Law firm bookkeeping: trust accounting the LSO way, general books that keep pace

Two sets of books, one firm

Every practice that holds client money runs two accounting systems, whether it means to or not. The trust side records funds you hold for others — retainers not yet earned, real estate closing money, settlement proceeds — and it is governed by LSO By-Law 9 down to the specific journals and ledgers you must keep. The general side is a normal business: fees billed, disbursements, payroll, HST, and partner draws or corporate salary.

The cardinal rule is that the two never blur. Money moves from trust to general only when fees are properly billed, and no individual client trust ledger may ever go negative — an overdraft on one client's ledger is a shortage of another client's money even when the bank balance looks healthy. We work in Clio, PCLaw, CosmoLex, or QuickBooks Online paired with Clio; the software matters far less than the discipline behind it.

The monthly trust comparison, done by the 25th

By-Law 9 requires a trust comparison every month, completed within 25 days of month-end — and it is the first document an LSO spot auditor asks to see. It is a three-way match:

• The reconciled trust bank balance — statement balance adjusted for outstanding deposits and cheques.
• The trust journal — every receipt and disbursement, in order, with client and matter identified.
• The client trust listing — each client's ledger balance, totalled to the penny.

All three must agree, and the comparison must be retained. We prepare it on schedule, investigate discrepancies — a stale certified cheque, a deposit posted to the wrong matter — and document the fix rather than plugging the difference. We also confirm the housekeeping around mixed trust accounts, including interest directed to the Law Foundation of Ontario.

Disbursements: recoverable, overhead, and the HST line between them

Not all disbursements are equal, and billing them wrong creates both margin leaks and HST errors. The treatment turns on whether the firm paid as agent for the client or as principal.

We tag every disbursement to its matter when incurred, so recoverable amounts actually get recovered. Unbilled disbursements sitting on aging files are one of the most common leaks we find when we take over a firm's books.

WIP after the end of billed-basis accounting

Since the 2017 federal budget phased out billed-basis accounting for professionals, law firms must include work in progress in income at the lower of cost and fair market value — you can no longer be taxed only when you bill. That makes WIP a real ledger balance that needs a real month-end process: time captured, cost determined, and the year-end figure supportable.

Contingency files are the exception that matters. Where the arrangement gives you no right to bill anything until the matter resolves, CRA accepts that there is nothing to include until that right arises. The books must keep contingency WIP visibly separate from hourly and block-fee WIP so the two are never mixed at year-end.

The general books: draws, HST, and a close that keeps pace

On the general side we run a standard monthly close: receivables aged and chased, HST reconciled on fees and principal-basis disbursements, payroll for staff, and draws or salary-dividend tracking for the partners or the professional corporation. Fee income, disbursement recoveries, and trust transfers each keep their own lanes so the P&L means something.

Firms with US clients or US-source fees add a layer — withholding forms, treaty positions, and the Reg 105 mirror image — which we cover in our cross-border tax guide for lawyers. For how our monthly close works across every engagement, see our bookkeeping services page.

Source: Law Society of Ontario — By-Law 9.