--- title: "Law Firm Bookkeeping & Trust Accounting Basics | MCC" description: "Retainers, client ledgers and three-way reconciliation explained with a worked example. Follow your state bar rules for the specifics." url: "https://mcc-solutionsnj.com/bookkeeping/guides/law-firm-bookkeeping-and-trust-accounting" --- Bookkeeping guide · Updated October 12, 2026 # Law Firm Bookkeeping and Trust Account Basics Law firms hold money that belongs to clients, and the rules for protecting it are strict. This guide explains the concepts only. Your state bar rules decide the details, and an ethics counsel or the bar can answer questions about your particular practice. By [Matthew Coleman](/about), MCC Solutions **Quick answer.** Client money a law firm holds, such as advance fees not yet earned, settlement proceeds or funds held for a third party, belongs in a client trust account kept apart from the operating account. Mixing the two is called commingling and is a serious ethics problem. Your state bar rules decide the details. Want this handled for you? Monthly bookkeeping, cleanup and year-end close for small businesses. Start with a free health check of your books. [Free health check](/bookkeeping/health-check)[Get a quote](/bookkeeping/#interest) **Related:** [Owner contribution or loan](/bookkeeping/guides/owner-equity-and-capital-contributions) · [Closing entries and retained earnings](/bookkeeping/guides/closing-entries-and-retained-earnings) · [Void vs delete a transaction](/bookkeeping/guides/voiding-vs-deleting-transactions) **Free tools:** [True cost of an employee](/bookkeeping/employee-cost-calculator) · [Contractor vs employee cost](/bookkeeping/contractor-vs-employee-cost-calculator) [![Intuit ProAdvisor Gold tier badge](/img/credentials/intuit-proadvisor-gold.png)](https://proadvisor.intuit.com/app/accountant/search?searchId=matthew-coleman77)Gold tier in Intuit's ProAdvisor program. [See my Intuit listing](https://proadvisor.intuit.com/app/accountant/search?searchId=matthew-coleman77) Keeping your own books? Tallyfinch does invoices, bank import and reports on your computer. [See Tallyfinch](/bookkeeping/mcc-books-downloadable-bookkeeping-software) ## Why trust money is different Money a client gives you in advance for fees not yet earned, settlement proceeds, or funds held for a third party is not the firm's money. It goes into a client trust account, kept apart from the operating account. Mixing the two, called commingling, is a serious ethics problem, even when no one intended harm. ## Track each client's balance Keep a ledger for every client who has funds in trust, showing deposits, disbursements and the running balance. A balance can never go negative, because that would mean using one client's money for another. Many firms use legal-specific software or a careful setup in general accounting software with a sub-ledger per client. ## Earned fees move out at the right time When a lawyer earns fees against an advance, the transfer from trust to operating should follow the engagement agreement and be supported by an invoice. Transferring too early or too late can create problems. Costs advanced for a client, like filing fees and expert reports, are tracked as client costs and billed back, so the firm can see which costs remain unrecovered. ## Three-way reconciliation Each month, reconcile three numbers: the bank statement balance for the trust account, the trust account balance in your books, and the total of the individual client ledgers. All three should agree after considering outstanding items. Any unexplained difference needs immediate attention. Keep signed reconciliations in the file for the period your bar requires. ## Operating books and good habits The firm's own books are more like any service business. Track fee income by practice area, billable hours realized, aging of unpaid invoices, rent, staff and technology. Keep a clear line between personal and firm expenses. Do not pay firm bills from trust, and do not deposit earned fees into trust except where rules allow a small amount for bank charges. Use positive pay and dual approval where possible, restrict who can sign on trust, and conduct periodic reviews. Bookkeepers need training on the trust rules, but only attorneys should decide questions about the rules. If a mistake occurs, call the bar's ethics hotline or your counsel promptly, rather than hiding it. ## Records to keep and who reviews them State rules usually require that trust records be kept for a specific number of years, including bank statements, deposit records, ledgers and reconciliations. Check the length with your bar. Have an attorney other than the one handling most of the trust activity review the monthly reconciliation when the firm size allows it. For solo lawyers, a periodic review by an outside accountant who understands trust rules adds a second set of eyes. Send invoices on a regular schedule, with clear descriptions and a statement of trust funds applied. Clients are less likely to dispute a bill that arrives monthly and itemizes the work. Prompt, itemized invoicing also makes the transfer from trust to operating easy to support if the bar ever asks. ## Worked example with numbers A client wires a $5,000 retainer into the trust account. The client ledger shows $5,000. After you bill and the client approves $1,200 of work, move $1,200 from trust to operating and record fee revenue of $1,200. The client ledger is now $3,800. At month end, the three-way reconciliation compares the trust bank balance, the sum of all client ledgers and the book balance for the trust account. All three should equal. If the bank shows $22,400, client ledgers total $22,400 and the book balance shows $22,400, you are reconciled. ## Mistakes that cost money Paying firm expenses from trust, letting a client ledger go negative and commingling funds are the problems state bars care about. Skipping the monthly three-way reconciliation hides these. Your state bar sets the actual rules, so follow them and treat this as a bookkeeping outline only. ## Check your work Keep a monthly packet: bank statement, client ledger report, reconciliation, and signatures. If any client ledger is negative, fix it immediately. ## Common questions **Can my bookkeeper handle trust account entries?** They can support the process under attorney supervision. The lawyer remains responsible for the funds. **Is a flat fee paid upfront always trust money?** That depends on the state rules and your agreement. Ask your bar's ethics resources before depositing it. This guide is general information, not tax, legal or accounting advice. Rules, fees and due dates change; check with the IRS, the NJ Division of Taxation or a licensed professional for your situation. Let us handle it [### Monthly bookkeeping Categorizing, reconciling and monthly reports, with cleanup, payroll and NJ filings available. Bookkeeping →](/bookkeeping/) [### QuickBooks Online Monthly bookkeeping, cleanup and reconciliation in QuickBooks Online for New Jersey small businesses. Your account stays in your name. 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