Glossary of Accounting Terms

Account
​A category used to track money in your books. You will have separate trust, operating and credit card accounts to track incoming and outgoing funds. Each account holds its own set of transactions. Keeping them separate ensures compliance and makes reporting easier.
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Accounts Payable
​Money your firm owes to others, like bills or vendor fees. These are unpaid amounts that need to be settled soon and keeping track of these helps you avoid missed payments. It also helps with budgeting.
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Accounts Receivable
​Money clients owe you for services you’ve provided. It becomes “receivable” once you send an invoice. Monitoring this helps ensure you’re getting paid on time and also impacts your firm’s cash flow.
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Accrual
​A method of recording income and expenses when they occur, not when cash is exchanged. This gives a clearer picture of how your firm is doing over time. For example, you record a fee when earned, even if you’re paid next month.
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Asset
​Anything valuable your business owns. Examples include cash, unpaid invoices, or office equipment. Assets show your firm’s strength. They also help you plan for growth or borrowing.
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Balance Sheet
​A report showing what your business owns (assets), owes (liabilities), and keeps (equity). It’s a snapshot of your firm’s financial position at a given time. Useful for lenders and internal review.
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Bank Reconciliation
​The process of comparing your records to your bank statement. It ensures your entries match real bank activity. Regular reconciliation catches errors and helps stay compliant.
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Capital
​Money invested in your business by the owner or partners. It can come from savings, loans, or retained profits. Capital helps cover expenses before income rolls in. It’s tracked separately from client funds.
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Cash Basis Accounting
​Records income and expenses only when money is received or paid. Easier to manage for small firms. Doesn’t show unpaid bills or invoices.
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Cash Flow
​The amount of money moving in and out of your firm. Positive cash flow means more is coming in than going out. It’s critical for paying bills and salaries on time. Even profitable firms can struggle with poor cash flow.
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Chart of Accounts
​A list of all the categories where your money is tracked. Examples: income, expenses, trust deposits, and client matters. Each has its own label and purpose.
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Client Ledger
​A running record of all transactions for one specific client or matter. It shows every deposit and withdrawal. These ledgers are required in trust accounting.
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Credit
​A type of transaction where money comes into an account, or where a liability increases. In client trust terms, this might be a retainer deposit. Credits increase balances in liability accounts.
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Current Asset
​Assets that can be turned into cash within a year. This includes bank balances and unpaid invoices. Keeping enough current assets helps cover short-term costs.
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Current Liability
​Money your firm owes that’s due within a year. Includes unpaid bills, taxes, or trust balances. Monitoring these helps manage cash flow.
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Debit
​A transaction that removes money from an account or increases an expense. For example, paying a court filing fee for a client. Debits reduce balances in assets. They are tracked separately from credits.
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Deposit
​Money added to your bank account. This includes retainers or reimbursements. Deposits must be logged correctly, especially in trust accounts. Mislabeling can lead to compliance issues.
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Disbursement
​A payment made from your account, often for a client expense. Common in trust accounting when you pay on behalf of a client. Must be recorded under the correct contact and matter.
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Double-Entry Accounting
​A method where each transaction affects at least two accounts (e.g., a debit and a credit). This keeps the books balanced.
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Earned Fees
​Money you’ve earned by providing legal services. You can now move it from trust to operating accounts. This helps distinguish unearned retainers from actual income.
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Equity
​The value left over after subtracting what you owe (liabilities) from what you own (assets). It shows what the business is “worth.” Equity increases when you earn a profit or invest more capital. It’s part of your balance sheet.
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Expense
​Money your firm spends to run the business. Examples: rent, software, travel, court costs. Expenses reduce your profit.
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Fiscal Year
​A 12-month period your firm uses for accounting. It doesn’t have to match the calendar year. Firms may choose a fiscal year based on tax or reporting needs.
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Fixed Asset
​Something your business owns and uses over the long term. Examples include office furniture or computers. Fixed assets are not used up in one year. They are tracked differently than short-term expenses.
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General Ledger
​A complete record of all your firm’s financial transactions. It includes all accounts—bank, client, expense, etc. The general ledger keeps everything organized.
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Income Statement
​Also known as a profit and loss report. It shows income, expenses, and net profit over a time period. Helps you understand whether your business is earning more than it spends.
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Interest
​Money earned or paid based on using someone else’s money. In trust accounts, earned interest often must go to a state IOLTA fund. In operating accounts, it may be kept as revenue. Track carefully depending on your state rules.
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Invoice
​A bill you send to a client for work performed. It shows the amount owed and payment terms. Reconciling invoices with payments received ensures accurate records. Keeping good records helps avoid disputes.
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IOLTA account (Interest on Lawyers' Trust Account) is a special bank account that attorneys use to hold client funds that are small in amount or held for a short time. The interest earned on these accounts is not kept by the attorney or the client—it is pooled and used to fund legal aid and justice programs.
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Journal Entry
​A manual record of a financial transaction. Usually includes a date, accounts affected, and amount.
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Liability
​Money your firm owes, now or in the future. This includes bills, credit lines, and trust funds held for clients.
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Matter
​A specific case, legal project, or client engagement. Matters help organize transactions and reporting for each unique client issue. Each matter having its own ledger is an important part of staying in compliance.
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Net Income
​The total amount you earn after subtracting expenses from revenue. Also called profit. Positive net income means your firm is doing well.
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Operating Account
​The bank account your firm uses for day-to-day expenses. This is separate from your trust account. Mixing these is not allowed in legal accounting.
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Overhead
​Recurring costs not tied to specific clients. Examples include rent, software subscriptions, and internet. These need to be paid whether or not you're billing clients. Reducing overhead improves profitability.
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Payment
​Money paid or received for services. Payments may be from clients or to vendors. Applying payments to specific invoices or matters helps keep your records clean and accurate.
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Payroll
​The total amount paid to employees and staff, including salaries, bonuses, and taxes withheld. While payroll is typically handled by a separate provider, related transactions should be tracked carefully. It’s a major expense category in most firms.
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Profit and Loss Statement
​Another name for an income statement. It helps you see what you earned, spent, and kept over time. Often reviewed monthly or quarterly.
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Reconciliation
​The process of checking that your records match your bank statement. Regular reconciliation ensures that no money is missing or double-recorded. It’s a key part of trust compliance.
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Retainer
​Money paid in advance by a client. It is deposited into the trust account until you’ve earned it. It is not considered income until work is performed.
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Revenue
​The total money your firm earns from clients. This includes fees, reimbursements, and interest (if applicable). Revenue is different from profit.
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Statement
​Often issued by your bank, a statement shows deposits, withdrawals, and balances for a defined period. Useful during reconciliation and audits.
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Transaction
​Any event where money moves—like a deposit, payment, or fee. Each transaction must be recorded accurately and assigned to the applicable client and matter.
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Trial Balance
​A list showing all account balances at a given time. Used to ensure that debits equal credits.
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Trust Account
​A separate bank account used to hold client funds, which must not be mixed with operating funds. Properly managing this account is essential to avoid ethics violations and maintain compliance.
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Uncleared Transaction
​A transaction that hasn’t been processed by the bank yet. For example, a check that hasn’t been cashed. These will continue to appear during the reconciliation process until cleared.
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Withdrawal
​Money taken out of a bank account. In trust accounting, this should only happen after fees are earned or expenses are approved.
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Write-Off
​Money you expected to receive but won’t. Often used when a client can’t or won’t pay a bill. Write-offs reduce your revenue.
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Write-Down
​Reducing the amount of a charge or invoice before it’s billed. This may happen if you discount time or service. It lowers the value of the invoice but does not affect collected funds.
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Year-End Closing
​The process of finalizing accounts for the year by reviewing income, expenses, and making any final entries. After closing, no further changes are made for that year. This step prepares your books for tax filing or review by an accountant.