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Legal Accounting
Joshua Lenon – Clio Omar Ha Redeye – Fleet Street Law
Carla Caldwell - Xero
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Agenda
• Basics of Accounting (5 minutes) • Legal Accounting Basics (15 minutes) • Tools for Legal Accounting (15 minutes) • One firm’s Accounting (10 minutes) • Preparing for Tax Season (5 minutes) • Questions (10 minutes)
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Instructors
Joshua Lenon • Lawyer, admitted in New York • Lawyer-in-Residence for Clio
Carla Caldwell • Director, US Training at Xero
Omar Ha-Redeye • Lawyer, admitted in Ontario • Principal, Fleet Street Law • Instructor, Centennial
College • Adjunct Faculty, Ryerson
University
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BASICS OF ACCOUNTING
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Types of Accounting
Cash Basis • Revenues are recognized
when cash is received • Expenses are recognized
when paid • Usually followed by
individuals and small companies
• Not in compliance with accounting's matching principle.
Accrual Basis • Revenues are recognized
when they are earned • Expenses are matched to
revenues or the accounting period when they are incurred (rather than paid)
• Better for tracking profitability
• Required for use by accountants
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Chart of Accounts
Chart of Accounts is a detailed listing of all the names of the accounts useful for reporting • Trust Accounts • Operating Account • Petty Cash • Insurance • Real Estate • Compensation
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Proper Accounting
Proper accounting tools should produce the following: 1. Income Statement 2. Balance Sheet 3. Statement of Cash Flows
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Income Statement
• Tracks profitability over a specified time interval
• Often called the profit and loss statement (P&L)
• Shows revenues, expenses, gains, and losses
• Does not track cash receipts nor cash disbursements
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Income Statement
Bottom Line = (revenues + gains) – (expenses + losses)
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Balance Sheet
• “Snapshot" of a company's financial position at a given moment
• Tracks current state of assets, liabilities, equity – Lawyer’s assets include operating accounts,
work-in-progress fees, office equipment – Lawyer’s liabilities include loans, accounts
payables – Law firm equity include capital, retained
earnings, income distributions
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Balance Sheet
Balance sheets should always balance.
Assets = liabilities + equity
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Statement of Cash Flows
Cash amount change over an interval of time • This is one place where lawyers’ trust
accounts will be tracked • Pulls information from income statement and
balance sheet
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Double Entry Bookkeeping
Every entry to an account requires a corresponding and opposite entry to a different
account.
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LEGAL ACCOUNTING BASICS
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Work in Progress
Ongoing/unbilled Client activity For accounting purposes, work in progress is considered as a current asset on the balance sheet. Complex calculations needed to determine, based on estimated costs and estimated revenue
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Work in Progress
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Trust Account Records
• Have an IOLTA / Trust Account
• Deposit Slips – Date – Source – Client or Matter
• Cash Receipts Book
• Disbursement Records – Cancelled Checks – Electronic Records
• Ledger – Client or Matter entries – Transfers, receipts,
balances & more
• Bank Statements
Florida(RULE(5.1.2(TRUST(ACCOUNTING(RECORDS(AND(PROCEDURES(
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Trust Account Records
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Trust Accounting
• Monthly reconciliation – balance per bank – deposits in transit – outstanding checks
• Comparison of reconciled balances and ledgers
• Annual listings – Unexpended trust
money
• Annual accounting certificate
• 6 year retention requirements
Florida(RULE(5.1.2(TRUST(ACCOUNTING(RECORDS(AND(PROCEDURES(
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Storing Trust Records
“original or clearly legible copies”
Florida(RULE(5.1.2(TRUST(ACCOUNTING(RECORDS(AND(PROCEDURES(
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TOOLS FOR LEGAL ACCOUNTING
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Clio Accounting Tools
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Clio Accounting Tools
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Clio Accounting Tools
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Clio Accounting Tools
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Using Full Accounting Suites
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Beautiful accounting software
Introducing Xero
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Director of US Education Xero
Hi! I’m Carla Caldwell.
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• Global leader in online accounting • 210,000+ paying businesses! • 8800+ Xero accounting partners • 575+ staff (US HQ in San Francisco)
• A new release every 3 - 6 weeks • Unlimited users with different roles • Bank feeds from 5000+ institutions
2007 2008 2009 2010 2011
Xero: Summarized
2012
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Accounting in Xero
• Fast bank reconciliation • Reports & Files • Easy end of year
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Next Steps
Try for free: www.xero.com/signup Become an accounting partner at: www.xero.com/partners
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ONE FIRM’S ACCOUNTING
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Differences Between Accounting and Legal Accounting
• Trust accounting – Statutory/regulatory duty – Common law duty of trustee • Growing need for Document Management – Attaching reporting letters or memos to docket entries • Increasing demand for mobility – Lawyers on the move or virtual – Loss of billables if not recorded contemporaneously
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Legal Incubator
(Not a legal
services provider)
(Independent Others)
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Accounting at Aluvion A quick intro to Aluvion’s bookeeping
philosophy
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Bookkeeping is important.
Bookkeeping doesn’t have to be hard. Systems and Organization Drudgery
Bookkeeping keeps your client happy. Transparent Billing Surprises
Bookkeeping increases profitability.
Profitable Work Delinquent Accounts
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Aluvion’s Bookeeping Principles
Track Everything! -Many Small Entries (mistakes less important) -Store Everything (reliability, analytics)
Filter Aggressively!
-Limit the noise -Review and track
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The Data Collection Funnel
Everything
Billing
Accounting
Every step of every task you completed in the office.
A summary of every task/deliverable you completed for every client.
The result of every financial transaction.
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The Data Collection Funnel
Everything
Billing
Accounting
Daily and Weekly Review of ‘billable hours’
Bi-weekly Case File Reviews, Invoice Reviews
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Tools we use:
-Everything -Billing -Accounting
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Docketing Tool
-Describe every task -Tag them appropriately
-Record time away from computer on mobile app, or any other way you feel comfortable
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Daily Docketing Review
Daily email to review spreadsheet that grabs ‘billable hours’ from their timedoctor. -Ensure only billable work is logged -Ensure time measurements are correct. -Add any time that wasn’t logged via computer.
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Export from Spreadsheet to Clio
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Systematize Reporting
Client Intake Form
Clio -Contact -Mater
CRM -Source -Closer
Client File
-Know your Client -Retainer Agreement
Xero
Information is entered once
Information is tracked in many different locations
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Contact Information • Email: – [email protected] – [email protected] – [email protected]
• Social Media: – Twitter: @omarharedeye – LinkedIn: ca.linkedin.com/in/torontolawyer/
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PREPARING FOR TAX SEASON
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Solo vs. Partnership Taxes
• Solo firm income is treated as personal income for solos. – Must pay Self-Employment Tax as well as Income Tax – Quarterly Payments
• Partnerships – Employment Taxes – Annual Return of Income – Personal Income Tax filings per Partner (maybe SE)
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TAKEAWAYS
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Takeaways
• Accounting is a complex, but necessary activity for profitable businesses
• Proper tools can simplify accounting & prevent ethical errors
• Frequent reviews are necessary to capture and bill time effectively.
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Takeaways
1. Create a Chart of Accounts 2. Pick an accounting tool 3. Set up Income Statements and Balance
Sheets to determine profitability of firm 4. Implement best practices for trust
accounting 5. Set weekly, monthly, quarterly, annual
reviews of time entry, billing, and accounting