12/9/2023 0 Comments Law firm monthly expenses sheetThe payment of a simple utility bill demonstrates this process in action. Your law firm's accounting software enforces double-entry recording - and your chart of accounts enables it. An increase in asset and expense accounts is a debit, while an increase in credit, equity, and revenue accounts is a credit. This double-entry system arises from a basic accounting equation: Assets equals liabilities plus equities. Following accounting best practices, each transaction requires a debit from one account and a credit to another. Under the heading of segregated liabilities, your chart of accounts should include pooled trust accounts and separate, interest-bearing trust accounts.Īs noted, a proper chart of accounts facilitates the appropriate recording of the transactions within those accounts. Your firm's chart of accounts will have several sub-accounts under each of the top-level groups, often with their own sub-accounts.Īn example specific to law firms would be the sub-account of segregated liabilities. The list of accounts is a hierarchical outline of the firm's financial accounts, grouped at the top level by assets, liabilities, equity accounts, revenue, and expenses. And the transaction records feed into the firm's balance sheet and income statement. The chart enables transaction records for each account. The most basic component of the chart of accounts is the chart itself, which is a categorized list of your accounts. What Are the Components of a Chart of Accounts? It also allows for the organization and documentation of advanced client costs so that the firm can bill for them. Specific to law firms, a workable chart of accounts helps you keep trust funds and operating funds separate. That structure is essential for tracking account balances and producing correct income and balance statements. Organizing the structure of your financial accounts into a chart of accounts enables your firm to record transactions properly. Why is Creating a Chart of Accounts Important? Nested under these you would find business credit card accounts, pooled trust accounts, and bank loans, among other things. Your liability account will have sub-accounts for current, segregated, and long-term liabilities. For example, your asset account might contain sub-accounts for your operating bank account, accounts receivable, and advanced client costs. Your firm's various financial accounts are organized under these categories.
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