Legal practice accounting: Client accounts & SRA compliance

Published 2 April 2026

Table of contents

• What is legal practice accounting?
• What do the SRA Accounts Rules require?
• How client accounts work in a UK law firm
• Risks that cause SRA breaches
• Accounting software features that help you comply with SRA rules
• Stay compliant with Xero
• FAQs on legal practice accounting

Key takeaways

• Legal practice accounting requires law firms to track financial records for the firm and client accounts separately. To be compliant with SRA Accounts Rules, you must keep client funds in a trust account, separate from your firm's general bank account.
• Deposit advance fees, retainers, and funds for client bills into the client account. Pay bills directly from this account – but make sure you keep invoices and receipts.
• Transfer money for your fees from the client account to the firm's account, but only after you send a bill.
• Do a 3-way reconciliation at least every 5 years and keep detailed records for annual SRA audits.

What is legal practice accounting?

Legal practice accounting refers to bookkeeping and financial management practices for law firms. Like all other types of accounting, it focuses on tracking revenue and expenses, but law firms must also follow strict industry rules related to client trust accounts, billing for time, and recognising revenue.

Because most solicitors bill for their time, they need to carefully track hours worked for each client. Consider using time tracking software that syncs with your accounting software to streamline invoicing. Finally, make sure you understand the revenue recognition rules for law firms – typically, you record revenue once it's earned, rather than when you receive a retainer or advance fees.

What do the SRA Accounts Rules require?

The Solicitor's Regulation Authority (SRA) Accounts Rules require law firms to:

• keep client funds separate from the firm's general funds
• manage client accounts in a certain way
• perform reconciliation regularly
• undergo yearly audits

Under the SRA Accounts Rules, you can only use client funds for client matters – like fees for your services or bills for expenses related to the client's case. You can pay client bills from the account, but you can only withdraw money for your fees after you’ve sent an invoice stating the exact cost.

You must track client accounts in a separate ledger in your law firm accounting software, and reconcile transactions at least every 5 weeks. Finally, you need to return all unused client funds promptly, and you may need to pay the client interest, depending on how long you’ve held the funds.

To learn more, check out the SRA Account Rules.

How client accounts work in a UK law firm

When a client engages your services, you must:

• set up a trust account and clearly label it as a client account
• deposit client settlements and payments for advance fees, retainers, or costs into the account
• use these funds to cover client costs like filing fees or expert witnesses.

To get paid for your services, send the client a bill and then transfer funds from their account to the firm's account.

Here are more details on how to maintain client vs office accounts.

Handling receipts, bills, transfers and residual balances

Keep receipts of every deposit, withdrawal, and transfer from your client accounts. Maintain copies of bills showing the cost of client expenses, as well as invoices backing up transfers for your fees.

To improve your client money accounting, use accounting software that lets you attach invoices, receipts, or other documents to bank transactions, making it easier to back up expenses during compliance audits.

Once you end your engagement with a client, return any unused funds (residual balances) as soon as possible. The SRA Accounts Rules prohibit law firms from holding onto residual funds – you can be penalised or sanctioned even for small balances. If you can't find the client to return the money, you can donate it to charity, but you must keep records. You need SRA approval to donate anything over £500.

Completing 3-way reconciliations

SRA Accounts Rules require you to do a 3-way reconciliation at least every 5 weeks – but you can always just do it monthly when you receive your bank statements.

To spot errors and prove you're not commingling funds, you should reconcile:

• bank statement for the client account
• client account ledger
• total of all client ledgers in your accounting records

The transactions in the bank statement for the client account should match the transactions noted in the client ledger. Once you've reconciled the individual client ledgers with their respective bank accounts, make sure the totals match what appears in your general ledger.

Then, have a Compliance Officer for Finance and Administration (COFA) or firm manager sign the reconciliation. If there are differences between your records and the bank statements, resolve them as quickly as possible.

Records and approvals that satisfy SRA reviews

Once a year, your firm must hire an independent accountant to perform legal compliance auditing. The auditor will issue a report to the SRA, and to review your compliance, they'll want to see your:

• signed 3-way reconciliation records
• bank statements and client ledgers
• proof of opening and closing client accounts
• residual balance reports
• a copy of your firm's policy regarding interest on client accounts
• other records from your law firm accounting software as needed.

The SRA also carries out spot audits – so make sure your records are always up to date.

Risks that cause SRA breaches

The way you manage client accounts is one of the most critical aspects of legal practice accounting. Small mistakes may breach SRA Accounts Rules and lead to penalties, sanctions, or other consequences.

Protect your firm by avoiding these common errors.

• Commingling client and firm funds: Always set up client accounts before accepting payments. And once you’ve done this, have clear policies on handling client bills and transfers for services to prevent accidental commingling.
• Reconciling client accounts late: The 5-week reconciliation rule gives you a buffer – as long as you reconcile accounts within a week of when you receive the bank statement. Schedule a regular time for reconciliation and assign someone to do it.
• Failing to resolve reconciliation errors: If there are discrepancies between the bank statement and your records, figure out why and address the errors. Update internal processes to reduce errors if you need to.
• Keeping residual balances: Have clear processes for returning unused funds as soon as you're done representing a client. If you can't return the funds, contact the SRA or donate the money to charity as soon as possible.
• Not preparing for annual audits: Annual compliance audits can be stressful, but if you perform reconciliation as required and keep detailed records, you can get through them easily.

The SRA has more resources on how to keep accurate client accounting records.

Accounting software features that help you comply with SRA rules

Choose legal practice accounting software that helps you stay compliant with SRA Accounts Rules.

Look for these five features:

• Ability to link multiple bank accounts: so you can track the firm's main account as well as all client accounts
• Automated : to speed up reconciliation between bank records and accounting records
• Bank feeds with real-time balances: connect bank accounts to the software so you always have a current balance and can easily spot overdrafts or residual balances
• Role-based permissions: control who can authorise payments, transfers, or other transactions
• Audit trails: track all activity for audits and transparency

Stay compliant with Xero

Xero small business accounting software has everything you need to stay compliant with SRA Accounts Rules and all other legal practice accounting rules. Connect multiple bank accounts, automate reconciliation to save time, and track everything so you're ready for an audit.

Best of all, it's easy to use and syncs with many law firm practice-management apps.

Get one month free

FAQs on legal practice accounting

Check out these frequently asked questions:

What is the difference between a client vs office account?

• The client account is where you hold funds in trust for a client – you deposit their payments, make withdrawals for bills they need to cover, and transfer funds after invoicing them for services.
• The office account is for your firm – you deposit client payments and transfers for services from client accounts, and then make withdrawals for firm expenses like overhead, admin, and payroll.

How often must a law firm complete a 3-way reconciliation?

The SRA Accounts Rules require law firms to do 3-way reconciliation every 5 weeks. Also, firms must undergo an independent audit once a year and submit to spot audits if selected by the SRA.

Can I pay firm fees from the client account before issuing a bill?

No – law firms in the UK cannot pay their fees from a client account until after they issue a bill. The bill must clearly state the cost of services and expenses, and the transfer must match the bill total.

How should we handle mixed payments that include fees and disbursements?

If a client makes a payment to cover both fees and disbursements, you should:

• deposit the full amount into the client's account
• send an invoice showing your fees and transfer payment from their account into the office account

Make disbursements as needed when you receive bills for the client, and track everything in the client ledger of your law firm accounting software.

How long should we retain client account records?

You should keep client account records for at least 6 years – or longer, depending on the client's situation. In particular, you may need to keep records for 7 to 21 years for cases related to property, litigation, and the custody of monitors.