How Do Solicitors Record Client Money Received in Advance

When clients pay money to a solicitor before any work is carried out, the firm is effectively holding funds in trust. That money still belongs to the client until the solicitor either earns it through billable work or pays it out on the client’s behalf. Because of this the Solicitors Regulation Authority (SRA) has clear rules about how it must be handled, and firms must keep their accounts in a way that shows the separation between firm money and client money at all times.

This article walks through how solicitors record client funds in advance, what the SRA expects and how the accounting treatment works behind the scenes.

Understanding What Counts as Client Money

Before looking at the accounting process it helps to understand what is actually classed as client money. When a client pays money on account of fees, expenses, search fees, disbursements or any anticipated work, those funds belong entirely to the client until the relevant service is completed. Even though the solicitor receives the money into their bank account, it is not available for spending or treated as business income. It must sit safely in a designated client account.

The most important point is that client money is never firm money. Solicitors act as custodians, not owners, of advance funds.

How Solicitors Record Money Received in Advance

When a solicitor receives money in advance, the accounting treatment reflects the fact that the firm is holding someone else’s funds. The money goes into a regulated client account, not the firm’s business account, and it is recorded on the firm’s internal ledger as a liability.

In practical terms this means that two entries are created. First, the client account bank ledger shows an increase in funds. Secondly, the client ledger for that individual matter records that the firm now owes the client the same amount. The solicitor’s accounting system must always match these two balances. The client money held should equal the total liabilities owed to all clients. If even a small difference appears, the SRA expects it to be investigated and resolved immediately.

Nothing at this stage appears as income in the profit and loss account. The firm has earned nothing yet and is merely safeguarding the money.

In my opinion this system protects clients and protects solicitors. The separation ensures the firm never accidentally uses client funds for its own costs, and it provides a clear audit trail for regulators.

How Client Money Is Used as Work Progresses

When the solicitor begins work on the file and raises a bill for completed services, that is the moment the firm becomes entitled to transfer client money into its business account. The transfer happens only after a formal invoice is raised. The bill converts part of the client liability into earned fees.

Accounting wise, the firm reduces the client ledger balance by the amount of the invoice. At the same time, the firm records the income in its profit and loss account and moves the equivalent amount from the client account to the business account. This movement must be recorded precisely because the SRA requires full transparency between billed work and money transferred out of the client account.

If the solicitor uses client money to pay a third party disbursement, such as a court fee or a local authority search fee, the payment is recorded against the client ledger. It reduces the liability owed to the client but does not count as firm income.

What Happens If the Firm Holds Client Money for a Long Time

The longer client money sits in a client account, the more important accurate record keeping becomes. The SRA requires firms to carry out regular three way reconciliations. This means matching:

• the physical bank balance in the client account

• the total of all individual client ledgers

• the internal control account that records overall client money owed

If all three figures do not match exactly, the firm must investigate the cause. Small timing differences can occur temporarily, but unexplained variances can lead to compliance issues.

In my view this is where many firms feel pressure. Holding advance client money is a responsibility, not a convenience, and firms must be able to show regulators that they are managing it correctly every single month.

What Happens When There Is a Surplus or Unclaimed Money

Sometimes a client overpays, or work ends with a small balance left on account. In these situations the solicitor must attempt to return the money promptly. The funds still belong to the client and cannot simply be moved into the firm’s income.

If the client cannot be located, the SRA allows firms to follow a specific process before transferring small amounts to charity. Even then, the firm must demonstrate reasonable attempts to contact the client and record the decision clearly. The money never becomes the firm’s.

Why Firms Cannot Use Client Money to Fund Their Operations

This is a core principle of SRA regulation. Client money is never working capital. Even if the firm is struggling with cashflow, it cannot dip into the client account, even temporarily. Misuse of client funds is one of the most serious breaches a solicitor can commit.

Because of this, client advances remain as liabilities until an invoice is raised or the money is paid on behalf of the client. The regulator treats any deviation from this as a risk to client protection.

In my opinion good systems and regular reconciliations are the strongest defence against errors. Firms that automate client ledger tracking or use specialist legal accounting software tend to stay compliant more easily.

How Advance Payments Appear in the Accounts

From an accounting perspective, advance client funds sit on the balance sheet as liabilities. They do not affect the profit and loss account until the solicitor raises a bill. The moment an invoice is issued, the firm recognises revenue and transfers the matching amount from the client account to the business account.

This creates a clean separation:

• Client account holds unearned client money

• Business account holds earned income

At year end, unbilled client advances must still appear on the balance sheet. They are not part of turnover and cannot be included within the firm’s taxable income.

When Advance Payments Become Problematic

Problems arise when:

• the firm forgets to raise invoices promptly

• client ledger balances are not monitored

• reconciliations are not completed

• disbursements are incorrectly posted

• money is moved from the client account too early

Each of these can create gaps between the true client liability and the client account balance. The SRA views these gaps as high risk and expects immediate correction.

In my opinion many compliance failures come from outdated manual processes rather than deliberate errors. Modernising financial workflows often prevents issues from ever arising.

Conclusion

When solicitors receive client money in advance, they must treat it as client property, not firm income. The funds must go into a dedicated client account and be recorded as a liability on the client’s ledger. Only when work is completed and a bill is raised can the solicitor transfer money into the business account and recognise income. Throughout this process the SRA requires precise record keeping, clear separation of funds and regular reconciliations.

In my opinion the key to staying compliant is understanding that advance payments belong to the client until the moment they are billed. When solicitors follow the rules carefully, client funds stay protected and the firm’s accounts remain accurate and transparent.