Linda Artesani explains how law firms use the Advanced Client Cost account to track retainers and case expenses like filing and witness fees, then invoice them back to clients. The ACC must be reconciled monthly and reclassified as a firm expense if a case is lost and costs can't be recovered.
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Hi there, Linda Artesani, Artesani Bookkeeping. This week's all about advanced client cost account and what it actually is and when you would use it when working with attorneys and law firms. It is probably one of the accounts that gets the most confusing. So basically, it's very simply, it's an asset account. And I'd like to think of it almost like a clearing account. So the client will give you a retainer. They're giving you upfront money, but the attorney hasn't actually earned the fees yet. And what will happen is they'll pay some expenses out for the case or the matter. Perhaps they're paying for a witness fee, a filing fee. All the time you see that the filing fee is paid for, and then when they invoice the client for their time and their legal services, they'll invoice them back for the filing fee to recoup the money and pull it out of IOLTA and put it into their— account to cover those costs. So when that happens, what you're seeing is the money is booked up into this asset account. So your expense is booked in the asset account, and then the invoice will book it out of the asset account. So it never hits the books as far as being an expense for the attorney. Now, there are times where it will become an expense, perhaps with a personal injury attorney that maybe didn't win the case and they paid all these upfront costs and they never, ever, ever took a retainer. So now they have to move that down into their expenses because now it's become a firm expense. In the article attached here, you'll see the actual transaction for how you would book that down and its expenses against the firm. You don't see this too often, but sometimes an attorney will write down an invoice, and when that happens, they write it down, you have to clear the entire thing out. And if there's money sitting in advanced client costs, you need to reconcile that account to show that that's been cleared out because you don't want to leave it. It'll be up there for perpetuity. It'll be up there forever because it'll never get booked down. So it's important to monthly manually reconcile advanced client costs and tick off the ones that cleared. And then review it with the attorney to say, hey, these are sitting here. This person is not paid. Are you writing down this invoice? And if you are, I need to book those expenses down. Let me share my screen. I'm going to show you what an advanced client cost account looks like on the— on a balance sheet and how you'll see the in and the out. And you'll see here the Advanced Client Cost account right here is $979.44. So think of that as work in process. This is fees or expenses that were paid on behalf of clients that have not been invoiced. So this is the account that you're going to need to reconcile. And I'll quickly come over here and show you the inside of what that $975.44 looks like. And you'll see here we had an expense and then we had a check. You'll see the in and the out. So there was a fee paid on behalf of the client and then it was invoiced for the client. You can also see here on this matter, we have a problem because we have invoiced a client for $201, but we're not reflecting the bill, the original expense. So it's going to make that account off. So now I'm going to need to search for the $201 that was billed to this Disorderly Conduct Matthew Fulton account and find where it is, and then make sure it's booked not down into any expense account, but make sure it's booked in the proper client advanced cost account or advanced client cost account. I see it both ways on the books and make sure that the in and the out will end up being a zero. So that's why it's really important to reconcile this. And this is just an account, a report I created by customizing the Advanced Client Cost account. I blew it open and I sorted it by— it's just sorted by the customer. It's that easy. But it's a great way to track these expenses because you really need to stay on top of this with your clients. And it's important to be sure that you stay on top of it monthly. Don't let it be an annual task. If you inherited a mess from another bookkeeper or that, you know, maybe the attorney didn't track this, you need to find a good starting point and figure out what the attorney— maybe if they're using LeanLaw, ask them to look through the work in process, look through that WIP report and see if it's correct. And if there's anything up there that doesn't belong, and then reconcile to that number. It's the way to get started if it's never been done. It really can be a big undertaking if the law firm's books have been going on for multiple years. And can you really do that with any of the softwares out there? So on that note, I hope you all have a wonderful week. I hope this was helpful. I know short video today, but hopefully giving you that idea of what it looks like. If this isn't a confusing topic, I've got a few articles in my blog, but if it seems like it's really confusing and you want to learn more, you can always join us in the Accountants Law Lab group. It's a private group. The link will be in the post. If you just want help as a general business help or join a fun group, we've got QB Community Live. If you're an attorney or a law firm and needing some help with this kind of a mess on your books, reach out. We have the staff and the team that does the accounting work for you. And on that note, I hope you'll have a wonderful, wonderful week. Bye now.
