Bookkeeping for Law Firms in Melbourne

Why Legal Practice Finances Are a Category of Their Own

Law firms have financial structures that don't exist in most other businesses. Client money held in trust is a statutory obligation under Victorian law — not a business decision. Work in progress sits as an asset on the balance sheet until it's billed, creating a revenue recognition timing that differs from most service businesses. Disbursements flow through the firm as pass-through client costs, not firm revenue. And partner drawings operate outside the payroll and super framework that applies to employees.

A bookkeeper who hasn't worked with legal practices before will typically code disbursements as income (inflating revenue and creating GST errors), process partner drawings through payroll (creating incorrect super and PAYG obligations), and have no framework for tracking WIP or understanding how it relates to the billing cycle. Getting these things right requires familiarity with how legal practices actually operate — not just general bookkeeping competence.

Trust Accounts: The Non-Negotiable Obligation

Under the Legal Profession Uniform Law (Victoria), any law firm that receives or holds money on behalf of a client must maintain a statutory trust account. This is not optional and not a matter of best practice — it is a legal requirement with serious consequences for non-compliance.

The trust account must be kept completely separate from the firm's operating (office) account. Money in trust belongs to clients, not the firm. It cannot be used for the firm's operating expenses, cannot be overdrawn, and cannot sit mixed with the firm's own funds. The trust ledger must record each client's balance individually, and the total of all client ledger balances must reconcile exactly to the trust bank account balance at all times.

Every month the firm must perform and document a three-way reconciliation: the trust bank statement balance must equal the trust cash book balance, which must equal the sum of individual client trust ledger balances. This reconciliation is reviewed annually by an external examiner appointed through the Legal Services Board of Victoria. A shortfall in the trust account — even a temporary one caused by an administrative error — must be reported immediately and is treated as a serious compliance matter.

Work in Progress (WIP): Revenue Earned But Not Yet Billed

Law firms record time as it is worked — hourly rates multiplied by time entries logged in the practice management system. This time represents value created for clients, but it doesn't become an invoice until the matter reaches a billing point, which may be months after the work was performed. The gap between time recorded and time billed is WIP.

WIP is an asset. It represents future billing that the firm has earned but not yet invoiced. In a correctly structured set of accounts, WIP appears on the balance sheet and is recognised as revenue when it moves to a bill — not when the time is worked and not when the money is received. A firm that only recognises revenue when invoiced understates its financial position in periods of heavy work and light billing, which distorts partner profit distributions and makes it difficult to assess the firm's true performance.

Tracking WIP accurately also allows the firm to identify matters where time has been recorded but billing has been delayed or forgotten — a common source of write-offs that could have been avoided with earlier follow-up.

Disbursements: Pass-Through Costs, Not Revenue

Disbursements are costs incurred on a client's behalf — court filing fees, barrister fees, searches, process server charges, expert witness fees. The firm pays these costs out of its own funds (or from the client's trust monies), then recovers them from the client on the next invoice.

The critical bookkeeping distinction is that disbursements are not the firm's revenue. They are a pass-through — the firm is a conduit, not a principal. Coding disbursement recoveries as professional fee income inflates the firm's revenue figure, creates GST complexity (some disbursements involve GST, others don't), and makes it impossible to see the firm's true billing rate from its own professional services. The correct treatment records disbursements paid as an asset (recoverable from the client) and the recovery as a deduction of that asset — not as income.

Partner Drawings vs Employee Payroll

In a legal partnership, partners are not employees of the firm — they are co-owners of the business. The money they draw from the firm is not a salary; it is a distribution of profits. This has several bookkeeping consequences:

• No PAYG withholding on partner drawings — partners pay income tax on their share of partnership profit through their personal tax returns, not through PAYG withholding from the firm.
• No super guarantee obligation on partner drawings — the super guarantee applies to employees and some contractors, not to a partner drawing from their own business.
• PAYG instalments — partners typically pay PAYG instalments quarterly through the ATO's instalment system to prepay their income tax liability on partnership income.
• Profit allocation — in a multi-partner firm, the partnership agreement determines how profit is allocated. This allocation needs to be accurately reflected in the accounts so each partner's tax position can be calculated correctly.

BAS for Law Firms: GST on Professional Fees and Disbursements

Legal professional fees are standard-rated supplies — GST at 10% applies to the firm's professional fees billed to clients. The GST treatment of disbursements recovered from clients depends on whether GST was included in the original disbursement: if the firm paid a court filing fee that included GST and claims an input tax credit, the recovery from the client must also include GST. If the original disbursement was GST-free (some government fees are), the recovery is also GST-free. Getting this right requires tracking the GST status of each disbursement type individually.