Linda Artisani explains how law firms should track client expenses by separating direct costs (filing fees, investigative work) that go into an Advanced Client Cost Account from indirect costs like postage that may be charged back. She stresses reconciling this account regularly to avoid unrecoverable balances, especially in personal-injury cases where lost matters require reclassifying advanced expenses as firm costs.
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Hi there. Linda Artisani from the Accountants Law Lab. This week we're gonna talk about direct costs and indirect costs, basically client costs when working with attorneys and law firms. So direct costs are those expenses that are paid on behalf of the client with the attorney's operating cash or capital. And they're just paid— the attorney will take a retainer and have the client money over here, but then they will pay for the fees for a court case. Let's just say a filing fee, and it's directly to Client XYZ. You're going to book it in that way using the Advanced Client Cost Account, which is an asset account. This is the proper workflow. It's the workflow the IRS has determined is how attorneys should present any client costs that are direct. So direct costs are sometimes called hard cost as well. But the one that you want to understand with this is that you're going to see all sorts of things when you pick up an attorney's records and look at how it's stated. Don't be surprised if you see billable expenses and billable income on the profit and loss, and neither one of those things should be showing if you're using the proper workflow that the IRS wants. It's the Advanced Client Cost Account. But sometimes the old school method still kind of creeps in, or the people that are doing the books just don't know how it should be shown. You have to make sure that you reconcile this account because at times there might be a matter that will close and then an expense will come in, and you don't wanna be putting it up in the Advanced Client Cost Account if you're never gonna recoup the money, 'cause it will sit up there forever. So it's an important part of the workflow to reconcile this account. So direct costs are sometimes called hard costs, and those would be your filing fees, investigative fees, any medical records, things of that ilk. And then there's soft costs. So soft costs would be more like postage, faxing. Sometimes attorneys still fax. Those are the kind of transactions you're going to see that don't have a particular— they're not targeted to one particular client. They might even be used at the law firm itself., but you would want to maybe charge it back to the client. And a lot of times you'll find out from asking the attorney, what is, what is the workflow there? Maybe they have a $10 fee for all postage on all matters. You just wanna take a look at their agreement, their attorney agreement with their client to see how that's stated. I think one of my favorite things about using software, because you're gonna find personal injury attorneys, they have a ton of client costs because they don't take that retainer in the front end. They actually will end up paying the expenses if they don't win the matter. So they'll be paying for all these expenses on a case and they'll be sitting up in that account. You have to reconcile it. And if you're using just QuickBooks, you'll be checking off that billable box so that it's ready to bill back when and if they win the matter or the case. However, if they don't win, you have to book it all down as an expense, because now it's become a law firm expense. If they didn't win the case or matter, which happens. The thing about personal injury attorneys is that I still like to use software with that, especially one of my favorite is the software LeanLaw because they, they have like a, I call it look ma, no hands. So if you layer it with Dext, so Dext, D-E-X-T, which is a receipt capture kind of software and QuickBooks and LeanLaw, those 3 pieces will work all hand in hand. So the Clients will upload all the bills and expenses paid at the law firm for the client expenses. You can have all the attorneys have a login for that, that they can just upload. You can communicate with them with that login. You can write their— have them write the name of the case or matter if it's not indicated on the receipt. And then you go into Dext, you code it over to Advanced Client Costs, put the matter. It'll go through Dext into QuickBooks as a bill. To be paid later or an expense that's been paid. And then if it's an advanced client cost, LeanLaw reads it and has it sitting waiting to be billed back to the client. So literally you just have to make a couple of clicks inside of Dext and all of that happens for you. It's an amazing workflow, especially since you don't have to do a lot of manual work to get it in place to bill your cut— for the billing time for the law firm's client. I think that's the most important piece. There's a lot more details in the article that's attached to this video if you wanna really learn the nitty-gritty of hard and soft costs, of direct and indirect costs. Of course, you've got other costs too at the law firm. You've got overhead, totally different, but you can still have that all flow through Dext as well. Pretty cool tool. So I hope this is helpful. If you want to learn more, please sign up to listen to more of these videos, subscribe and read our blogs and provide feedback on any topic you'd like to hear from us. And if you want, you can join our group, the Accountants Law Lab. Thanks for watching. Bye now. Bye.
