal accounting software is specifically geared for your occupation, many forms and reports can be generated quite easily, utilizing data you’ve keyed into the program. Using this method is likely the easiest way to prepare your firm for optimal financial compliance with regulators because its creators know what you’re obliged to do.
Legal accounting software does require training, however most suppliers (such as uLawPractice) provide frequent one on one sessions to assist users on exactly how to use the service.
Lawyers who have trust accounts could save money and time by investing into Legal Accounting Software.
We recommend trying out uLaw Practice, a low-cost form of accounting and practice management software geared specifically for lawyers in Canada. It's an all-inclusive software suite available on any web browser connected to the internet.