In the fast-paced world of law, managing the financial intricacies of a practice can often feel like being cross-examined by a particularly aggressive opposing counsel. In other words, stressful.
But just like you can’t disregard questions from the opposition, you can’t ignore accounting either. Your law firm’s accounting isn’t an optional activity: it’s vital to your firm’s success, profitability, and good reputation.
The good news is that whether you’re a seasoned attorney or just starting out in the field, there are six essential accounting concepts that can help you create effective practices for your firm. So sit back, grab a cup of coffee, and let’s turn those concepts into your firm’s allies.
Many law firms rely on GAAP, otherwise known as the Generally Accepted Accounting Principles, as a foundation for their financial accounting framework and financial statement generation.
GAAP is a set of universal accounting norms, standards, and procedures. These principles aren’t industry-specific—they broadly apply to any business to ensure comprehensive and comparable financial reports. Consistent accounting and record-keeping practices provide protection for lawyers and their firms in case of IRS audits.
Depending on the size of your firm, you may have an accountant that manages GAAP-related matters for tax filing and other accounting needs. Nonetheless, understanding the basics can enhance your collaboration with your accountant, benefiting your firm and its employees.
Accounting isn’t just about tallying up your firm’s numbers at the end of the month. Accounting provides insight into the financial health of the organization.
What’s more, there’s not just one way to handle your accounting. Here are three popular methods of accounting:
There’s no one right answer to which method to use; each law firm has its own needs to consider when making this decision. However, it’s important to stick with a method once you’ve chosen it rather than switching between methodologies.