Overly complex charts of accounts plague many industries (see "Chart of Accounts for Construction Contractors," by Dan de Roulet), not just law firms. We agree with Dan’s premise “less is more” when it comes to the Chart of Accounts (COA).
And, while simple is better, different industries need different COAs – and within industries there are different requirements. For example, although attorneys and accountants both are in the service industry, law firms have a unique set of requirements that do not apply to accountant firms.
We frequently see COAs that run multiple – and unnecessary – pages due to a lack of understanding of what's required for a law firm. For example, a firm may create trust liability sub accounts for individual clients or detailed client costs or income and expenses accounts by partner.
To simplify the law firm’s COA, consider what's necessary to provide the firm with the financial information they regularly need from the profit and loss and balance sheet, while using more specific reports to drill down to the details.
What accounts are required on the chart of accounts for a law firm:
Know what’s needed for Trust Accounting
- Trust bank account – customarily there is only one bank account, although a few financial institutions open sub accounts by client. Some practice areas, where the attorney is the fiduciary, e.g., estate management, require individual bank accounts by client.
- Trust liability account – only one account is required on the balance sheet as long as the system can distinguish by client, e.g., using “jobs.”
Limit sub accounts under Client Costs
- Tracking can be on the balance sheet as a current asset, on the profit and loss as an expense or a combination of both. This decision is dependent on several factors, including the contemporaneous nature of the expense and its reimbursement, the practice area of law, etc.
- Reimbursements must be tracked and linked to the matter. In addition, when using the expense (on the profit and loss), the reimbursement must be tracked as income. Some firms may use sub accounts in order to monitor significant areas of costs, e.g., medical records, but less is always more. Distinguishing by minute differences in the type of courier service or medical record rarely is necessary on the COA.
Don’t use the COA for individual attorney profitability analysis – many firms compensate partners by the “eat what you kill” doctrine. This can result in rather creative and complicated charts of accounts.
- Tracking income by Practice Area may be worthwhile for an overview and quick analysis of revenue.
- Using “classes” in QuickBooks often is a suitable solution for monitoring the income and expenses attributed to each attorney.
- Fee collection and allocation reports in legal specific accounting software, such as CosmoLex, can often provide the required information.
Be open to discussing with the firm what is necessary on the chart of accounts to understand the financial viability of the firm and what can be retrieved using other reports, such as profit and loss by class. Memorizing the more detailed reports so they are easily accessible will often overcome objections of simplifying the COA.
When reviewing the practice areas and unique requirements of your law firm clients always begins with a review of the Chart of Accounts. Please look at this sample COA as a starting point for your next law firm engagement.
Rick Kabra Cosmex
Rick Kabra, Ph.D., is CEO of CosmoLex Cloud, a web-based law practice management system designed for small law firms. Rick has a Ph.D. in Electrical Engineering and has more than 12 years of experience in the legal software industry catering to the specialized technology needs of small law firms. He also is the co-author of the book, "Law Firm Accounting Demystified." In addition, he has given hundreds of seminars and has published numerous articles on legal technologies related to law office management, cloud computing, and legal billing, business & trust accounting compliance issues.