Law firm accounting & bookkeeping 101: Your guide for 2026

Running a law firm involves more than just offering legal advice. A successful practice relies on efficient financial management to ensure steady cash flow, maintain compliance with trust accounting rules, and track billable hours accurately. Yet, many attorneys struggle to balance demanding client needs with the complexities of bookkeeping and accounting.

In this comprehensive guide, we break down the accounting and bookkeeping tasks specific to law firms, clarify legal accounting jargon, explain trust account rules, and offer practical financial record management tips. If you're an established legal professional or just starting your practice, use this guide to empower your firm's financial health, boost productivity, and gain peace of mind that you’re adhering to regulations and supporting your business growth.

Bookkeeping vs. accounting

The importance of law firm accounting

Key legal accounting terms

Setting up your financial infrastructure

Trust account management

Law firm bookkeeping records

Law firm bookkeeping challenges

Law firm bookkeeping mistakes to avoid

Does your legal practice need a bookkeeper?

Finding the right bookkeeping services

Virtual bookkeeping is a smart solution for busy attorneys

Bookkeeping vs. accounting

While often used interchangeably, bookkeeping and accounting serve distinct roles. Bookkeeping focuses on recording, categorizing, and organizing daily transactions so every dollar coming in and going out is tracked properly. On the other hand, accounting focuses on interpreting this information and providing insights and strategies that help law firms make informed business decisions.

For example, your bookkeeper records all client payments accurately. Then, your accountant analyzes this data to identify slow-paying clients and recommend better billing policies.

This collaborative relationship ensures that your law firm stays financially healthy, legally compliant, and well-prepared for growth. Without accurate bookkeeping, accountants wouldn’t have reliable data to work with. And without accounting, your law firm wouldn’t have the financial insights needed to make informed decisions.

Bookkeeping

Bookkeeping focuses on the daily recording and organization of financial transactions. Key responsibilities of a bookkeeper in a law firm include:

• Recording daily transactions (client billings, expenses, payments, etc.)
• Posting debits and credits to the general ledger
• Reconciling bank statements with accounting records
• Managing accounts payable and receivable
• Preparing invoices and processing payments
• Generating basic financial statements, such as income statements and balance sheets
• Processing payroll and maintaining employee records

Accounting

Accounting involves analyzing and interpreting financial data to provide strategic insights and ensure compliance with tax laws and legal regulations. An accountant’s role in a law firm includes:

• Reviewing and assessing financial statements to identify trends and anomalies
• Preparing and adjusting journal entries for accurate financial records
• Conducting internal and/or external audits to ensure regulatory compliance
• Preparing and filing tax returns
• Offering financial advice
• Developing financial strategies and forecasts

The importance of law firm accounting

Law firm accounting and bookkeeping share similarities with other industries. However, they’re actually areas of specialization, requiring knowledge of complex legal accounting principles and regulations. 

Ethical obligations

As a law practice, you have a fiduciary duty to your clients, as well as an ethical responsibility to properly handle the financial resources clients entrust to you. You must also maintain transparent records of their finances.

Regulatory compliance

Each state bar has its own specific regulations, and you must be thoroughly familiar with and adhere to these rules. Your firm may be subject to random or scheduled audits to ensure compliance. Failure to comply with regulations, particularly those concerning trust accounting, financial reports, and recordkeeping, can lead to disciplinary action, including fines or disbarment.

Client trust

Proof of transparency surrounding financial records helps earn your client’s trust and confidence in your practice's ability.  

Key financial statements

Your financial statements tell the story of your law firm’s financial health. The key financial statements include:

Income statement: Also known as a profit and loss (P&L) statement, an income statement shows your firm’s revenues, expenses, and net profit or loss over a specific period. If your firm struggles with profitability, your income statement can highlight areas where you might need to cut costs or adjust pricing.

Balance sheet: A balance sheet helps you assess financial stability and debt management by showing what your firm owns (e.g., cash, accounts receivable, office assets) and what your firm owes (e.g., loans, unpaid vendor invoices). For example, if your firm has a high amount of outstanding invoices (accounts receivable) but little cash on hand, you may need to improve your collections process to boost cash flow.

Cash flow statement: A cash flow statement tracks how money moves in and out of your firm over a specific period, helping you understand whether your business is generating enough cash to cover its expenses. For example, if your firm is technically profitable but struggles to pay bills on time, your cash flow statement might reveal that too much cash is tied up in unpaid invoices.

Budget and financial forecasting

Budgeting and financial forecasting are another key part of law firm accounting. A well-planned budget outlines your expected income and expenses over a set period, helping you stay on track with spending, manage cash flow, and identify areas for cost-cutting or investment.

Financial forecasting uses historical data to predict future revenue, expenses, and cash flow. This helps you anticipate slow periods, plan for hiring, and make informed business decisions. For instance, if your projections show a dip in revenue next quarter, you can get ahead of the problem by focusing on bringing in more clients, adjusting spending, or setting aside extra cash now.

Key legal accounting terms

Now that you understand why law firm accounting is so important let’s break down some key financial concepts that every attorney should know.

Trust accounting

Trust accounting involves managing client funds that a law firm holds in trust. When clients give you money—whether it's a retainer, settlement funds, or an advance for legal work—you’re legally required to hold those funds in a separate trust account until they’re earned or disbursed for case-related expenses.

IOLTA (Interest on Lawyers’ Trust Accounts)

An IOLTA account is a specific type of trust account where lawyers hold small or short-term client funds. These accounts earn interest, but the lawyer doesn’t keep it. Instead, the interest is pooled and used to fund legal aid programs that help low-income individuals access legal representation.

Commingling

Commingling is when a law firm mixes client funds with firm funds, either intentionally or by mistake. It’s a serious ethical violation that can result in bar sanctions, fines, and even disbarment. To avoid unintentional commingling, you must keep meticulous records, separate trust accounts, and regularly reconcile accounts.

Retainers

A retainer is an initial payment a client makes to a lawyer to secure their services for a specific period or matter. Some of these types of retainers include:

• Unearned: These funds still belong to the client and must be kept in a trust account until the lawyer earns them by performing work.
• Earned: These funds immediately belong to the law firm upon receipt and can be deposited into the firm's operating account.

Each jurisdiction has specific guidelines for managing retainer funds, so make sure your law firm is compliant with state bar trust accounting regulations.

Contingency fees

A contingency fee means you only get paid if you win or settle a case, usually taking a percentage of the client’s recovery. These fees are heavily regulated, so you must clearly outline the percentage, potential costs, and client responsibilities in a written agreement while following state bar limits on fees. From an accounting perspective, contingency fees are not typically tracked as accounts receivable until a recovery is secured.

Client costs

Law firms regularly incur expenses on behalf of their clients, which generally fall into two categories:

• Hard costs: These are direct payments to third parties for case-related expenses, such as court filing fees, expert witness fees, and deposition transcripts. Firms typically bill these costs to clients at the exact amount paid. 
• Soft costs: These cover internal firm expenses related to case management, including printing, copying, postage, legal research database fees, and travel expenses. Depending on the firm's billing policies, firms may charge soft costs as a flat fee or based on actual usage.

Setting up your financial infrastructure

Without a solid financial system in place, managing client funds, tracking expenses, and staying compliant with legal and ethical obligations can quickly become overwhelming. Here’s what you need to know to establish a reliable financial infrastructure for your law firm.

Opening your accounts

One of the biggest mistakes a law firm can make is mixing client funds with business funds—also known as commingling. This is an ethical violation that can lead to serious legal consequences, so it’s important to keep separate bank accounts. Law firms require specific bank account types to manage their finances and comply with legal and ethical obligations. Here's an overview of the accounts:

• Operating account: The operating account should be your primary checking account where your daily business transactions occur. Use it to deposit revenue, pay expenses like salaries and rent, and pay your vendors.
• IOLTA (Interest on Lawyers' Trust Accounts): IOLTA accounts are a type of trust account where the interest earned is remitted to a state-designated fund to support legal aid programs.
• Savings account: Just like your personal savings account, your law firm savings account can be beneficial for setting aside funds for future expenses, taxes, unexpected situations, and more significant investments, like an expansion.

How many bank accounts should a law firm have? As a law firm, you should typically maintain at least two separate bank accounts: an operating account for your day-to-day expenses and revenue and an IOLTA account for holding client funds. Depending on your firm's size and practice specialty, additional accounts may be necessary for specific purposes or to comply with local regulations.

Choosing a bank

Now that we've discussed the importance of separate bank accounts let’s go over what to look for in a bank when selecting a financial institution for your firm:

• IOTLA availability: Make sure the bank offers IOTLA so you can manage client funds properly and stay compliant with state regulations.
• Online banking features: Look for a bank that provides key online features, such as easy fund transfers, detailed transaction histories, mobile check deposits, and alerts for payments and deposits.
• Fees: Banks have different fee structures, so compare your options before making a decision. Some common fees include monthly maintenance charges, transaction fees, IOTLA accounts fees, and wire transfer fees.
• Reputation and experience: Choose a reputable financial institution with a history of stability and experience in handling law firm accounts

Selecting an accounting method

There are two main methods of accounting: cash basis and accrual accounting. 

Cash basis accounting is a method where income is recorded when payments are received, and expenses are recorded when they’re paid. This approach is straightforward, making it easier for small law firms to manage cash flow and track available funds. However, it may not provide an accurate long-term financial picture since it doesn’t account for outstanding invoices or upcoming expenses.

On the other hand, accrual accounting records income when it's earned and expenses when they're incurred, regardless of when cash changes hands. This method provides a more accurate picture of the firm's financial position and performance over time. However, it requires more complex bookkeeping, as firms must track accounts receivable and payable, which can make cash flow management more challenging.

So, which method should you choose? Most law firms use the accrual accounting method since it provides a clearer, more comprehensive view of your firm’s financial health, especially when handling trust accounts, retainers, and long-term cases. However, some smaller law firms may opt for the cash basis method, which is simpler but less comprehensive.

Ultimately, the best accounting method for your firm depends on your business structure, financial complexity, and long-term goals. It’s to consult with a legal accountant or bookkeeper so they can help you select the right approach to keep your firm financially sound and compliant.

Core bookkeeping practices

Once you’ve settled your bank accounts and chosen your accounting method, your law firm needs a solid bookkeeping system to stay organized and keep your finances in check. Here are key bookkeeping practices you should follow:

Use legal accounting software

Choosing the best accounting software for law firms depends on your practice’s size, specialties, and specific requirements. Look for features tailored to attorneys and your team, such as time tracking, legal billing capabilities, financial reporting, and retainer management. Evaluate the different options and choose the software that best aligns with your unique requirements and workflow.

Reconcile accounts regularly

Reconcile bank statements and trust account balances regularly to identify discrepancies, prevent financial discrepancies, and keep trust accounts in compliance.

Track billable hours diligently

In the legal sector, time is quite literally money. Implement a robust system to track billable hours accurately to ensure fair client billing. This fosters client trust while ensuring your firm receives proper compensation for its expertise.

Invoice promptly and consistently

Keep cash flow steady by billing clients promptly and consistently. You need reliable cash flow to cover day-to-day operating costs, invest in your firm's growth, and maintain a healthy financial standing.

Maintain detailed records

From client ledgers to trust account records, your law firm must maintain numerous financial documents and information. Good recordkeeping is imperative for both financial transparency and legal compliance.

Keep track of expenses

From court filing fees to office supplies, tracking every expense ensures accurate tax deductions, proper client reimbursements, and better financial planning. An expense tracking tool can help automate this process so you never miss a deductible expense.

Consider hiring a pro

Consider partnering with a bookkeeping or accounting professional who specializes in law firms. Their expertise helps ensure your financial records are accurate and legally compliant.

Trust account management

Let's discuss trust accounts and their rules in more detail since they play a significant role in law firm accounting and ethics. 

Law firm trust accounts, including IOLTA, operate under strict regulations designed to safeguard client funds. These accounts hold money belonging to clients or third parties, separate from the law firm's own finances.

Key trust account rules

The American Bar Association (ABA) has explicit rules detailing how to properly manage trust accounts. In a nutshell, these are the main principles:

• Lawyers must maintain complete records of client trust accounts and provide full accountings when required.
• No commingling of client funds with the lawyer's or law firm's funds.
• Lawyers must keep detailed records and ledgers for each client with funds in the trust account.
• Regular three-way reconciliations (at least quarterly, preferably monthly) are recommended to ensure accuracy.
• Trust account records must be retained for a period of time, typically five years after the termination of representation.

As a law firm, adhering to trust account rules is one of your fundamental responsibilities. Violations can result in serious consequences. Regular training and oversight help ensure compliance with these important ethical and financial obligations.

Common trust account mistakes

Even with the best intentions, trust accounting mistakes happen. Here are three of the most common errors that law firms make:

• Borrowing from client funds: Never use client funds for firm expenses, even temporarily. Withdrawing money from a trust account without authorization constitutes misappropriation and can lead to severe disciplinary action, fines, or even disbarment.
• Misapplying funds: Always allocate trust funds correctly to the appropriate client ledger. Avoid transferring funds between clients or applying one client’s retainer to another client’s outstanding balance. Even small mistakes can lead to trust accounting violations.
• Improper recordkeeping: Maintain detailed, up-to-date records to prevent missing funds, billing disputes, and compliance failures. Manual tracking or outdated accounting systems increase the risk of human error, so use reliable bookkeeping tools to stay organized.

Three-way reconciliation 

Three-way reconciliation is a fundamental part of proper trust account management. This process ensures that every dollar in your client trust account is accounted for by cross-checking three critical records: 

• Bank statement balance (The trust account balance reported by your financial institution)
• Trust ledger balance (The internal record of all trust account transactions_
• Total of individual client ledgers (The sum of all client-specific trust account balances)

How do you perform a three-way reconciliation? Follow the steps below: 

• Step 1: Collect your bank statement, trust ledger, and client ledger balances for the period you’re reconciling.
• Step 2: Compare your trust ledger's total balance to your bank statement's ending balance.
• Step 3: Confirm the total trust ledger balance matches the combined client account balances.
• Step 4: If the numbers don't match, check for errors in transactions, bank fees, or outstanding payments.
• Step 5: Keep detailed reconciliation reports for audit purposes. 

It’s best to perform this process monthly so your firm remains compliant and avoids financial mismanagement.

Law firm bookkeeping records

Law firms must maintain specific documentation related to their operations and ethical responsibilities. The following records ensure transparency and regulatory compliance and help foster client trust.

Essential records

Here’s what you need to track and retain to keep your law firm’s bookkeeping in order:

1. Client ledgers

These are detailed accounts for each client, tracking all financial activity related to their case. Ledgers include retainer fees paid, billable hours worked, expenses incurred on the client's behalf, and invoices sent.

2. Retainer agreements

These are formal contracts between the law firm and the client, outlining the scope of legal services to be provided, fee arrangements, and other terms of engagement.

3. Trust account records

Trust accounts hold funds belonging to clients or third parties (e.g., settlement funds, court fees). Scrupulous records of all trust account transactions, such as deposits, withdrawals, and interest earned, are essential to ensure client funds are handled appropriately and not commingled with the firm's operational funds.

4. Expense receipts

Every business expense incurred by the firm, whether it's office supplies, travel costs, court filing fees, or continuing education expenses, must be documented with receipts. These transaction records are required for tax purposes and to ensure transparency in billing clients.

4. Bank statements

These provide a record of all transactions in the firm's bank accounts, including operating and trust accounts. Regular reconciliation of these statements with the firm's internal records helps ensure accuracy and identify any discrepancies.

5. Tax-related documents

Law firms, like any business, must maintain records of tax payments (income tax, payroll tax, sales tax, etc.) and any relevant tax forms filed. These records are necessary for complying with tax laws and preparing accurate tax returns.

Record retention

How long should records be kept? Retention periods for law firm records can vary depending on local regulations and the specific nature of the documents. However, according to general guidelines from the American Bar Association Model Rule on Financial Recordkeeping, lawyers must keep detailed financial records for a minimum of five years after their work with a client ends. This includes client ledgers, retainer agreements, expense receipts, bank statements, and tax-related documents.

Depending on other requirements, certain documents may need to be kept longer. For example, the IRS recommends keeping tax-related documents and bank statements for seven years.

When it comes to storing and organizing records, be sure to follow these best practices:

• Use secure, cloud-based storage for digital copies of financial records.
• Store and maintain physical backups in a secure location.
• Regularly review and archive older records.

Law firm bookkeeping challenges

Law firm bookkeeping presents specific challenges due to the particular nature of legal practices and the strict ethical guidelines governing client funds. Here are some common challenges law firms face:

Complex trust accounting

Managing client trust accounts demands careful attention to detail and strict adherence to regulations.

Solution: Implement an accounting software system or partner with a legal-specific bookkeeper (or both!) to ensure accurate tracking and compliance.

Time tracking and billing 

Accurately tracking billable hours for multiple attorneys and cases can be prone to errors and lead to client disputes.

Solution: Utilize time-tracking software that integrates with your billing system to streamline the process and minimize errors.

Expense allocation

Allocating expenses between different clients and matters can be complex, especially with multiple attorneys or clients involved. 

For example, let’s say a law firm incurs a $700 travel expense for an attorney to attend a deposition related to two different client cases. Accurately allocating the proportion of that expense to each client's bill requires careful tracking and calculation, as it may not be a simple 50/50 split depending on the time and resources dedicated to each case during the business trip.

Solution: Establish clear guidelines for expense allocation and utilize project management software to track expenses by client and matter.

Regulatory compliance 

Staying up-to-date with new and shifting regulations related to trust accounting, recordkeeping, and financial reporting takes time and effort. The consequences of non-compliance can be serious.

Solution: Consult with a legal professional or compliance expert regularly to ensure your firm adheres to all relevant regulations.

Law firm bookkeeping mistakes to avoid

To maintain financial health and avoid legal and ethical issues, law firms should be mindful of the following common bookkeeping mistakes:

Commingling funds

Never mix client funds in trust accounts with the firm's operating funds. This is a serious ethical violation and can lead to disciplinary action.

Inaccurate time tracking

You must track billable hours accurately to avoid underbilling clients and losing revenue. For example, a lawyer might forget to track time spent on a phone call with a client. Implement a robust time-tracking system and ensure all attorneys and staff adhere to it.

Neglecting expense tracking

Every expense, no matter how small, should be recorded and categorized correctly. You'll need this information for accurate billing and tax reporting.

Ignoring reconciliation

Regularly reconcile bank statements with your internal records to identify discrepancies and prevent errors from snowballing.

Overlooking tax obligations

Stay informed about tax laws and deadlines. Failing to meet tax obligations can result in penalties and interest charges.

Not seeking professional help

If you're unsure about any aspect of law firm bookkeeping or need clarification on an issue, consult with an accountant or bookkeeper who specializes in legal accounting. Their expertise can save you time, money, and potential legal trouble.

Does your legal practice need a bookkeeper?

Law firms need bookkeeping services to maintain accurate financial records, ensure compliance with legal and ethical standards, and manage complex financial transactions. Proper bookkeeping can help your practice track billable hours, manage trust accounts, and handle client funds appropriately. With good bookkeeping, you’ll have reliable numbers and data to draw valuable insights into your firm's financial health. This information can help you plan your strategy and make more informed decisions.

Is managing your law firm's finances starting to feel like a second full-time job? Here are some signs that it might be time to bring in a professional bookkeeper:

Your firm is expanding rapidly

As your firm expands, so does your volume of financial records and transactions. Hiring a bookkeeper can help manage this influx and ensure everything stays organized and accurate. 

Frequent financial errors

Even minor errors in financial records can lead to significant problems during audits and reconciliations. Having a pro do the work helps ensure financial data precision and accuracy, which can help prevent costly mistakes, potential legal and tax issues, and client dissatisfaction.

Limited time for core legal work

Managing financial records can be time-consuming, taking you away from your core legal responsibilities. A bookkeeper can take over these tasks, allowing you to dedicate more time to your clients and legal practice.

Finding the right bookkeeping services

Ready to facilitate your law firm's financial management with professional bookkeeping? You can either hire an in-house bookkeeper or outsource your bookkeeping to a virtual bookkeeper. Let's look at the differences so you can weigh these choices.

In-house bookkeeper

An in-house bookkeeper works directly within your firm, offering immediate support and a personal touch. Having someone in-house can be particularly beneficial when it comes to handling sensitive client billing and trust account management. However, this onsite service comes at a higher cost due to salaries, benefits, and office space considerations.

Virtual bookkeeper

A virtual bookkeeper provides flexibility. They can work remotely and often on a tailored schedule that meets your firm's needs. This cost-effective solution relies on digital communication and document sharing, potentially streamlining your operations.

Virtual doesn’t mean less qualified. Virtual bookkeepers specializing in law firms often possess extensive experience working with diverse legal practices and a deep understanding of industry-specific regulations. Many hold bachelor's degrees in accounting or finance and boast certifications from reputable organizations like the American Institute of Professional Bookkeepers (AIPB).

Bookkeeping expertise

Whether you opt for in-house or virtual bookkeeping, prioritize expertise and experience. Ensure your chosen professional possesses a solid grasp of legal accounting principles, accounting software like QuickBooks, and tax regulations specific to law firms. They should also have a proven track record of accurate recordkeeping, trust account management, and generating comprehensive legal industry financial reports.

Virtual bookkeeping is a smart solution for busy attorneys

From managing client cases to navigating complex legal matters, your attorneys have enough to juggle. Day-to-day bookkeeping tasks shouldn't add to your team’s burden. Entrust your financial records to a dedicated team of certified bookkeepers through QuickBooks Live Experts, ensuring accuracy and compliance. 

Need more extensive accounting assistance? Find an accountant near you. A QuickBooks Certified ProAdvisor can offer financial advice, help improve your business processes, and take on your accounting challenges so you don’t have to. 

With bookkeepers and accountants from QuickBooks on your side, you’ll have more time to focus on serving your clients and growing your practice.