This article is part of a six part section on finance. The pages in this section will take you through the basics of trust and general accounting, including a sample Chart of Accounts for a solo or small law firm, some comments about buying accounting software and some accounting tips.
The General Ledger
The General Ledger ("GL") is the accounting record in which all non-trust financial transactions are posted and sorted.
Until recently, the GL was a physical book or books that were posted by hand, but law office accounting software has now replaced books in almost all law offices. The advantage of software is accuracy, speed and convenience. As well, law office accounting programs make it easy to extract the information you need to make better financial decisions for your practice.
The Chart of Accounts
The GL is divided into accounts in the chart of accounts. By convention, GL accounts are numbered as follows:
- 1000-1999 Assets
- 2000-2999 Liabilities
- 3000-3999 Capital
- 4000-4999 Revenue
- 5000-5999 Expenses
Sample Chart of Accounts (for solo or small law firm)
Assets
1000 General Bank
1100 Accounts Receivable
1200 Furnishings & Equipment
1250 Less Depreciation
Liabilities
2000 Bank Loan/Line of Credit
2100 Business Credit Card
2300 Net GST Payable
2400 Employee Withholdings
Capital
3000 Capital Contributions
3100 Draws
Revenue
4000 Fees
4100 Interest
Expenses
5000 Auto
5010 Bad Debts
5020 Business Promotion/Marketing
5030 Disbursements
5040 Insurance
5050 Interest/Bank Charges
5060 Library/On-line Research Charges
5070 Maintenance and repairs
5080 Office Supplies
5090 Phone
5100 Professional fees
5110 Rent
5120 Salaries/Benefits
5130 Taxes
5140 Travel
5150 Sundry
Notes:
- There is no magic to this particular chart of accounts; it is intended to cover the most obvious assets, liabilities, capital accounts, revenue accounts and expenses in the typical solo or small firm. You should feel free to add to or subtract from the list as you see fit. The goal is to sort the raw information into the categories you need for your decision-making.
- Likewise, there is no magic to the numbers given to the accounts, though they do follow the normal convention and will be recognized as such by your accountant.
The Profit and Loss Statement
The Profit and Loss Statement (or P&L or Operating Statement) is the most important non-trust accounting record in a solo or small law office. It shows what has happened in each revenue and expense account during a fiscal period-a month, a year or the current year to date. It usually has the current and comparative figures from a previous period. It may also show variances from the budgeted targets. You use this statement to track the profitability performance of your practice on a month-to-month and year-to-year basis.
The Balance Sheet
The Balance Sheet shows the relationship between the Assets, the Liabilities and the Capital of your business. It is important as a snapshot of the financial health of the practice. It can be used to analyze changes in bank balances, accounts receivable, debt, assets and working capital. In a partnership, the Balance Sheet is important because it shows the capital accounts, which record the relative positions of the partners with respect to withdrawing money from the partnership.