What are the key differences between legal and general business accounting?

Accounting plays a vital role in every organisation, but legal accounting operates under a distinct set of principles and regulations. While general business accounting focuses on tracking income, expenses, and profitability, legal accounting involves additional responsibilities such as handling client money, complying with the Solicitors Regulation Authority (SRA) rules, and maintaining separate ledgers for client and office funds.

For solicitors, understanding these differences is essential to remain compliant and protect client trust. For accountants who work with law firms, it requires specialised knowledge and systems to meet the profession’s regulatory standards.

This article explores the key differences between legal accounting and general business accounting and why law firms need tailored financial management.

1. Client money versus business funds

The most important distinction between legal and general business accounting lies in how money is handled. Law firms regularly hold client money, such as conveyancing deposits, settlement funds, or money for disbursements.

Under the SRA Accounts Rules, solicitors must keep this money completely separate from their own. This means maintaining two types of bank accounts:

• Client account: Holds money belonging to clients or third parties.

• Office account: Holds the firm’s own money, such as fees, wages, and operational costs.

General businesses do not usually manage client money in this way. Their accounting focuses solely on business income and expenses, without the additional complexity of holding funds on trust.

Law firms must also perform regular reconciliations between client ledgers, bank statements, and internal records to ensure every penny is accounted for.

2. Regulatory compliance and oversight

Legal accounting is governed by strict regulatory frameworks. In England and Wales, law firms must comply with the SRA Accounts Rules 2019, which set out how client money should be received, held, and transferred.

Accountants working with law firms must ensure that:

• Client and office funds remain separate.

• Client money is only used for its intended purpose.

• Regular reconciliations are completed and documented.

• Any breaches are reported to the SRA promptly.

General business accounting, while still subject to tax and financial reporting standards, does not face such sector-specific regulations. The focus for most businesses is compliance with HMRC rules and accounting standards such as FRS 102, rather than professional conduct rules.

3. The role of the accountant

In a law firm, accountants often take on a compliance-focused role alongside financial management. They are responsible not just for preparing accounts and tax returns, but also for ensuring that financial processes adhere to SRA standards.

This includes:

• Preparing the annual Accountant’s Report for submission to the SRA.

• Monitoring client account activity and identifying potential breaches.

• Advising on internal controls to safeguard client funds.

• Supporting the firm’s Compliance Officer for Finance and Administration (COFA).

In a general business, the accountant’s responsibilities are usually limited to bookkeeping, payroll, management accounts, tax planning, and financial reporting. They are not typically involved in external regulatory oversight.

4. Accounting systems and software

While general accounting systems such as Xero, QuickBooks, or Sage are popular across many industries, law firms often require specialist legal accounting software.

These systems are designed to:

• Manage both client and office ledgers.

• Record disbursements and allocate them to specific matters.

• Track work in progress and time recording for billing.

• Generate reports that comply with SRA and Law Society requirements.

Common examples include LEAP, Clio, and Quill, which integrate both case management and legal accounting.

In contrast, general businesses typically use standard accounting software without the need for dual ledgers or client matter tracking.

5. Disbursements and billing structure

Law firms handle disbursements differently from other businesses. A disbursement is a cost paid on behalf of a client, such as court fees or expert witness charges.

In legal accounting:

• Disbursements are often paid from the client account or reimbursed through the office account.

• They must be clearly identified and allocated to the correct client matter.

• VAT treatment varies depending on whether the disbursement is a recharged expense or a third-party payment.

In general business accounting, expenses are recorded as business costs and passed to customers as part of a sale or service invoice, without the same level of tracking by client or case.

6. Reporting requirements

Law firms require detailed reporting not just for tax and management purposes, but also to demonstrate compliance with regulatory obligations.

Typical reports include:

• Client account reconciliation reports.

• SRA compliance and breach logs.

• Work in progress (WIP) and aged debtors analysis.

• Fee earner performance reports.

These reports help ensure transparency and accountability in how client money and firm finances are managed.

General business accounting focuses more on profit and loss statements, balance sheets, and cash flow forecasting, without the same emphasis on compliance-based reporting.

7. Role of the COFA and internal controls

Every SRA-regulated law firm must appoint a Compliance Officer for Finance and Administration (COFA). This individual is responsible for ensuring the firm’s compliance with the SRA Accounts Rules.

Accountants work closely with the COFA to establish and maintain:

• Proper segregation of funds.

• Authorised payment procedures.

• Accurate and timely reconciliations.

• Documentation of all transactions for audit and reporting purposes.

General businesses do not require such a role, as financial compliance is typically handled internally through management or external auditors.

8. VAT and tax treatment

While both legal and general businesses must comply with VAT and tax regulations, law firms face more nuanced VAT challenges due to disbursements and mixed supplies.

For example, VAT may or may not be chargeable depending on whether a disbursement is treated as an expense incurred on behalf of the client or as part of the firm’s service.

Accountants specialising in legal VAT understand these distinctions and ensure VAT returns are accurate and compliant with HMRC guidance.

9. Trust and ethical responsibilities

Beyond compliance, legal accounting carries a higher ethical responsibility. Solicitors are trustees of client money, meaning they must uphold the highest standards of integrity and transparency. Any misuse, even accidental, can lead to serious disciplinary action from the SRA.

In contrast, general business accounting focuses on accuracy and compliance but does not typically involve fiduciary duties to third parties.

10. Audit and inspection

Law firms undergo periodic SRA audits to ensure compliance with client money rules. Accountants play a key role in preparing firms for these inspections, providing reconciliations, reports, and documentation to demonstrate compliance.

General businesses are audited primarily for financial accuracy and statutory compliance, not regulatory conduct. The objectives are financial assurance rather than ethical oversight.

The bottom line

While legal and general business accounting share fundamental principles of accuracy and transparency, legal accounting is far more specialised. It requires additional systems, controls, and ethical considerations to manage client funds and comply with SRA rules.

Accountants supporting solicitors act as both financial advisors and compliance partners, ensuring the firm meets its professional obligations while maintaining profitability and efficiency.

In short, legal accounting is not just about managing money—it is about safeguarding client trust, upholding regulatory standards, and helping law firms operate with integrity and confidence.