Handling finances is a critical part of running a successful law firm. But maintaining compliance with legal ethics while keeping your books in order? That’s a whole different challenge.
A well-organized chart of accounts can help you do both.
At its core, a chart of accounts gives you a complete financial snapshot by listing every transaction—from client payments to office expenses. While it might sound like an accounting-only task, having a clear understanding of your firm’s financial setup is essential for various reasons. It keeps your business on track and ensures you’re following industry regulations.
In this blog, we’ll break down what a chart of accounts might look like in bookkeeping for lawyers and share tips on setting it up.
What does a Chart of Accounts mean for law firms?
A chart of accounts (COA) is a blueprint for organizing every financial transaction that happens in your law firm. It’s essentially a roadmap that gives you a clear view of how money is moving in and out of your business.
Imagine it as a detailed ledger where every expense, revenue source, and asset is categorized. Whether it’s the deposit you’ve received for a new case, the cost of new office equipment, or the revenue from a successful settlement, everything gets neatly filed under the right account.
However, it goes one step further than just keeping track of your everyday transactions. For law firms, it carries an extra layer of responsibility. Depending on your jurisdiction, your chart of accounts may also need to track funds held in trust accounts (and any interest earned), ensuring compliance with legal standards set by your state bar association. Falling short here could lead to significant penalties, including the potential suspension of your license.
For most law firms, the chart of accounts is organized into six primary categories:
- Assets – This includes everything the firm owns, such as bank accounts, trust funds, and office equipment.
- Liabilities – Debts or obligations the firm owes, including any segregated liabilities like client trust accounts.
- Equity – The owner’s interest in the firm after liabilities have been deducted from assets.
- Revenue – Any income the firm receives from billable hours, retainers, or legal services.
- Expenses – Operating costs, such as salaries, rent, and office supplies.
- Compensation – Payments made to employees, partners, or subcontractors.
By structuring your chart of accounts this way, you’ll have a clear and easy-to-follow system that helps you stay on top of your finances while meeting legal obligations.
In the next section, we’ll walk you through how to set up this system effectively, ensuring compliance in bookkeeping for lawyers like yourself.
Everything that must be present in a Chart of Accounts
1. Assets
Assets in your law firm represent anything your business owns that provides some form of economic benefit—either immediately or over time. For example, if you’re a personal injury lawyer, your firm’s operating account is considered an asset because it both exists under the firm’s ownership and provides direct financial benefit in the form of cash.
Current assets are assets that can be converted into cash within one year. These typically include:
- Cash: Upfront, liquid cash available for the firm’s operations.
- Accounts receivable: Fees owed to your firm by clients, waiting to be received.
- Lines of credit: Any funds that are immediately available to the firm through credit.
- Operating account: The main bank account used for day-to-day business expenses and transactions.
Non-current assets are items of value that aren’t as easily converted to cash but still provide economic benefit over time. These include:
- Business property: Any owned real estate that houses the firm’s operations.
- Furniture and fixtures: Items like desks, chairs, and office furniture that provide long-term use.
- Computer equipment: Laptops, desktops, and IT infrastructure essential for the firm’s daily operations.
By categorizing your firm’s assets in this way, you’ll have a clearer understanding of both immediate financial resources and long-term investments, ensuring your law firm remains financially resilient.
2. Liabilities (Liability Accounts)
Liabilities are the financial obligations your firm is responsible for, helping support your business’s growth and operations. These are items and accounts your firm owes, such as:
- Accounts payable: Outstanding bills or payments due to vendors and suppliers.
- Lines of credit: If your firm has drawn money from a line of credit, the borrowed amount is a liability until it’s repaid.
- Business or capital loans: Any loans taken out to fund your firm’s operations or growth.
- Payroll taxes: Employer payroll tax liabilities that need to be paid on behalf of your employees.
- Wages and salaries: Owed wages, which should be tracked in their own ledger to ensure accuracy.
Also read: Understanding your AR accounts: What every small business needs to know
Bookkeeping for lawyers goes beyond managing standard liabilities. Lawyers must place special emphasis on managing client trust accounts to ensure both legal and financial compliance. These accounts, known as Interest on Lawyers Trust Accounts (IOLTA), are segregated liabilities and must be tracked separately from the firm’s operating account. Trust accounts hold client funds—such as retainers, settlement money, or court fees—that legally belong to the client until earned through billable work.
Here are some key considerations for managing bookkeeping for law firms with respect to trust accounts:
- Trust account tracking: Keep separate ledgers for every client’s trust funds, ensuring you maintain detailed records of every deposit, withdrawal, and interest earned.
- IOLTA compliance: Any interest earned on trust accounts does not belong to the law firm or the client. Instead, it goes to the state bar association, typically to fund pro bono or legal aid cases.
- Prevent commingling: By keeping trust account funds separate from your operating account, you ensure that you’re not using client money for firm expenses before it’s earned.
All state bar associations have strict regulations regarding how trust accounts are managed. Be sure to check with your local bar association to ensure you’re meeting specific requirements regarding trust accounts and IOLTA.
3. Equity
Equity represents the value left in your firm after all liabilities are subtracted from your assets. It reflects the firm’s ownership value and can fluctuate depending on the firm’s profits, losses, or any distributions made to the firm’s owners. In simpler terms, equity is what you own (assets) minus what you owe (liabilities).
When it comes to bookkeeping for lawyers, equity typically includes:
- Retained earnings: Net income that remains after your firm has paid any dividends or distributions to investors.
- Profit/income distributions: Any profits that are distributed to the firm’s partners or shareholders.
Also read: Net earnings and retained earnings: What’s the difference?
4. Revenue
Revenue is the total income your law firm earns from providing legal services. It’s the lifeblood of your business and comes in various forms, such as:
- Earned fees: Payments received for legal services rendered, such as hourly fees, flat fees, or contingency fees.
- Recovered disbursements: Any expenses your firm pays upfront on behalf of clients that are later reimbursed, such as court fees or expert witness costs.
- Other income: Any other sources of revenue, like referral fees or interest from business-related investments.
5. Expenses
Expenses are the costs associated with running your law firm. Properly tracking these expenses ensures you maintain financial control and maximize profitability. Typical law firm expenses include:
- Office rent and parking: The cost of leasing office space and associated parking fees for employees.
- Utilities: Monthly payments for electricity, water, internet, and other utilities required to keep the office running.
- Office equipment and operations: This includes the cost of telephones, computers, software, and office supplies.
- Marketing and promotions: Expenses related to advertising your firm’s services, from online ads to networking events.
- Professional costs: Continuing education, conference fees, bar association dues, and other professional expenses that ensure your firm stays up-to-date and connected in the legal community.
Compensation is a key part of your law firm’s expenses, and it covers all costs related to employee pay and benefits. Properly tracking compensation ensures that your firm is staying on top of payroll obligations and managing costs effectively. Typical items under the compensation ledger include:
- Salaries: This covers the wages for all employees, from lawyers and paralegals to secretaries and clerks.
- Employee benefits: Retirement contributions, health insurance, and other benefits provided to your staff.
- Other employee costs: This includes expenses for ongoing training, education, or any additional employee-related costs such as bonuses or incentives.
By ensuring that compensation is accurately tracked through efficient bookkeeping for lawyers, your firm can better manage payroll and stay compliant with employment regulations.
The bottom line
Setting up a well-structured chart of accounts is essential for ensuring your law firm’s financial health and compliance. By carefully tracking assets, liabilities, equity, revenue, expenses, and compensation, you create a clear financial roadmap that helps you avoid common accounting pitfalls.
However, as a lawyer, your priority should be focusing on legal matters, not dealing with the complexities of accounting.
That’s where CoCountant steps in. We specialize in bookkeeping for lawyers, offering tailored solutions that include tracking client trust funds, allocating case-specific expenses, and preparing audit-ready financial reports—all while ensuring compliance with legal ethics and financial regulations.
With CoCountant managing your books, you can focus on serving your clients and growing your practice.
