A combined practice management and legal-specific accounting system is a game changer for law office profitability, regulatory compliance, and peace-of-mind.

By Dr. Rick Kabra, Technology Specialist

Accounting300The Perils & Pitfalls of Law Firm Accounting

Surveys consistently identify accounting frustration as a number one concern for small law firms. That’s because every legal practice must adhere to myriad specialized legal accounting requirements, and the penalties for failing to meet those requirements – through errors or oversights – are quite severe.

Three Foundations of Legal Accounting

In addition to accounting basics – such as P&L and cash flow – a law practice must also take care in three distinct areas:

  • Client Funds Accounting: One client’s funds must not be commingled with other clients’ monies – or with the firm’s operating funds. Improper client funds accounting is the leading cause of disbarments every year.
  • Matter Cost Accounting: Every expense needs to be allocated to its legal matter or it will not get billed. Each must be tracked and placed on the Balance Sheet or P&L Statement as appropriate. The cost portion of every client payment must be recorded separately from fee payment.
  • Back Office Accounting: “Overhead” gets complicated because reimbursements for indirect matter costs require a different accounting treatment than reimbursements for direct matter costs.

The survival of your firm – and your license – depends on maintaining spotless books. The best solution is a systematic approach followed on a daily basis.  Retrofit repairs and monthly cleanups are time-consuming, error prone, and lead to major problems down the line. However, if you implement a properly designed system, you can overcome these difficulties.

How Accounting Interacts with Your Billing System

Every law practice needs both practice management and accounting systems. Let’s look at a few examples of how these two systems interact with each other:

  • Retainer management requires precise accounting, as funds may be received into trust accounts or into operating accounts.
  • Invoices paid from retainers must be reflected in both billing (on a matter’s unpaid balance) and in accounting (on your bank balance).
  • Client costs paid by the firm must be entered in your accounting system and in your billing system – in order for the cost to be billed to the client.

Billing and accounting systems interact constantly with each other; using separate systems creates multiple problems.

What Happens When Practice Management & Accounting Systems Are Separate?

Here are just a few problems created by using multiple systems:

  • Data Entry Errors: Entering the same information separately into two independent systems doubles the chance of making an error.
  • Matter Costs Recovery: When disbursements from accounting do not show in billing, you can’t tell if an expense has been billed. Expenses get misplaced – often never billed.
  • Inflated Revenue: Without the ability to mark reimbursable expenses separately from billable legal fees, accounting reports exaggerate revenue.
  • Practice Area Income Tracking: While your practice management system understands different practice areas, the accounting system will not know to implement different fee structures
  • Financial Overview: When information is spread across multiple systems, you can’t get a high-level overview of your total financial situation.

What Happens When Practice Management & Accounting Systems Are Combined?

With a combined practice management and accounting solution, all of the above problems disappear!

  • Synchronization: A combined system pulls information from one central database, with no synchronization, import/exports, or double entry needed. Your accounting and billing systems are always up-to-date and reconciled.
  • Matter-Centric Organization: When all information is tied to specific matters, expenses don’t fall between the cracks. Clients’ billing questions are answered easily with all information on one screen.
  • Accurate Revenue: Incoming payments are automatically divided between fee income and expense recovery. Your P&L Statement shows your actual revenue.
  • Segregated Practice Areas: Each practice area has its own income statement. You see the profitability of each area and the practice as a whole.
  • Unified Reporting: Everything is on one screen, whether it’s a financial overview of your entire firm or the billing status of an individual matter. Reports such as P&L, Matter Costs, and Balance Sheet make it easy to see important financial details of your firm’s operation.

A combined practice management and legal-specific accounting system is a game changer for law office profitability, regulatory compliance, and peace-of-mind. If you put this system in the Cloud, then you add the power of mobility, flexibility, and freedom from IT hassles.


CosmoLex is a Cloud-based law practice total solution, specifically designed for small law firms and solo attorneys. CosmoLex combines practice management and accounting functions, allowing lawyers to focus on the practice of law. CosmoLex’s CEO, Dr. Rick Kabra, has over 10 years of experience in the legal software industry, meeting to the specialized technology needs of small to mid-sized law firms. www.cosmolex.com