Why is law firm bookkeeping different?

Why is law firm bookkeeping different?

Bookkeeping for law firms requires an extra understanding of specific requirements governed by the Law Society, which do not apply to your regular bookkeeping client. When you are not familiar with these requirements, it makes it difficult to ensure proper bookkeeping for a law firm.

A few differences in law firm bookkeeping are:

The Trust Account

A trust account must be used when holding funds that belong to a client. Some examples of when a trust account is required are, when a lawyer holds retainer deposits for eventual services rendered, for settlement funds on litigation matters or for real estate transactions.

The Law Society By-laws list and explain all the important requirements that a lawyer must follow when working with a trust account.   

As the law firm’s bookkeeper, it is important to not only balance your trust account to your ledger but also to your client trust listing. This is called a three-way reconciliation. If your client trust listing at a certain date does not match your bank statement, you may be missing client funds. This must be addressed immediately.

The Law Society requires a monthly reconciliation of a trust account be completed by no later than the 25th day following the end of the banking statement period.


As lawyers, you can incur quite a few fees on behalf of your clients. A proper set up of your chart of accounts is required to ensure that the recovery of these expenses is properly captured.

Also, when a law firm is an HST registrant, it is important to understand the application of HST on reimbursable expenses. Some expenses, regardless of them initially being HST exempt, may become taxable to the client as they are considered a part of legal services rendered.

Transaction Levies

Depending on the type of law being practiced, transaction levies, which are file specific insurance premiums, must be reported and paid to the Lawyer’s Professional Indemnity Company (LawPRO) on a quarterly basis.

There is a detailed list of when these levies should be paid and when they may not apply. For example, in a real estate transaction, generally the premium would apply to a sale transaction but not a purchase transaction with title insurance. 

The transaction levy is a good example of a disbursement that is considered a reimbursable expense. A lawyer does not pay HST on this premium as it is HST exempt. They are however required to charge the HST to their clients.

Annual Reporting to the Law Society

On an annual basis, lawyers are required to report their activities to the Law Society. The lawyer responsible for the law firm’s trust account must file a report on mixed trust accounts along with their annual report.

As the bookkeeper of a law firm, you must confirm throughout the year as well as at year end that the trust account balances and that outstanding deposits and cheques, if any, are properly explained.