WIP and Disbursements in Law Firm Bookkeeping: Two Things Most Melbourne Firms Handle Wrong

Why These Two Items Define Law Firm Financial Reporting

Most professional service businesses have a simple revenue model: deliver the service, issue an invoice, receive payment. Law firms don't work this way. Work is delivered continuously across matters that may run for months or years before a bill is raised. Costs are incurred on behalf of clients and recovered later, often bundled into invoices alongside professional fees. The financial reporting that results from treating these items incorrectly — recognising revenue only when billed, coding disbursement recoveries as income — tells a story about the firm's financial position that can be significantly misleading.

For a managing partner trying to understand whether the firm is profitable, which practice areas are performing, and whether the billing pipeline is healthy, getting WIP and disbursements right is the foundation everything else rests on.

Work in Progress: What It Is and Why It's an Asset

WIP is the accumulated value of time recorded by fee earners on client matters that has not yet been billed. When a solicitor spends three hours on a matter and records that time at their billing rate, $X of WIP is created. It hasn't been invoiced yet — the client doesn't know about it and hasn't been asked to pay — but the work has been done and the firm has a claim to charge for it.

That claim represents future billing that the firm has already earned through time invested. It is an asset — specifically, a contract asset or work in progress under accounting standards. It should appear on the balance sheet, not be invisible until an invoice is raised.

The practical implication is significant. A firm with $400,000 of unbilled WIP is in a very different financial position to a firm with $50,000 of WIP — even if both have the same invoiced revenue for the period. If WIP is not tracked and reported, the managing partner cannot see the billing pipeline, cannot identify matters where billing has been delayed, and cannot make informed decisions about revenue forecasting or resourcing.

WIP Write-Offs: When Billed Amount Is Less Than WIP Value

Not all WIP gets billed at full value. Sometimes a matter takes longer than expected and the fee earner writes off some time to keep the bill reasonable. Sometimes a client disputes a portion of the bill. Sometimes WIP is simply forgotten and never billed. Each of these outcomes requires a write-off — a reduction in the WIP asset that doesn't result in a corresponding invoice.

Write-off rates are one of the key profitability metrics for a law firm. A practice area where fee earners consistently write off 30% of their recorded time is less profitable than it appears from billing alone. Tracking write-offs by fee earner, practice area and matter type is only possible if WIP is tracked systematically — and only visible in the firm's reporting if WIP is on the balance sheet rather than invisible until billing.

Disbursements: Pass-Through Costs That Are Not Revenue

A disbursement is a cost the firm pays on a client's behalf and recovers from the client. Court filing fees, barrister briefs, search fees, process server charges, expert witness fees — these are expenses the client would have paid directly if they were managing the matter themselves. The firm acts as an intermediary, paying the cost and then recovering it.

The critical bookkeeping distinction is that disbursements are not the firm's revenue. The firm doesn't earn a margin on them (unless it charges a mark-up, which creates its own accounting treatment). Coding disbursement recoveries to a professional fee income account inflates the firm's apparent revenue, distorts its billing rate analysis, and creates GST complications — because the GST treatment of disbursement recoveries depends on the GST treatment of the original disbursement, which is not always 10%.

Hard vs Soft Disbursements

The distinction between hard and soft disbursements matters for both accounting and GST purposes.

Hard disbursements are genuine out-of-pocket costs paid to third parties on the client's behalf — barrister fees, court filing fees, search fees, process servers. These are true pass-throughs. The GST treatment of the recovery mirrors the GST treatment of the original payment: if the court filing fee included GST (and the firm claimed an input tax credit), the recovery from the client includes GST. If the disbursement was GST-free, the recovery is GST-free.

Soft disbursements are charges for the firm's own resources — photocopying at a per-page rate, long-distance calls, document storage, printing. These are more like professional charges at a rate, and their GST treatment is straightforward: they are taxable supplies at 10% if the firm is registered for GST.

Mixing hard and soft disbursements into a single "disbursements" income account — without distinguishing their GST treatment — produces an inaccurate BAS every quarter.

The Practice Management System and Xero: Getting Them to Talk

Most Melbourne law firms use a dedicated practice management system — LEAP, Practice Evolve, Smokeball, HighQ — for time recording, matter management, billing and trust accounting. These systems generate invoices that are then recorded in the firm's accounting software (often Xero) for the office accounts.

The reconciliation between the practice management system and Xero is where disbursement coding errors typically occur. The practice management system may categorise all matter costs as disbursements; Xero needs to code them correctly as recoverable assets (hard disbursements) or professional charges (soft disbursements), not as income in either case until recovered. A bookkeeper who understands both systems — and how the data flows between them — is what keeps this reconciliation reliable.