If you’re new to trust accounting or need a refresher, this guide covers the key points every law firm should know.
What Is Trust Accounting?
Trust accounting refers to managing client funds that a law firm holds in trust. These funds do not belong to the firm—they must be kept separate and used only for their intended purpose.
Lawyers often hold money on behalf of clients for settlements, retainers, or legal transactions. Mismanaging these funds can lead to serious legal and financial consequences.
The Golden Rule: Separation of Funds
One of the biggest mistakes a law firm can make is mixing trust funds with business funds. Every trust account must be separate from the firm’s operating accounts.
Even if a firm is financially struggling, trust funds cannot be touched. These accounts are strictly for client money and must be handled with care.
Accurate Record-Keeping Is Essential
Keeping detailed and up-to-date records is a must. Every deposit, withdrawal, and transfer should be recorded with clear explanations.
Law firms must maintain:
A ledger for each client’s trust funds.
A general ledger for the trust account itself.
Regular reconciliations to ensure records match bank statements.
If an audit or client dispute arises, accurate records can protect the firm.
Regular Reconciliation Prevents Errors
Reconciling trust accounts means comparing internal records with bank statements to ensure they match. This should be done monthly, at a minimum.
Working with a trust account auditor can help firms identify discrepancies early and ensure compliance with legal and financial regulations. Regular audits not only catch errors but also prevent missing funds or unintentional overdrafts before they become bigger problems. A firm that fails to reconcile accounts consistently risks compliance violations and potential penalties.
Handling Client Funds Properly
Client funds should only be withdrawn for approved reasons. Lawyers cannot take funds before earning them; all transactions should be well-documented.
Common mistakes include:
Using trust funds to cover firm expenses.
Delaying withdrawals for completed work.
Making payments without clear client authorisation.
A clear policy for handling trust funds reduces the risk of costly errors.
Compliance Matters—Don’t Risk Penalties
Trust accounts are heavily regulated, and non-compliance can result in fines, legal action, or loss of a practising certificate.
Law firms must follow:
Local legal regulations for trust accounts.
Reporting requirements for audits and financial reviews.
Strict guidelines on how funds are held and transferred.
Failure to comply can damage the firm's reputation and financial standing.
Trust Account Audits Are Not Optional
Most law firms are required to undergo regular trust account audits. These audits ensure that funds are handled properly and that the firm complies with financial regulations.
A well-organised firm with accurate records will find audits straightforward. Poor record-keeping, however, can turn an audit into a stressful process.
Training Staff on Trust Accounting
Everyone handling client funds should be trained on trust accounting rules. Even small errors can lead to big problems.
Firms should:
Educate new employees on proper procedures.
Regularly update staff on changes to trust account regulations.
Establish clear policies to prevent mishandling of funds.
A well-trained team reduces the risk of mistakes and compliance issues.
Final Thoughts
Trust accounting is not just about keeping numbers in order—it’s about protecting clients and maintaining the integrity of a law firm. Keeping trust funds separate, maintaining accurate records, and following compliance rules ensures a firm stays on the right side of the law.
With the right practices in place, law firms can handle trust accounts confidently, avoid legal trouble, and build lasting client trust.