Law Firm Bookkeeping You Can Hand an Examiner

A retainer is client money held for unfinished work. It belongs in trust and on your books as a liability, not revenue. Recording it as income overstates earnings and brings tax forward. Earned fees move the other way, leaving trust on a schedule once billed.

Advanced case costs are the third category. Filing and expert fees on contingency matters are recoverable, so they are receivables by matter, not expenses.

Five findings account for most trust complaints, and none of them require bad intent. Commingling is firm revenue deposited in trust, or an expense paid from it, even briefly and even by accident.

Negative client balances mean another client's money funded a disbursement, and the account total can tie while it happens, which is why ledgers matter as much as the bank balance. Late earned fee transfers leave fees in trust after billing, or move them out before the work is done. Disbursing against uncollected funds means paying out on a check that has not cleared.

The fifth is no documented reconciliation. Without a signed monthly trail, a firm has only an assertion the account was handled properly, and no evidence for an examiner.

A general bookkeeper reconciles the bank to the books. Trust ledgers are often not kept at all, retainers are frequently booked as revenue on receipt, and advanced case costs are expensed when paid. Reporting stops at firm totals, and bar audit readiness means assembling records after the request arrives. Legal bookkeeping adds the client layer, with ledgers per client and matter, monthly three-way reconciliation, retainers held as liabilities, and costs carried as receivables.

Most problems are not arithmetic. They sit in the gap between the practice management system and the accounting file, like a payment applied in one and never posted in the other, a trust transfer booked but never applied to the client ledger, or a billable cost never recorded.

Each is small alone, but over a year they overstate income. We reconcile the two systems every month.

A profit and loss statement says very little about a law firm on its own. Six numbers say most of it. Realization rate is the share of recorded time that gets billed. Collection rate is the share of billings that get paid, and revenue per timekeeper measures what each biller brings in against cost.

Receivables and work in progress aging shows how long earned money waits to arrive, and contribution margin by practice area shows which work funds the firm and which is carried by it. Trust to operating transfer timing, how long earned fees sit in trust after billing, is a compliance measure as much as a cash one.

Onboarding starts with the trust account as it stands, meaning the current bank balance, whatever client ledgers exist, and the last signed reconciliation. You get a plain summary of what is in order and what is not before any cleanup is quoted.

After that the cycle repeats. Transactions post through the month, the operating books close, trust is reconciled three ways, and the documentation is filed where your team can reach it. Exceptions are flagged in the month they appear, not at year end. If ledgers are missing, that work is finished first.

Firms that arrive mid-year are usually behind, and the trust account is what cannot wait. We rebuild client ledgers from bank statements, case files, and practice management records, then identify negative balances, unidentified deposits, and stale items.

Opening balances are tied out and you get a written summary of what was wrong and what changed. Cleanup is quoted as a standalone project and finished before the monthly cadence starts. The ABA model rule requires trust records preserved for five years after the representation ends. Many states follow it and some require longer, so retention follows your jurisdiction.