Legal Billing & Trust Accounting Glossary

An AR aging report buckets outstanding invoices by how long they have been unpaid: current (under 30 days), 30–60 days, 60–90 days, and over 90 days. For law firms, the distribution across those buckets signals collection health. Invoices that age past 90 days carry a significantly lower probability of collection and may require active write-off or write-down decisions.

Any billing structure that moves away from the standard hourly rate model. Common AFAs include flat fees, capped fees, contingency fees, subscription retainers, and phased billing. AFAs give clients cost predictability and require firms to price legal services based on value and scope rather than time spent. Over 80% of law firms now use some form of AFA.

The percentage of invoiced amounts that clients actually pay. Calculated as total collected divided by total billed. Industry averages for mid-sized law firms sit around 84–89%. A firm with a high billing realization rate but a low collection rate is invoicing efficiently but failing at the collections stage — a distinct problem requiring different remedies.

The process of calculating and recording each attorney's share of firm revenue based on agreed compensation formulas. Compensation tracking accounts for factors such as origination credit, working attorney credit, hours billed, and collections. Modern legal billing software automates these calculations to eliminate manual spreadsheets and reduce partner disputes.

A fee arrangement in which the attorney is paid only upon a successful outcome, typically a percentage of the client's recovery — commonly 33% in personal injury matters. Contingency fees allow clients to access legal representation without upfront costs. Funds recovered are usually deposited to trust first, with the attorney's earned percentage transferred to the operating account after expenses.

A payment made by a law firm on behalf of a client, such as court filing fees, expert witness costs, process server fees, or title search charges. Disbursements are distinct from attorney fees and are typically tracked as billable expenses on the matter. Hard costs paid directly by the firm are often advanced from the operating account and then billed back to the client.

The actual revenue earned per hour of attorney time invested on a matter, calculated as total fee collected divided by total hours worked. Effective Hourly Rate (EHR) is the primary profitability metric for flat-fee and alternative-fee matters, revealing whether a fixed price is above or below the firm's effective cost of service. An EHR below standard billing rates signals underpricing or scope creep.

A retainer structure in which clients maintain a minimum balance in their trust account throughout the entire engagement. When the balance drops to a predetermined threshold, the client is required to replenish funds before work continues. Evergreen retainers improve cash flow predictability and reduce collection risk compared to traditional one-time retainers that deplete to zero.

A fixed price quoted for a defined scope of legal work, regardless of the actual hours spent. Flat fees give clients cost certainty and can improve a firm's cash flow through upfront payment. Profitability depends on accurately scoping the work and tracking the effective hourly rate on each matter. Flat fees paid in advance must be held in the client trust account until earned.

IOLTA is a pooled trust account program in which law firms hold short-term or nominal client funds in a single interest-bearing bank account. The interest earned belongs to neither the firm nor the client; instead, it is remitted to the state bar's IOLTA program to fund civil legal aid and bar administration. IOLTA accounts are required in all U.S. jurisdictions for qualifying client funds.

LEDES is an open standard format for electronic legal billing adopted by corporations, insurers, and large clients to receive standardized invoices from outside counsel. LEDES invoices encode time entries and expenses using UTBMS task and activity codes, enabling automated review and processing. The LEDES Oversight Committee maintains the specification, with LEDES 1998B the most widely used format.

A matter is the specific legal project or case opened for a client, equivalent to a project record in a law firm's billing system. All time entries, expenses, invoices, and trust transactions are tracked at the matter level. One client may have multiple open matters simultaneously — for example, a business client may have separate matters for litigation, contract review, and employment counsel.

A law firm's operating account holds the firm's own money — earned fees, firm revenues, and business expenses. A trust account (typically IOLTA) holds client funds that the firm does not yet own, such as advance fee retainers or settlement proceeds. Mixing these funds is a serious ethical violation called commingling. Funds move from trust to operating only when fees are earned and properly documented.

Compensation credit awarded to the attorney who is responsible for bringing a client or matter to the firm. Origination credit is a component of partner compensation formulas and is typically expressed as a percentage of collected fees on the originated work. It creates an incentive for business development but can cause internal conflict when clients are transferred between partners or served by multiple attorneys.

The fraction of billable work that is ultimately converted to collected revenue. Billing realization measures how much of time worked makes it onto an invoice; collection realization measures how much of invoiced amounts is actually paid. The overall realization rate combines both. The industry average across mid-sized firms is approximately 84–88%, meaning firms typically collect about 84 to 88 cents of every dollar of work performed.

An advance payment from a client deposited to the firm's trust account before work begins. As the attorney earns fees, funds are transferred from trust to the operating account in accordance with the engagement agreement. A true retainer pays for availability; a security retainer is an advance against future hourly or flat fees. All retainers must be held in a compliant trust account until earned.

The monthly process of verifying that three records agree: the trust account bank statement, the firm's trust ledger, and the sum of all individual client ledger balances. All three totals must match exactly. Three-way reconciliation is required by most state bars and is the primary control against trust account errors, unauthorized transactions, and misappropriation of client funds.

The specialized accounting practice governing how law firms handle client funds held in trust. Trust accounting requires strict separation of client funds from firm operating funds, individual client ledgers for every matter, and regular three-way reconciliation. Errors or commingling can trigger state bar disciplinary action. Most jurisdictions follow ABA Model Rule 1.15, with additional state-specific requirements.

UTBMS (Uniform Task Based Management System) codes are a standardized taxonomy of task codes and activity codes used to classify legal work on LEDES invoices. Task codes identify the phase of litigation or transaction (e.g., L200 for pre-trial motions), while activity codes describe what was done (e.g., A102 for research). Corporate and insurance clients use UTBMS codes to audit outside counsel invoices and enforce billing guidelines.

The percentage of an attorney's available working hours that are spent on billable work, calculated as billable hours divided by total working hours. Industry benchmarks vary by firm size: mid-sized firms (5–19 attorneys) average approximately 37% utilization; larger firms average around 45%. A low utilization rate may indicate excess capacity, while a very high rate can signal unsustainable workloads or poor work delegation.

Work in Progress represents all time and expenses that have been recorded by attorneys but not yet converted to an invoice. WIP is a snapshot of a firm's unbilled revenue pipeline. High WIP lockup — the number of days between work performed and invoice sent — signals billing delays that reduce cash flow. The median law firm carries approximately 47 days of WIP at any given time.

A write-down reduces the amount billed to a client below the standard rate, with the discount visible on the invoice — a transparent reduction that can strengthen client relationships. A write-off eliminates time or fees entirely, either before billing or after determining an invoice is uncollectible. Write-downs preserve the perception of value; write-offs provide no business development benefit and can mask systemic billing inefficiencies.