Trust accounting is one of the most sensitive parts of running a law practice because the money being held does not belong to the firm. At a broad level, trust money is money entrusted to a law practice in connection with legal services. The exact rules differ between states and territories (Trust accounting in NSW, Victoria and Western Australia falls under the Legal Profession Uniform Law, while other jurisdictions have their own legislation), but the principle is consistent: the firm must be able to show where the money came from, who it belongs to, how it has been handled, and what balance remains. For law firms, that means trust accounting needs to be treated as a separate control environment rather than an extension of ordinary bookkeeping.
Trust Money is Not the Same as Office Money
One of the first distinctions a law firm needs to make is whether money belongs to the practice or is being held on behalf of someone else. Where money is trust money, it cannot simply be treated as business income or used for ordinary operating expenses. It needs to be dealt with under the rules that apply in the firm’s jurisdiction.
In NSW, for example, the Law Society explains that trust money received by a law practice generally needs to be deposited into a general trust account unless a specific exception applies. The money must then be held for the person on whose behalf it was received.
| Type of Money | How It Is Treated |
| Trust money | Money entrusted to a law practice in connection with legal services and subject to trust-money rules. This includes controlled money and transit money, which have specific handling and record-keeping requirements. |
| Office money | Money belonging to the law practice and available for ordinary business use |
The key is to classify the money correctly when it is received. Fixing the treatment later is usually more difficult.
Trust Records Need to Tell the Full Story
A trust account is not reliable simply because the bank balance looks right. The records should make it possible to trace each transaction back to the relevant client or matter. That includes money received, transfers made, amounts withdrawn, and the balance still being held. A sound record-keeping process should make clear:
- Who the money belongs to: Each client or matter should have an identifiable trust ledger.
- Why the transaction occurred: Descriptions should explain the purpose of the receipt, transfer or payment.
- What authority supported it: Withdrawals should be backed by the documentation required under the relevant rules.
- What remains: The firm should be able to see the current balance held for each client or matter.
In Victoria, trust records generally need to be kept for seven years after the last transaction entry or the finalisation of the matter, whichever is later. NSW and Western Australia also operate under the Legal Profession Uniform Law, but Queensland and other jurisdictions have their own rules, so firms should confirm the retention period with their own regulator.
Reconciliation is More Than Matching the Bank
A trust bank account can hold money for many different clients at the same time. That makes reconciliation one of the most important controls in the process. This is commonly known as a three-way reconciliation: the total of the individual client ledgers is compared with the trust-account records and the bank balance, allowing for any legitimate timing differences. A proper reconciliation helps identify issues such as:
- Unexplained differences between the bank and trust records;
- Transactions posted to the wrong client;
- Duplicate or missing entries;
- Unidentified or long-standing balances
- Transfers that have not been recorded correctly.
The important point is that differences should be investigated, not simply carried forward month after month. Specialist trust accounting services can support reconciliations, client ledgers and other trust-account administration, but the law practice still retains responsibility for compliance.
Withdrawals Need Clear Authority
Money should not leave a trust account simply because the firm believes it is entitled to it. The relevant client authority, billing arrangements and regulatory requirements need to be satisfied first.
Queensland provides a useful example. The Queensland Law Society states that general trust money must be held exclusively for the person on whose behalf it was received and only disbursed under an appropriate direction or other lawful authority.
The exact procedure differs by jurisdiction, but firms should have clear controls around:
- who can approve trust transactions;
- what documentation is required;
- who can operate the account;
- how electronic payments are authorised and recorded.
This is especially important when money is being transferred from trust to the office account for legal fees.
Ordinary Accounting Software May Not Be Enough
General accounting software can work well for the firm’s ordinary business accounts, but trust accounting is different. Trust systems need stronger controls over transaction histories, client ledgers and audit trails. Software that allows historical trust transactions to be altered too easily may not meet the relevant regulatory requirements.
Law firms should not assume that software used for office accounting is also suitable for trust accounting. Before changing systems, firms should confirm that the software they plan to use supports the trust-accounting and record-keeping requirements in their jurisdiction.
External Examinations Are Part of the Control Framework
Many law practices that hold trust money are also subject to annual external examination requirements. The process and deadlines vary by state and territory. In Victoria, law practices operating trust accounts must appoint an external examiner to review their trust records each year.
Queensland and NSW also have their own annual examination and reporting requirements for practices that handle trust money. These reviews are important, but they should not be the first time problems are identified. Reconciliations, ledger reviews and internal checks should already be happening throughout the year.
Irregularities May Need More Than a Bookkeeping Correction
If a trust-account error is found, the correct response may involve more than fixing an entry. Some deficiencies or irregularities can trigger reporting obligations.
In Victoria, for example, lawyers, law-practice associates, external examiners and relevant banks that become aware of a trust-account deficiency or irregularity must notify the regulator as soon as practicable.
Queensland also has specific notification requirements for trust-account irregularities.
The exact obligation depends on the jurisdiction and nature of the issue. Firms should therefore have a clear escalation process rather than treating every discrepancy as a routine bookkeeping adjustment. For a closer look at the mistakes that commonly create these problems, see Trust Account Compliance Mistakes That Put Law Firms at Risk.
Principals Still Remain Responsible
Law firms can use bookkeepers, practice managers, accountants and external providers to support trust-account administration. What they cannot do is assume that responsibility has moved with the work.
The Victorian regulator’s 2026 Risk Outlook specifically reminds principals that responsibility for law-practice trust accounts cannot simply be delegated to bookkeepers or practice managers.
That distinction matters when working with bookkeeping outsourcing companies. External support can help keep records current and reconciliations completed, but the law practice still needs to maintain oversight, approvals and accountability.
Wrapping Up
Trust accounting is ultimately about control and traceability. A law firm should be able to show who trust money belongs to, where it is held, why it moved and what balance remains. That requires more than a separate bank account. It requires accurate ledgers, regular reconciliations, clear withdrawal authority, suitable software and a process for dealing with irregularities.
Because the detailed rules differ across Australian jurisdictions, firms should always refer to the legislation and regulator guidance that applies to their own practice. If your law firm needs support with trust records, reconciliations or broader bookkeeping processes, Befree can provide structured financial administration while your principals retain responsibility for compliance. Contact Befree to discuss how outsourced bookkeeping support can fit into your existing trust-account controls.