Law firms often pay client costs out of client trust balances or advancing payments for costs on a daily basis. If these costs are not accounted for correctly in QuickBooks, practice management software, or both, this could prove to be extremely costly for a law firm. One question we get a lot is: how can I handle these advanced costs in QuickBooks?
If your firm is covering a client’s expense to be reimbursed when the case settles, when a garnishment is received, etc., these costs should be paid from your operating account (assuming you’re not paying from the client’s available trust balance, of course). In QuickBooks, where you may currently be expensing these costs to case expenses, client expenses, or cost of goods sold; you should book these costs to an asset account called “advanced client costs” or something similar. These costs are considered an asset because they are essentially a loan from your firm to the client – no different than if you wrote a check to a friend who has promised to pay you back.
After Case Settlement
When the case settles, the client sends in payment to cover the costs, etc. those payments will be categorized to that same asset account to zero out the balance for that particular client. This can be super important! Imagine over the course of the year, your pre-pay costs for clients totaling $100,000, and as of December 31 none of those costs have been reimbursed. If you’ve been classifying these payments to “case expenses” you will be significantly understating your profits for the tax year. On the flip side, if you receive all $100,000 in reimbursements the following year, you will have a net income that is $100,000 too high. These amounts will still zero each other out for the life of the business, but are not giving an accurate picture of the finances of the business in either year.
If you’ve read this far and realized you’ve been handling these costs incorrectly, you have no idea what we’re talking about, or you’re just starting out and want to do things right, please give us a call at 314-450-1140 or email us at info@stlbookkeeping.com to see how we can help!