Accounting and bookkeeping services for law firms

Law firms are excellent at recording time and surprisingly poor at turning it into cash. A typical small or mid-sized practice has months of work sitting as unbilled WIP and unpaid invoices, partners who can't agree on how profit should be split, and an office ledger that doesn't agree with the practice management system. On top of that, the ATO has published specific guidance on how lawyers allocate profit to their families, and since 1 July 2026 many law firms have AML/CTF obligations for the first time.

Here is how we approach the business side of running a legal practice, and what you should expect from any accountant you hire for it.

Law firm accounting at a glance (2026–27)

Partners' profit shares aren't wages, so they don't count towards payroll tax. Employed solicitors, paralegals and support staff do, and related firms and service entities can be grouped.

What does accounting for a legal practice involve?

Accounting for a legal practice is ordinary business accounting run on top of three ledgers that must never be mixed: office money (the firm's own), trust money (held for clients in the general trust account) and controlled money (client money in an account the firm controls). Your accountant looks after the office side and the tax; the trust and controlled money records are kept by the practice under the legal profession rules and examined each year by an independent external examiner.

What law firm bookkeeping covers each week

• Fees received split correctly between trust and office, with trust-to-office transfers matched to the bill they pay.
• Disbursements coded consistently as recoverable (paid as the client's agent) or part of your fee, so GST is right on every BAS.
• Practice management system receipts and invoices reconciled to Xero each month.
• Payroll, Payday Super and leave for employed solicitors and staff.
• Partner drawings recorded against each partner's capital account, never as wages.
• Supplier bills, card statements and receipts coded and approved, with questions sent to you by SMS or email.

Our transaction coding agent suggests codes for each bank line and drafts questions for anything unclear; your bookkeeper reviews every one before it's posted.

What financial problems do law firms run into?

• Lock-up that nobody measures. Time is recorded but not billed for weeks. Bills go out, but collection is nobody's job. The firm is profitable on paper and short of cash every month.
• Partner distributions that cause friction. When the numbers are opaque, every distribution round becomes a negotiation. Without matter and fee-earner profitability, a partner who brings in work and a partner who does it have nothing objective to discuss.
• Office and trust money confused. Money is transferred from trust to office before a bill is issued, or office expenses are paid from the wrong account. These are trust account breaches as well as accounting errors.
• Tax structures nobody has reviewed in a decade. Service trusts charging round-number fees, profits flowing to spouses with no documented reason, and no check against the ATO's current guidelines.
• No forecast. Big matters settle, or don't, and the firm finds out what the quarter looked like after it's over.

What do our accounting services for law firms include?

Our professional firm profits agent scores your allocation against the ATO guidelines, and our partnerships agent works through the profit splits under your partnership agreement. A qualified accountant checks every figure before we discuss it with you.

Which KPIs should law firm financial reporting show?

Law firm financial reporting should show, every month, how fast work turns into cash and what each partner and practice area really earns. These are the numbers we put in front of partners. A firm that watches them rarely has a cash surprise.

Example: what a month of lock-up is worth

Say a five-partner firm bills $4,800,000 a year, about $13,000 a day. Its WIP sits at 70 days and debtors at 55 days: lock-up of 125 days, or roughly $1,640,000 of fees the firm has earned but not banked. Billing monthly instead of at matter milestones and chasing debtors at 30 days brings lock-up to 95 days. That releases about $390,000 of cash once, enough to clear an overdraft or fund a year of partner drawings without borrowing. The weekly WIP report is what makes the change stick.

Not sure what your lock-up is? Ask us and we'll work it out from one practice management report.

Which tax and compliance issues are specific to law firms?

Trust money and the external examination

Trust money is regulated by the legal profession law in your state, not by tax law. In Uniform Law states (NSW, Victoria and WA), a practice that held trust money during the trust year must have its trust records examined by a qualified external examiner, and the report is lodged by 31 May (Law Society of NSW). The examiner must meet the Uniform Law eligibility requirements and complete an approved external examiner course. Queensland runs its own scheme under the Legal Profession Act 2007 (Qld), administered by the Queensland Law Society, with the same 1 April to 31 March examination period.

We are not your external examiner and we don't operate your trust account. What we do is make sure the office side is clean: transfers from trust to office only against issued bills, receipts correctly split between trust and office, interest and statutory deposit items recorded properly, and office ledgers reconciled. That makes the examination quicker and cheaper, and problems surface during the year rather than in the report.

AML/CTF obligations from 1 July 2026

Since 1 July 2026, lawyers who provide certain "designated services" are reporting entities under the AML/CTF Act. These include helping clients buy or sell real estate, receiving or transferring client money or property for a transaction, creating or restructuring companies and trusts, buying or selling businesses, and acting as or arranging a nominee director, trustee or shareholder (AUSTRAC — professional designated services). A firm must apply to enrol with AUSTRAC no later than 28 days after it first provides one (AUSTRAC enrolment), adopt an AML/CTF program and appoint a compliance officer. Litigation and general legal advice are not designated services on their own.

For your accountant, this means your client onboarding, ID checks and source-of-funds records now sit alongside your financial records, and AML/CTF compliance costs belong in your budget. BPAG is a reporting entity too, so we'll ask for ID when you engage us; our AML/CTF page explains how.

When WIP becomes income

For tax, a firm on an accruals basis generally derives fees when it has done the work and is entitled to bill, not when time is merely recorded. Some smaller practices may be entitled to return income on a cash basis. Conditional fee and no-win-no-fee matters usually aren't income until the condition is met. New partners buying into WIP and departing partners being paid out for it raise specific tax questions too. This is one of the most common areas where firms either overpay or carry a risk they don't know about.

Partner and principal profit allocation (PCG 2021/4)

The ATO's Practical Compliance Guideline PCG 2021/4 sets out how it assesses the risk when a principal of a professional firm, including a law firm, directs profit to associated entities such as a family trust, spouse or company (ATO guidance). In summary:

• Two gateways must be passed first: the arrangement must be commercially driven, and it must have no high-risk features.
• The firm then scores two mandatory risk factors: the share of profit the principal returns personally, and the total effective tax rate on the profit across the principal and associates. A third factor compares the principal's remuneration with a commercial benchmark; the ATO lets you rely on the first two alone only where that benchmark is impractical to work out.
• Scores put the arrangement in a green, amber or red zone. Green is low risk; red means the ATO is likely to look closely.
• A principal who returns all of their profit entitlement personally is automatically in the green zone, provided the gateways are passed.

Splitting income isn't prohibited. But an arrangement that scores red, or that fails a gateway, needs to be fixed or defended with good reasons. We score it each year before distributions are finalised, not after.

Personal services income

Barristers and sole consultants working through a company or trust can be caught by the personal services income rules, which attribute the income back to the individual unless the business passes the results test or another personal services business test. Our page for consultants and agencies covers these rules in more detail.

Service entities

Many older firms pay a related service trust or company to provide staff, premises and equipment. These arrangements can still work, but the fees must be commercially realistic and supported by documents and evidence of the services actually provided. Round-number mark-ups and unexplained charges are where problems arise.

Accounting for law firms in Sydney and Brisbane: what differs?

The accounting is the same wherever you practise. The regulator, the trust rules and the payroll tax threshold are not.

Most of our law firm work happens over email and video wherever the firm is, because the records live in Xero and your practice management system. Melbourne firms work the same way, under the Uniform Law, with Victoria's $1 million payroll tax threshold. See our Sydney office page if you'd rather meet in person.

Which structure suits a law firm?

Moving from a partnership to an incorporated legal practice is a restructure. It can involve CGT on goodwill, stamp duty, transfer of WIP and debtors, new employment arrangements and regulator notifications. Small business restructure rollover relief and the small business CGT concessions may help if you qualify. Our business restructuring team handles the tax modelling, and your legal colleagues handle the documents. For new entities, see our business structures service.

How do we work with law firms?

1. Free strategy call with the managing partner or principal. We'll ask about structure, practice management software and what's keeping you up at night.
2. Diagnostic. We calculate your lock-up, utilisation and realisation from your system, score your profit allocation under PCG 2021/4, and review service arrangements.
3. Set-up. Xero and practice management system aligned, chart of accounts for practice areas, partner reporting built.
4. Monthly. Partners get a short pack: lock-up, fees, profit by partner, cash and forecast. Our management report agent drafts it from your Xero data; your accountant reviews and explains it.
5. Year end. Profit allocation finalised, distributions and drawings reconciled, returns lodged, office records ready for the examiner.
6. Strategy. Partner admissions and retirements, ILP conversion, mergers, succession and sale.

Everything runs on Nagaris, with client data stored in Australia. The AI agents draft; a qualified accountant reviews and signs off, and nothing goes to you or the ATO without a person approving it.

What do accounting services for a law firm cost?

A small firm with straightforward books usually fits our Business Insights plan (from $249 per week + GST), which includes bookkeeping, BAS, payroll for up to 10 staff and monthly reporting. Multi-partner firms that want profit allocation work, forecasting and a monthly strategy meeting usually choose the Fractional CFO plan (from $499 per week + GST); our fractional CFO service explains what that includes. Restructures and ILP conversions are quoted as fixed fees. See our pricing page for details.

If you're a sole practitioner with a handful of matters and simple books, a bookkeeper and an annual return may be all you need for now. We'll tell you.

What should you send us?

• Last two years' financial statements and tax returns for every entity in the firm
• Your partnership agreement or ILP constitution and shareholders' agreement
• An aged WIP and debtors report from your practice management system
• Chargeable hours by fee earner for the last 12 months
• Any service trust or service company agreements and invoices
• A diagram (even hand-drawn) of who owns what, including family trusts and companies
• Last year's external examiner's report, if there were any findings
• Your AUSTRAC enrolment confirmation, if you provide designated services

Photos and PDFs from your phone are fine. If you're thinking about bringing in a new principal or selling the practice, also read our pages on selling a business and succession and estate planning.

General information only, current as at 23 October 2026. It is not personal tax, legal or financial product advice and doesn't take your circumstances into account. Talk to us before you act. Where a recommendation needs a licensed financial adviser or a solicitor, we work alongside them.