Double Entry Bookkeeping Guide for Law Firms

The Institute of Legal Finance & Management (ILFM) is the educational body for qualifying bookkeepers to become confident legal cashiers.

Working in a legal practice and looking after their books is detailed and intricate, and couple that with adhering to the Solicitors Regulation Authority’s regulations - it’s no mean feat!  

A Career in Legal Finance and Accounting

What makes a career in legal finance different to other accounting careers is that many law firms – depending on the service offered - are required to hold money belonging to their clients or on behalf of other third parties. These monies are held in a “client account”.

Example of law firm client account usage

For example, in a matter involving the administration of a deceased’s estate, a legal adviser will collect the assets of the estate before distributing them to the beneficiaries. Many of these assets will constitute money that is held in a firm’s bank account while the legal adviser undertakes the services required to complete the administration. However, this money does not belong to the law firm. 

It is vital that clients trust law firms to safeguard their money and assets and, therefore, law firms must comply with stricter accounting rules than businesses that do not deal with client money.

Rules around law firm client accounts

One such rule is the requirement to keep money belonging to clients or third parties separate from money that belongs to the firm.

Law firms must use a dual system of accounting to ensure that it is clear from their records which financial transactions relate to money belonging to the firm, and which relate to money that belongs to others.

A legal practice must also use separate bank or building society accounts to maintain this separation of money.

Dual Accounting Systems are called Double Entry Bookkeeping

Double entry bookkeeping and how to unpick it if the balance is incorrect, is where the ILFM’s qualifications, continued CPD training and support come into play.

Specialist bookkeepers in law (called Legal Cashiers), are not data entry experts, they are professionals that can resolve balances on double entry ledgers. Everything’s great when a ledger balances, but when it doesn’t, intricate legal cashiering training must be implemented.

One of the first things our Tutor, Sarah Blundell, looks at with all new students, is their understanding of the fundamentals of bookkeeping. Our ILFM Diploma Qualification has two parts to it:

1. Bookkeeping for Legal Finance Professionals; and
2. Legal Finance Compliance & Accounts Rules.

There are exemptions to Part One above, with the list being:

• ACCA F3 and above (Association of Chartered Certified Accountants)
• CIMA (Chartered Institute of Management Accountants)
• AAT (Association of Accounting Technicians) Level 2 and above
• ICAS (The Institute of Chartered Accountants of Scotland)
• Some relevant university degrees in Accounting or Finance
• ICAEW

There are NO exemptions from sitting Part Two of the Diploma.

Let’s jump straight into double entry bookkeeping – this is what we say in our course!  And then you can see that we elaborate further. 

What Are the Rules of Double-Entry Bookkeeping?

There are three major components to the double-entry method in law firm bookkeeping, and they are:

1. Every business transaction or accounting entry must be recorded in at least two accounts in the books.
2. For each transaction, the total debits recorded must equal the total credits recorded.
3. Total assets must always equal total liabilities plus equity (net worth or capital) of a business. Both sides of this equation must be the same (they must balance).

The Bookkeeping Accounting Equation

Financial accounting is based on the ‘accounting equation’. The accounting equation is a sum that balances out what belongs to the business and what the business owes, providing a snapshot of the business’ financial health. What belongs to the business is known as ‘Assets’ and what is owed by the business is called ‘Liabilities’.

The accounting equation can therefore be written as:

To put this in very basic terms, imagine that the business borrowed from a bank £50,000 when it started trading and has bought an office costing £45,000 and has £5,000 worth of office equipment.

Because the business now owns the office it is classified as a business asset, as is the office equipment which the business also owns.

The business has not repaid any money yet to the bank and so it owes the bank £50,000.

The accounting equation would now look like this:

You can see that the sum balances. The assets of the business equal its liabilities.

“Liabilities” is the term generally used to describe the money that the business owes to external parties but internal parties, such as business owners, can also be owed money from the business. Where there is owner investment this is generally referred to as Capital. Capital is a liability of the business as it is not money made by trading, it has been lent to the business by its owner. Usually in accounting records the liabilities are split into the two categories:

Liabilities – for money owed to all external parties who do not own the business but have lent money or other assets to the business.

and

Capital – which is money invested and retained in the business by the business owner.

Let’s look at the accounting equation again. By separating the external liabilities and the internal liabilities the accounting equation would now read as:

You will see that the liabilities still appear on the same side of the equation but have been broken down to separate liabilities owed to external parties and owner investment - capital.

It is important to note that the equation can sometimes appear to be written differently, for example you may see the information appear as:

Again, think about the equation written this way in terms of what is owned by the business and what is owed by the business. Whichever format of the equation is used both sides will always balance, and the information will always reflect the position of the business.

Now we will look again at the example of the business start-up above, but this time let’s say that the money lent to the business was £20,000 from the bank and the remaining £30,000 was invested by the owner of the business.

The sum still balances but this time it shows the liabilities broken down. Remember that the money owed to the business owner is still a liability; it is what the business owes the owner, their capital.

If we write the equation in the alternative format described above, it will still balance.

All three elements of the accounting equation will be covered in more detail in studies with the Institute of Legal Finance & Management (ILFM).

Our courses are easy to enrol, and if you’d like to read more about any of our exemptions, please click HERE and if you’d like to read about our course material, please click HERE (please note course material page is restricted for ILFM members only).

If you are not currently a member of the ILFM, you can join us HERE.