Professional services firms — law firms, management consultants, engineers, architects, accountants — bill time and expertise rather than goods. The bookkeeping model that works for a product business does not translate cleanly. Revenue recognition is tied to performance obligations that are often incomplete at month end, WIP balances grow and collapse in ways that can distort the P&L if not managed correctly, and some firms carry trust obligations that create entirely separate accounting requirements.
Work in Progress and AASB 15
AASB 15 Revenue from Contracts with Customers governs when revenue can be recognised. For professional services, the key question is whether the performance obligation is satisfied over time or at a point in time.
A performance obligation is satisfied over time if: (a) the client simultaneously receives and consumes the benefits as the firm performs, or (b) the firm's performance creates an asset the client controls as it is created, or (c) the firm's performance does not create an asset with an alternative use and the firm has an enforceable right to payment for performance completed to date.
Most ongoing legal, accounting, and consulting engagements satisfy the "over time" test under criterion (a) — the client benefits continuously from the advice. This means revenue should be recognised progressively as the work is performed, not simply when the invoice is raised. WIP represents the value of services performed but not yet invoiced.
For a law firm that charges $500 per hour and its solicitors complete 80 hours on a matter during June but no invoice is raised until July, the June financials should recognise $40,000 of revenue (or at minimum, record $40,000 of WIP as an asset with matching deferred income if there is uncertainty about collectibility).
Setting Up a WIP Schedule
A WIP schedule is typically maintained outside the accounting software (in a practice management system like LEAP, Clio, or a time-billing module) and then journalled into the general ledger at month end.
The schedule records: matter/project reference, timekeeper, hours logged, standard charge rate, total value of services rendered, amount already invoiced, and the net unbilled balance. The unbilled balance is the WIP balance.
The month-end journal entries (simplified):
To recognise WIP:
Dr Work in Progress (asset) [hours × rate]
Cr Revenue — Professional Fees [hours × rate]
When invoiced (billing the WIP):
Dr Accounts Receivable [invoice amount]
Cr Work in Progress [WIP amount billed]
Cr Revenue — Professional Fees [any additional amount billed above WIP, if applicable]
Write-off of WIP (write-down without billing):
Dr WIP Write-off / Billing Adjustment [amount written off]
Cr Work in Progress [same amount]
WIP write-offs happen when partners discount bills, when matters are abandoned, or when work is written off for client relationship reasons. Code write-offs to a separate expense account — not as a revenue reduction — so they are visible in management reports. A partner who writes off 15% of WIP each month is making a business decision the practice manager needs to see clearly.
Fixed-Fee vs Time-Billed Engagements
Revenue recognition differs between these billing models.
Time-billed: Revenue recognised as time is recorded (over-time method above). The WIP balance represents the recoverable value of services rendered.
Fixed fee: The total fee is the transaction price. Revenue is recognised based on the stage of completion — typically calculated as costs incurred to date as a proportion of estimated total costs, or by reference to milestones if the contract specifies them. If a $30,000 fixed-fee engagement is 60% complete at month end, recognise $18,000 of revenue. The difference between the revenue recognised and any progress billing already invoiced is either a contract asset (revenue exceeds billing) or a contract liability (billing exceeds revenue recognised).
If the firm's estimate of total costs changes — the job is running over budget — the revised stage-of-completion percentage must be recalculated prospectively. Bookkeepers should prompt engagement partners to update their fee estimates at month end, not rely on the original estimate for 12 months until they surprise everyone with a write-off.
Disbursements: GST and Recovery
Disbursements are expenses incurred by the firm on behalf of clients — court filing fees, barrister fees, expert witness fees, travel costs, search fees, printing. The GST treatment of disbursements depends on whether the firm is acting as principal or agent:
Agent: If the firm arranges the supply on behalf of the client and the client is the recipient of the supply, the disbursement is not a supply by the firm. The firm simply passes the cost through without adding GST. The client claims any ITC directly. The firm does not claim the ITC (because it is not the recipient of the supply) and does not charge GST on the recovery.
Principal: If the firm itself receives the supply (e.g., purchases expert witness services in its own name and then on-charges them), it is making a supply to the client and must charge GST on the recovery (if the underlying supply was taxable). The firm claims the ITC on acquisition.
The distinction matters, and the ATO has issued specific guidance on legal disbursements. Court filing fees, for example, are generally disbursements where the firm acts as agent — the client pays court fees through the firm. Barrister fees engaged directly by the solicitor firm are more likely to be principal arrangements.
Keep disbursements in a separate balance sheet account (Disbursements Recoverable), not in the P&L, unless they have been billed. Unbilled disbursements are an asset, not revenue.
Solicitor Trust Accounts
Law firms in Australia must maintain a statutory trust account for client monies held on account — advance fees paid before work is done, settlement funds, and similar receipts. This is distinct from a real estate agent's trust account and operates under each state's Legal Profession legislation (e.g., Legal Profession Uniform Law in NSW and Victoria, Legal Profession Act 2007 in Queensland).
Key obligations that affect bookkeeping:
- Trust money must be kept in a dedicated trust bank account, separate from the firm's general account.
- All trust receipts must be recorded on the same day received.
- Transfers from trust to general account (i.e., drawing down advance fees when the work is earned) require a compliant trust-to-office transfer — which means the firm must have issued a bill or provided a statement of account before the transfer.
- Trust account records are subject to annual external examination by a qualified trust account examiner.
The bookkeeping for trust accounts is ring-fenced. The trust bank account balance must reconcile to the sum of all individual client ledger balances held in trust. A mismatch — any mismatch — is a reportable breach in most state jurisdictions. Run this reconciliation at least monthly, and keep the working papers.
Debtors Management in Professional Services
Sixty-day debtors are almost normal in professional services — which does not mean they should be tolerated without monitoring. A debtor that ages past 90 days in a law firm or consulting practice is a cash flow problem and increasingly a bad debt risk.
Set up aged debtor reports by partner as well as by total firm. Partners who have their own aged debtors visible in the monthly management pack are more likely to follow up with clients. Flag any debtor over 90 days for partner review and confirm whether it is disputed, subject to a payment arrangement, or collectible.
Provision for doubtful debts should be reviewed at each reporting date. A general provision of, say, 2-5% of debtors 60-90 days, and a specific provision for any debtor known to be at risk, is a reasonable approach. The provision is a debit to bad debt expense and a credit to the provision account. When the debt is confirmed uncollectible, write it off against the provision (debit provision, credit debtors). If subsequently recovered, reverse the write-off and recognise the receipt. GST adjustments may be required for bad debt write-offs where the GST was previously remitted — a decreasing adjustment is available in the period the debt is written off as bad, subject to the conditions in Division 21 of the GST Act.