Law Firm Bookkeeping: Stay on track with the fundamentals

Accounting Girl
May 21
4 min read

When you went to law school, you probably didn’t dream about balancing books and reconciling accounts. But here you are, running or managing a law firm, and suddenly, bookkeeping is on your to-do list.

You don’t have to love accounting (that’s what we’re here for), but you do need to understand the fundamentals to keep your firm financially healthy, ethically compliant, and scalable.

Let’s break it all down without the jargon, stress, or math headaches, just the basics.

Why Law Firm Bookkeeping Really Matters

Bookkeeping isn't just about tracking expenses. For law firms, it’s tied to:

Client trust compliance (yes, we’re talking about those IOLTA accounts)
Ethical obligations
Accurate billing
Growth readiness

Messy books don’t just slow you down; they can get you in trouble with your state bar, cause billing errors, or bring frustration to your tax season.

But with solid bookkeeping, you can enjoy fewer headaches, more confidence, and no surprise ethics issues.

Law Firm Bookkeeping Fundamentals You Can’t Ignore

To stay on track, focus on getting these key areas right:

1. Separate Your Trust and Operating Accounts

If you hold client funds, like retainers, settlements, or unearned fees, you must keep that money in a designated trust account (often called an IOLTA account).

Do not mix this with your firm’s operating money. Remember

Each client’s money should be tracked separately
You can’t use one client’s funds to pay another’s bill
Withdraw only when the money is earned

Not sure if your trust accounting is compliant? You’re not alone. Many firms mess this up unintentionally, but unfortunately, regulators don’t care if it’s a mistake. Keep it clean, tight, and transparent.

2. Track Income by Matter or Case

You want to know where your money is coming from, right?

Don’t lump all revenue into a single “legal services” category. Instead, track by:

Client
Matter type (e.g. family law, personal injury, business contracts)
Attorney or billing code (if applicable)

This gives you clear insight into what work is most profitable, who your highest-value client is, and where to focus your marketing.

Bonus: It makes end-of-year reporting and forecasting a breeze.

3. Keep Your Chart of Accounts Law-Firm Friendly

Your chart of accounts is like your bookkeeping map, it helps categorize every dollar that comes in or goes out.

Make sure it’s set up for legal industry needs. That means including:

Client Trust Liabilities
Fee Income
Reimbursed Client Expenses
Partner Draws or Distributions
Advanced Client Costs

Using generic categories like “miscellaneous income” or “other expenses” will make it harder to stay compliant and harder to make decisions. Customize your chart to reflect your firm’s unique financial flow.

4. Use Legal-Specific Accounting Software (or Integrations)

QuickBooks is great, but on its own, it might not cover everything your firm needs.

Many law firms use practice management tools like:

Clio
PracticePanther
MyCase
CosmoLex

Tip: Whatever you use, make sure it can track trust balances by client and reconcile those accounts monthly. That’s non-negotiable.

5. Reconcile Monthly—No Exceptions

Bookkeeping isn’t a once-a-year thing. Reconciling your accounts every month ensures:

You didn’t miss any transactions
Your trust balances are accurate
Your income and expenses are categorized correctly
There’s no funny business happening in your accounts

6. Stay Compliant with Ethics Rules and Bar Requirements

Each state has its own version of the ABA’s Model Rules, but they all boil down to this: you’re required to handle client funds with care and keep clear records.

Some jurisdictions require:

Monthly trust reconciliations
Three-way reconciliations (bank balance, client ledger, and book balance)
Written accounting of trust balances on request

If you’re ever audited or investigated, your bookkeeping should make it obvious that you’ve done everything right.

Common Law Firm Bookkeeping Mistakes (And How to Avoid Them)

Even successful firms can fall into these traps:

Commingling funds: Mixing client money with operating funds—even temporarily.
Not tracking reimbursable expenses: Forgetting to bill clients for costs you paid on their behalf.
Treating draws as expenses: Owner distributions aren’t a business expense—they reduce equity.
DIY-ing too long: As your firm grows, your books get more complex. Don’t be afraid to outsource.