Running a law firm? You have already heard people exchange bookkeeping and accounting all around. They are similar, but not identical, and the understanding of the difference can make a difference that would significantly alter your financial management.
What is Law Firm Bookkeeping?
Law firm bookkeeping is the day-to-day recording of your financial transactions. Think of it as the foundation of your financial management system. Your bookkeeper tracks every pound that comes in and goes out of your firm, ensuring that all transactions are properly documented and categorised.
The major bookkeeping activities are:
- Construction of trust account transactions and client payment transactions.
- Monitoring the cost and supplier payment.
- Processing payroll
- Verification of bank accounts.
- Accounts payable and receivable management.
- Proper billable hours record keeping.
In the case of solicitors and barristers, legal bookkeeping is mission-critical as solicitors and barristers have a hard eye on the client's money, as maintained by the SRA. The slightest slip will give a compliance headache.
What is Legal Accounting?
It is based on that good bookkeeping foundation that accounting is founded on. When it comes to bookkeeping, it is all about slogging through the transactions, however, when it comes to accounting, it is all about drawing insights, crunching, and providing you with a better picture. Your accountant transforms the raw data into strategic advice and assists your decision on the course of action.
The duties of accounting consist of:
- Making the financial statements and reports.
- Financial analysis and forecasting.
- Tax planning and compliance
- Financial strategy planning.
- Giving guidance on business choices.
- Creation of regulatory compliance.
- Financial records auditing and reviewing.
Accountants view the forest: What areas of the practice generate cash, when you may require new capital and how you can organize the firm to ensure low tax bills.
The Key Differences
The record-keeper of bookkeeping. So what interpreter is accounting? Accuracy and consistency are the concerns of bookkeepers; accountants make use of that information to plan and strategise.
The majority of law firm bookkeeping services provide lock in of those day-to-day details so that your accountant can intervene with a better perspective.
Why Both Matter for Law Firms
Both functions are needed because legal practices grapple with unique cash flows, which include trust accounts, regulatory rules and the works. Any out of place transaction may trigger a SRA inquiry, and therefore bookkeeping is not only good practice, but also a responsibility. But the nice figures will not give you the information whether the company is really profitable or what areas are performing. That is the place where accounting comes in.
Common Mistakes to Avoid
Smaller companies usually attempt to make their own or be satisfied with simple bookkeeping. That usually results in:
- Missing out on tax savings
- Predictable cash flow hiccups.
- Non-conformity to SRA regulations.
- Dumb decisions because of lack of insight.
- Difficult to get finances when required.
The other side of the coin is to have a glitzy accounting without the seriousness of bookkeeping: the knowledge is never deeper than the surface.
Finding the Right Balance
A good combination typically appears as follows:
- Maintain a good bookkeeping system; either internally or using a service that corrects the daily transactions and trust account.
- Periodically review your accounting: of financial health and plan, have a meeting with a qualified accountant who is familiar with the legal rules.
- Complete the year with due compliance; year end accounts, tax returns, entire statements of your accountant.
Other companies outsource all to experts who understand the industry. Others such as a combination strategy: in-house bookkeepers and outsourced accounting. Choose the one that fits your size, complexity and growth plans of the firm.
The Bottom Line
Awareness of the division of bookkeeping and accounting implies that you will be able to pile a firmer financial foundation of your practice. Bookkeeping maintains the day-to-day clean and business-like; accounting transforms that business-like data into practical actions to drive the firm. They combined bring you the sanity you require to succeed.
It may seem intelligent to invest in good bookkeeping and good accounting but in the current cut-throat legal environment; it is a survival and growth strategy in the long run to invest in good bookkeeping and competent accounting whether you are operating as an individual or as a large team.
