What are the three golden rules of book keeping?

In law firms, it is good practice, not just to get your books straight, but also to make it a professional and ethical requirement to do so. Sound financial documentation helps protect your practice against compliance headaches, malpractice suits and bar discipline.

Understanding the three golden rules can help lawyers maintain clean books, particularly where they are dealing with client trust accounts and operating money. Let us examine each of the rules individually and watch what happens to legal bookkeeping.

Three Golden Rules of Bookkeeping

What comes in, credit What goes out (Real Accounts)

Real accounts include such items as the bank accounts, office equipment, and sums of money that you are owed by your firm.

As your company receives a retainer, you credit (i.e. increase) your bank account. You credit (i.e. lower) the same account when you pay rent or purchase legal software.

This is an important rule to lawyers when following account of trusts of the clients. All deposits in your IOLTA must be debited correctly and all remittances to clients or vendors must be credited with hard copy.

Debit the Receiver, Credit the Giver (Personal Accounts)

Personal accounts monitor money owed to or by individual persons- consider clients, vendors or your own company.

When a client is owing you a fee, it is debited in accounts receivable (the receiver). When you cover a court filing fee on behalf of them, you would be crediting your operating account (the giver), and charging the client on his ledger.

This is a requirement that ensures every transaction is back to the right party. In bookkeeping of law, it prevents commingling, and ensures that client funds are easily distinguishable and identifiable.

All Expenses and Losses, All Income and Gains (Nominal Accounts) - Debit Everything and Credit Everything.

Nominal accounts: These are recording your firms revenue and outgoings such as legal fees earned, office expenses and salaries.

Income is credited when the firm is paid a fee due to a closed case. You credit expenses when you pay the paycheck of paralegal or even malpractice insurance.

In the case of lawyers, this rule permits you to draw up correct profit and loss statements. It also makes auditors content since they can make the distinction between income earned and client money in a trust.

The Importance of These Rules to Law Firms

Cases The law firms have more stringent bookkeeping requirements than the majority of businesses. The attorneys are required to abide by state bar regulation about trust accounting, keep comprehensive client account books and be prepared to get unexpected audits.

Violation of these golden rules may lead to shortages in trust accounts, ethical grievances or disbarments. There are clean compliant bookkeeping which safeguard your license and reputation.

These regulations also support proper billing. When all the transactions are recorded in the right way, you avoid payment wrangles and leave the clients with only the charges they deserved.

Application of the Rules to Trust Accounting

There should be additional precision in trust accounts. Client funds should not be confused with operating cash of your firm.

Each dollar to your IOLTA must be a debit credit to your trust account and client ledger respectively. On the transfer of the earned fees to the operating account, credit the client ledger and debit the trust account.

This is because by adhering to the golden rules, you can be assured that all your trust account balances will be settled at the end of each month as is required by most jurisdictions.

Frequently Asked Questions

What is different about bookkeeping of lawyers compared to bookkeeping?

Lawyers work with money of a client in trust accounts which are highly regulated by state bars. This is in contrast to normal businesses where the law firms are supposed to maintain different client books, not to mix them, and have stringent reporting policies. Errors may result into disciplinary measures or disbarment.

Are the golden rules applicable to trust (IOLTA) accounts?

Absolutely. The three golden rules refer to all the accounts such as IOLTA and client trust accounts. They ensure that all transactions are recorded properly and client money remains well managed and apart form your own money.

What is it like when a law firm violates rules of bookkeeping?

Violation of rules may result into shortage of trust accounts, breach of ethics, and violation of bar complaints. Common consequences are fines, suspension or disbarment. Even unintentional mistakes may lead to severe punishment in case they indicate carelessness or incompetence.

What frequency should law firm bookkeeping be checked?

Reconcile at least your trust and operating accounts per month. There are firms that ensure that bookkeeping is monitored on a weekly basis to prevent errors. It is also a good idea to have annual audits by a legal accounting pro in order to keep abreast with state bar requirements.

Are accounting programs applicable in law firm trust accounts?

Sure, though with software that is developed to provide legal trust accounting. Frequently business tools do not have the required compliance features such as three way reconciliation and client ledger tracking. Clio, PCLaw and QuickBooks are all popular.

What is the largest bookkeeping error law firms make?

The most complaints are the confusion of client funds and operating money. This occurs when attorneys deposit personal or firm cash in trust accounts or withdraw too soon unearned fees. Trust and operating accounts should always be kept totally distinct.