Lynda ArtesaniLegal Accountant and Data Migration Specialist at The Proper Trust

Hard and Soft Costs for Law Firms

16 Apr 2024 · 1 min

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0:55

In this brief instructional segment, the speaker explains the accounting concepts of hard (direct) and soft (indirect) costs within law firms, emphasizing the importance of correctly assigning direct expenses to specific clients. Advanced client costs are described as a clearing account used to temporarily hold client‑related expenses until they are billed back, at which point they become billable expense income. The speaker notes that these advanced client costs should be reconciled monthly and highlights that, under IRS rules, they function like a short‑term loan and must be reflected on the books accordingly, rather than being treated as ordinary billable expense and income.

Chapters

So hard and soft costs is terms you're going to hear working with law firms, indirect or direct. We're talking about the direct expense. Yeah. And the direct expense for the client, it'll have the client's name attached. You can't just go booking those into advanced client costs without knowing who they belong to because you'll never be able to get them out. We reconcile that account monthly. We don't make a subset of accounts. We don't go down that road of subbing it out like we do with the trust, but we do put it in advanced client costs. And then when it gets put in and it and it gets billed back, now it's become billable expense income. And if it's advanced client cost, it's just going to be advanced client cost in and out. It's kind of like that clearing account. But if they're doing billable expense, it becomes billable expense income. That's your offset. And then you're not having to deal with that reconciliation. But I think it is in the IRS code that it's really a mini loan, and that's how it should be treated on their books. It should not be billable expense and billable income.