Two sets of books, one licence
Every law practice runs a general ledger like any business, plus a second set of records the Law Society of Ontario polices under By-Law 9. Money received on account of a client, retainers, settlement funds, closing proceeds, goes into trust the day it arrives. Most sole practitioners and small firms hold it in a mixed trust account, one pooled account for many clients, and the interest on that account belongs to the Law Foundation of Ontario, not to the firm.
Fees leave trust only after a bill is delivered. Until then the money is the client's, however much work sits on the file. That one rule shapes the entire bookkeeping design: trust records track whose money you are holding, the general ledger tracks what you have earned, and nothing is allowed to blur the line. Get it wrong and the consequences are professional, not just financial; a trust shortage is the fastest route to a Law Society investigation there is.
The monthly trust comparison is the heartbeat
By-Law 9 requires a trust comparison prepared every month, within 25 days of month-end. It is a three-way match: the reconciled trust bank balance, the total of all client trust ledgers, and a client-by-client listing proving no individual ledger is overdrawn. A ledger that goes even one dollar negative means one client's money has covered another client's matter, and that is a conduct problem, not a bookkeeping one.
We fold the comparison into the month-end close so the 25-day window never sneaks up. The recurring culprits are predictable: a settlement deposit posted to the wrong matter, an e-transfer sitting unallocated, a stale trust cheque never cashed, fees moved out of trust before the invoice existed. We also watch the cash rule, because a licensee generally cannot accept $7,500 or more in cash on a single client matter.
| By-Law 9 record | What it has to show |
|---|---|
| Trust receipts and disbursements journals | Every dollar in and out of trust, dated, with the client and matter identified |
| Client trust ledger | A running balance per client per matter, never overdrawn |
| Monthly trust comparison | Bank, journal and ledger totals agreeing, prepared within 25 days of month-end |
| General journals and billings record | Fees billed plus general receipts and disbursements on the practice side |
The general ledger carries its own traps
Client disbursements the firm pays before billing, court fees, process servers, expert reports, are a recoverable asset, not an expense. We code them in two categories from day one, those paid as the client's agent and those that are the firm's own cost, because that split decides how HST applies when the file is billed. The tax mechanics live on our lawyer tax pages; the bookkeeping side is simply discipline, applied every week rather than reconstructed every April.
Unbilled time matters more than it used to, because year-end WIP is now taxable for law practices. If dockets are incomplete or write-offs are invisible, the year-end valuation becomes guesswork. And the ordinary business layer still has to run: payroll for clerks and assistants with source deductions remitted on schedule, Employer Health Tax once Ontario payroll passes the $1,000,000 exemption, and 13% HST on fees with input tax credits captured on rent, software and research subscriptions.
A stack that keeps trust and ledger in sync
Practice-management software (Clio, PCLaw, CosmoLex, LEAP) is where matters, dockets and trust activity live. We connect it to QuickBooks Online as the general ledger, with Dext capturing supplier bills, and map the flow so trust money never touches an income account. Inside our End-to-End Accounting engagement, bookkeeping, payroll, financial reporting and tax filing run under one roof, so the trust comparison, the statements and the T2 are built from the same reconciled numbers. The monthly deliverable stays short on purpose: cash on both sides, unbilled disbursements by file, fees billed against last year, and anything that moved.
Ready for March 31, and for the knock
The Annual Report to the Law Society, due March 31, asks detailed questions about your trust accounts, and LSO spot audits expect records produced on request, not after a scramble. Firms we keep are always one export away from both. Year-end flows straight into the corporate tax return, and if the CRA ever questions HST or payroll, CRA Audit & Review Support starts from books we already know. We do this for sole practitioners and small firms across Mississauga and the GTA.
Source: Ontario — Law Society Act.
