Xero is very good at the office side of a law firm and it is not a legal cashiering system. Here is what it does, what it does not do, and how the two systems are reconciled to each other — plus why no software choice is what makes a firm compliant.
Xero is excellent general accounting software, and for the business side of a law firm — the firm's own money — it is a good choice. It is not a legal cashiering system, and on its own it does not produce compliant client-side records. That is not a criticism of Xero. It is simply a different job, and firms that blur the two end up outside Rule 8.3 without ever intending to.
Specifically, out of the box Xero does not give you the records Rule 8.1 names — client ledgers identified by client name and a description of the matter, with client money and business money on separate sides, and a list of all client ledger balances with a running total. It does not produce the three-way reconciliation rule 8.3 requires, which ties the bank statement balance to the cash book balance and to the client ledger total. And it does not maintain the Rule 8.4 central record of all bills and other written notifications of costs. Those three obligations belong on the client side of your systems.
The architecture
What the records in rules 8.1 to 8.4 actually demand is a clean division of labour.
A legal case management or legal accounts system holds client money: matter ledgers by client and matter, receipts and payments, transfers against bills under Rule 4.3, the balance listing, and the five-weekly three-way reconciliation with the record signed off by the COFA or a manager. This is where the Accounts Rules obligations actually live, and it is what your reporting accountant tests.
Xero holds the firm's own money: the business bank account with live feeds, purchases and expenses, payroll, VAT under Making Tax Digital, and the statutory accounts and management reporting. Fees billed, staff cost as a percentage of fee income, work in progress and profit before partner drawings all come from here.
The two are reconciled to each other on a defined cycle — office receipts arising from client-to-office transfers agreeing to the transfers recorded on the client side, and billed fees agreeing between the two. This is the step firms skip, and it is the step that turns two systems into one reliable set of books. It is also where Rule 8.2 matters more than most firms realise: statements must be obtained at least every five weeks for all client and business accounts, so the office account is inside the Accounts Rules perimeter too.
Rule 12.8 requires you to give your reporting accountant details of all bank and building society accounts used in the practice during the accounting period — not just the client account. A tidy, complete Xero file makes that schedule a five-minute job. An office account that has been reconciled once a year makes it a week of archaeology.
Set-up
Before the list, the thing the list cannot do. No software architecture makes a firm compliant. Conduct does. Whether a bill or other written notification of costs went out before the transfer, for the specific sum in it, is a Rule 4.3 question about what somebody did, not about where the entry was posted. Who authorised and supervised a withdrawal is a Rule 5.2 question about people. Whether enough was held for that particular client is a Rule 5.3 question the ledger only reports on afterwards. Good systems make the right conduct easy and the wrong conduct visible; they do not substitute for it, and a reporting accountant tests the conduct through the records rather than the other way round.
Chart of accounts, bank feeds, VAT settings and reporting configured around fee income, disbursements, staff cost and lockup rather than a generic template.
The client ledgers, balance listing and five-weekly three-way reconciliation maintained in a system that can actually produce them, ready for sign-off.
Client account bookkeepingA defined, scheduled reconciliation between the client system and Xero, so transfers and billed fees agree across both rather than approximately.
Returns prepared and filed digitally, with disbursement and recharge treatment worked through on your matter types before it is posted.
Monthly or quarterly management reporting off the live file — fees, WIP, lockup, staff cost ratio and profit per equity partner.
Accounts and taxOpening balances and comparatives agreed back to your last filed accounts, bank feeds and payroll moved across, the new chart of accounts mapped to the old one — and the client side left where it belongs.
We use Xero because it does the office side well and because it makes us and you look at the same live numbers. We do not claim any partner status with Xero on this site, and we do not claim Xero does client accounting on its own, because it does not. If your firm holds client money, the client side needs a system built for it and a routine that satisfies rule 8.3 every five weeks — which is the thing that decides how your Accountant's Report reads.
Not sure where your current set-up stands? The client account health check takes about five minutes, and COFA support is where the compliance side of this sits.
No, and any answer that says otherwise should be treated carefully. Xero is general accounting software. It does not by itself produce the records rule 8.1 requires — client ledgers identified by client name and matter description with client and business money on separate sides, and a list of client ledger balances carrying a running total. It does not produce the three-way reconciliation required by rule 8.3, which ties the bank statement to the cash book and to the client ledger total. And it does not maintain the rule 8.4 central record of bills. Those come from a legal accounts or case management system.
The office side, which is most of the firm's own accounting. Bank feeds and reconciliation on the business account, purchase and expense processing, VAT returns filed under Making Tax Digital, payroll, and management reporting — fees billed, staff cost as a percentage of fee income, and the profit figures partners actually look at. It also gives you and your accountant the same live picture rather than a file sent once a year. What it is not is a legal cashiering system, and a firm that treats it as one will fail rule 8.3 without noticing.
The normal architecture splits the two sides. The legal case management or legal accounts system holds the client side: matter ledgers, client money in and out, transfers against bills, and the three-way reconciliation with the sign-off rule 8.3 requires from the COFA or a manager. Xero holds the office side: the business bank account, purchases, payroll, VAT and the statutory accounts. The two are then reconciled, so office receipts from client-to-office transfers agree to the transfers recorded on the client side. Getting that reconciliation defined and scheduled is the part firms skip.
Yes, and for a VAT-registered law firm this is not optional. All VAT-registered businesses are already within Making Tax Digital for VAT and have been signed up automatically, so there is nothing to join. What it means in practice is keeping the records digitally and filing the return from them, which is exactly what a properly configured Xero file does. The harder VAT question in a law firm is not the filing mechanism but the treatment of disbursements and recharges on your matter types, which is a matter of getting the analysis right before it is ever posted.
Rule 3.2 of the SRA Accounts Rules requires the name of the client account to include the name of the authorised body and the word client. That is a naming requirement about the account itself at the bank, not about how it appears in your software, and it is checked. Rule 3.1 separately requires the client account to be at a branch or head office of a bank or building society in England and Wales. Rule 3.3 then limits what the account may be used for: payments in, transfers and withdrawals must relate to the delivery of regulated services, so it may not be used to provide banking facilities.
A free look at how your client system and your office accounting fit together, what is falling between them, and what a clean set-up would give you that this one does not.
One short email: what has changed in the Accounts Rules, the dates coming up, and one number worth checking in your firm. No spam, unsubscribe any time.