Has Your Advanced Client Cost Account been Reconciled?

I think the second most popular topic that I get asked about after talking about trust accounting is advanced client costs.

What is it?  When do we use it?  How do we use it?

All great questions if you are new to the advanced client cost account or working with attorneys and law firms. Let me go through these questions one at a time.

What is it?

I'll bring you back to this post explains direct and indirect costs. Advanced clients cost our fees at the attorney's will front for a client. An attorney typically takes a retainer and holds that money until the money is earned. In advance of getting paid, the attorney may incur some costs or fees for the client before billing. These are advanced client costs. See this post for more information.

These are hard costs. There are typical costs that are paid on behalf of a single client.

We also have soft costs. These are fees that you can't designate to one individual client, and some of these may also be used by the firm. They include:

In addition to expenses, advanced client costs can also be attorney time or hours to be billed to the client. An attorney's time is tracked typically in an external application, and hopefully, that app is connected to QuickBooks. That makes billing and monitoring these essential expenses crucial.

When do we use it?

I like to use the example of a personal injury (PI) attorney, although this account is used across many practice area types. I can't think of a practice area requiring extensive tracking of client costs.

PI firms need the tracking of these hard and soft costs because there's typically no upfront retainer. At least that has been my experience when working with personal injury law firms. The matters are on a contingency basis, and if the attorney wins the case, then the advanced client costs are applied against the retainer, which is usually a check from an insurance company.

How do we use it?

But what if the attorneys lose the case? The fees are sitting up in the asset account "advanced client costs." These expenses now become the firm's expenses. Booking them as such is done with a simple journal entry:

CR Advanced client cost account

DR Billable expenses not recovered expense.

New Client Mess

What if you inherited a set of books in the advanced client cost account that that has never been balanced? Where do you begin?

Answering that question is a tough one. If the client was using an outside app, like LeanLaw, I suggest you work with the attorneys to ensure that all the expenses showing in the legal software are correct. You will then need to adjust and reconcile the advanced client cost account against the hard numbers inside LeanLaw.

Reconciliation

You reconcile the Advanced Client Cost (asset) account just like you would reconcile any bank account. The difference is you don't have a statement. If you're using LeanLaw, you will see the expense booked in and then the invoice booking it out. It's kind of like a sweep or a holding account; the funds go in and out. They never hit the attorney's expenses unless they are actual costs that the firm incurred as an expense. If it's a client expense, it shouldn't be there unless it never gets billed. 

This topic can get confusing. I hope this explains it in detail for you. If you're still struggling, join our group, the Accountant's Law Lab. It's a private space where we have a once-a-week meeting and discuss topics like this.

If you were an attorney and know that your books are not exactly right, do you want to be sure this account is reconciled. You don't want to miss any expenses that your firm incurred, especially at year-end for tax purposes. Reach out to us. We specialize in working exclusively with the legal industry.