The Ultimate Guide to Bookkeeping for Law Firms

February 28, 2026 | By Sarah Jenkins, CPA

For most businesses, a bookkeeping error is an annoyance. For law firms, it can be a career-ending event. The rules governing Australian legal practices—particularly regarding Trust Accounts—are strict, and the penalties for non-compliance are severe.

Whether you are a solo practitioner or a mid-tier firm, your accounting system needs to be bulletproof. Here are the 4 pillars of legal bookkeeping you must get right.

1. The Golden Rule of Trust Accounting

Never, ever mix client money with firm money.

If a client pays a retainer or settlement funds, this money belongs to them until you have issued a bill or completed the work. It must go into a designated Statutory Trust Account.

Compliance Warning: You cannot borrow from the Trust Account to pay wages or rent, even for "just one day." This is technically theft and is the fastest way to lose your practicing certificate.

2. Tracking Disbursements (Recovering Costs)

Law firms bleed money through "Soft Costs" that are never billed back to the client. You need a system to differentiate between:

Hard Costs: Payments you make to third parties (e.g., Court filing fees, barrister fees, expert witness reports). These must be recovered.
Soft Costs: Internal expenses (e.g., Printing, photocopying, courier fees).

We recommend using software like Dext combined with your practice management tool to capture these receipts instantly and assign them to the Client Matter number.

3. Work In Progress (WIP) isn't Cash

Lawyers often look at their WIP report (billable hours logged but not invoiced) and feel wealthy. However, WIP is not cash. It cannot pay the rent.

Your bookkeeping system needs to track the "Lockup Days"—the time between doing the work and actually getting the cash in the bank. If your Lockup exceeds 90 days, your firm is in a cash flow danger zone.

4. The Tech Stack: Integration is Key

General accounting software like Xero is great, but it isn't designed for legal trust accounting on its own. You need a specialized Practice Management System that integrates with Xero.

We work with firms using:

LEAP: The industry standard for conveyancing and general practice.
Clio: Great for modern, cloud-based firms.
Actionstep: Excellent workflow automation.

If your Practice Management software isn't syncing automatically with Xero, you are wasting hours on double-entry data every week.

Preparing for your External Trust Examination?

Don't panic about your annual audit. We can perform a "Pre-Audit Health Check" to ensure your Trust ledgers reconcile perfectly before the auditor arrives.

Book a Trust Account Review

Summary

Your focus should be on your clients and the law, not on wrestling with ledgers. By setting up the right software stack and strict Trust protocols, you can ensure your firm stays compliant and profitable.