Trust accounting deals with client money your firm holds on someone else’s behalf, such as settlement funds, retainers or conveyancing deposits, and is governed by the Legal Profession Uniform Law and overseen by the Law Society. Regular business accounting deals with your own firm’s income, expenses, tax and payroll, under the ATO and ASIC. The two sit on separate bank accounts, follow different rules, and require an annual external examination on the trust side that the office side never sees.
Where Trust and Office Accounting Diverge in a Law Firm
Trust money is not your money. The moment a client transfers a deposit, a retainer or settlement funds into your trust account, that money belongs to the client until it is properly disbursed under their instructions or a specific legal event. It cannot be used to pay firm wages, rent, supplier invoices or partner drawings, even temporarily, and even if the firm is otherwise solvent. The trust account sits at an approved ADI and is operated under signatory rules set by the firm and recorded with the Law Society.
Day-to-day trust accounting runs on tight rules that office accounting does not have. A trust receipt must be issued the moment money is received, and trust ledger entries must be posted the same business day or the next. Each client matter has its own trust ledger that has to reconcile to the cent. On top of that, the firm has to produce a monthly trust trial balance and a three-way reconciliation between the bank, the cashbook and the client ledgers.
Every NSW law practice that handles trust money is required to appoint an external examiner each year. The examiner reviews the trust records and lodges an External Examiner’s Report with the Law Society. They are appointed from the Law Society’s approved register and are not the same person who keeps the firm’s regular books. Breaches, errors or shortfalls flagged in the examination can trigger a Law Society investigation and disciplinary action, which is a different order of consequence to a missed BAS lodgement.
Most law firms run their trust accounting on purpose-built software such as LEAP, Smokeball or Actionstep, which enforce the contemporaneous receipting and ledger rules automatically. The office accounting side typically runs on Xero or MYOB, kept entirely separate so trust data and firm financial data never cross paths. An accountant supporting a law firm needs to understand both stacks, how they should and should not integrate, and how to read a trust reconciliation alongside the firm’s profit and loss.
The honest read is that trust accounting is a different discipline to general business accounting. It has its own rules, its own software, its own examiner and its own consequences for getting it wrong. A general accountant can do a perfectly competent job on a law firm’s office accounting and still know very little about the trust side. Knowing the difference, and asking the right questions of whoever handles each piece, is part of the job of running the firm well.
Looking for an Accountant Who Understands Law Practices?
If you would like the office-side accounting handled by someone who understands the trust-side rules sitting alongside it, our accountants for law firms work specifically with legal practices on the Central Coast. Learn more about MYC Partners Accountants, or get in touch if you would like to talk through your firm’s setup.