Advanced Client Costs are funds attorneys front for client expenses and later bill back. They must be recorded as clearing assets, not billable expenses, or your profit-and-loss statement gets distorted and expenses go unrecovered. The video walks through reconciliation, write-offs, and a software workflow using Dext, LeanLaw, and QuickBooks.
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So the two things that trip up a new legal bookkeeper are the trust account and tracking all of that. Usually from my experience with working with the Law Lab, a lot of times it's just, where do I start? How do I fix that? But the second thing, which is what this video is about, is advanced client costs, or I'm affectionately gonna call it ACC. So advanced client costs are the client fees that your attorney upfronts the money. They're mini loans to the client as the client has these expenses that come in, the attorney pays for them upfront, then bills them back, and they actually collect a retainer. So they're getting prepaid for them, but they have to sit that money in the retainer bank account until the, the revenue is earned from legal services that have been performed. So that is the hardest, one of the harder things to track. And why is it harder to track? I think that this is one of the places that if it's not tracked properly, the expenses get missed, they don't get billed back. Also, if it's not tracked properly, and we find A lot of firms are still using the old method of billable expenses and billable income, and those can be wildly variable. So you'll look at a balance sheet, you'll get a profit and loss, 'cause these are gonna sit on the profit and loss, unlike the advanced client cost, which is gonna sit on the balance sheet. And you'll look at it, you're gonna say, wow, they had a lot of expenses one year and they've got more income the next, or the same year they've got less income, they spent more than they made, and recouped basically. And it can be a very strange mathematical problem. So knowing that when you look at someone's profit and loss, it can wildly affect it. And you really want to work very closely with the tax professional to understand how they're stating it on a tax return, because we've seen it where clients just throw everything into billable expenses. And then when they win a matter or case, they get the income and then it's pure income because that might have been expensed years before, because a lot of these cases go on for a lot of years. And it doesn't give a really good reflection of the books at any given time. So I think that that method, which is not the method the IRS wants to see it, they want to see you using advanced client costs where you're putting it in an asset. It's kind of a clearing account. You put it in the asset when you pay for it, you take it out when you bill it back. It never ever affects your books because it's really not your— you're not really spending the money on the expense and the client is reimbursing you for this. So it's important to track it properly. So that you can understand how it's stated in the books. And you really want it to be stated that way because that's the easiest way. Now, when it comes to tracking that, you need to reconcile this account. So yes, you're going to reconcile an account that never gets a statement, but you want to start ticking and tacking off as you bill— pay for the billable expenses, they're here. As you bill back to the client, it's here, and it's an in and out situation. But you want to do that to keep that manageable. Why? Because there may be times where the client doesn't pay you back for it for whatever reason, you end matters in a not great way, your attorney might be like, okay, that file's done, I'm never going to get paid. And then if you forget about the advanced client costs sitting up in the asset, they'll sit there forever. And you need to book them down as a client expense. Billable expenses unrecovered is the name of the expense account because you're not going to get the money back. It is a pure expense to the law firm and you need to make sure you take care of that. And so it's important, because if you don't track this stuff, you're looking at some financial loss. If it's not tracked and it's not billed back, and the case is closed, and the bookkeeper comes in, starts to reconcile this big account, and then finds out that this matter has been closed a long time, you go back to the attorney and say, these expenses are sitting up in the asset. What do you want me to do? And sometimes they'll say, write them off, which means you've got to do a journal entry to take them out of advanced client cost and book them down to the expense. So credit advanced client cost, debit the debit the billable expenses unrecovered account. There could be a dispute with the client. They don't want to— they don't agree to pay for an expense. The same thing, you got to write it down. And really, there's some ethical risks involved if you don't track these costs properly, and it can violate the trust and accounting rules. So you really need to make sure that you're following the rules of the system. Look up your rules that you're working with your client. Very, very important. So this is— I've got a couple of case studies in here so you can kind of look at some scenarios that's going to help you understand this. Way these expenses are tracked. We like to use Dext or Hubdoc where we have the client and, and anyone that does collecting of paying money for fees on behalf of the law firm, they import them into— they just put the app on their phone, take a picture and upload it to our system with the name of the client on it so that way we can tag it. We've got systems in place to track all the expenses so none are missed. And especially if you're working with a PI firm, those expenses can go over 2, 3, 5 years. So you want to make sure that they're all tracked and that they're billable, which is why you want to use the software here. You don't want to be skipping out the software using QuickBooks, hitting billable. It's just this archaic way to work. You want to work with software like LeanLaw. I call it the look ma, no hands method. You have it go into Hubdoc, it's tracked. You track the matter as you start to implement putting it into Hubdoc and pushing it into QuickBooks. It goes to advanced client cost, automatically goes into the books, waiting to be— into LeanLaw, waiting to be billed back to the client. You bill it back to the client. Now it's in and out. And when the client pays, they paid it back. It's a beautiful system. And the payment could be just using the trust and applying the trust, but it's a beautiful system that no expenses are missed. You really want to use software here. If your client's not using software, I highly recommend that you encourage them to use it. You know, there can be challenges here. There can be challenges with reconciliation as you're starting to look at a file. Maybe it's never been reconciled. Where do you start?— it's not easy to track in QuickBooks to try to reconcile this account. You can do detailed reports to kind of show things that are posted and cleared. That can help as well. There's also— it's just important to reconcile this, this account. If you don't reconcile it, it's going to be hard. Now, if your client is using the billable expense, billable income method, you're going to switch methods to the advanced client cost. You need to draw that line in the sand. When's that happening? Maybe it's happening at the beginning of the year, and then you have to kind of shift everything into advanced client cost. That's a job that you wanna work hand in hand with the tax professional so that it's done properly. Find out how they're booking it in. I've seen clients have wildly different account balances in billable expense income and billable expenses account. And then when you talk to the tax person, they're making an adjusting entry to make sure that it's more balanced out, that it's not all in one year and all in the other. That's your WIP, that's your work in process that you're dealing with right there that hasn't been billed back. And you wanna make sure it's accurate. You wanna make sure that whatever's on the books matches what's in Clio or QuickBooks when it comes to those expenses. And that's very easy to do in Clio a lien lawyer, you just kind of look and pull the expenses tab up and look at what's there waiting to be billed. That's your WIP, that's your work in process for expense, the expense side. So I've gone into a lot more detail in the article about how to manage these advanced client costs, how to reconcile these advanced client costs effectively. Know that there's a good article there to start to go through and kind of look at it. Make sure you communicate with your attorney-client whatever you find. If you got a new client, let them know what you see. Discuss any possible write-offs. If there's stuff hanging in there that's from like 2019, time to get it off the books. If it's sitting in advanced client you know, this client, this matter is gone. Talk to them about getting that off the books and getting that all cleaned up. A cleaned-up accounts— Advanced Client Cost Account is just as important as any of the other accounts that are with— that have things in it that are uncleared when working with lawyers. Your lawyer, your attorney that you work with is going to love the fact that you're keeping really squeaky-clean books for them. If any of this seems very confusing, we can walk you through the steps. Please join us in the Accountants' Law Lab. We'd love to have you there. And until next week, bye now. Bye.
