Understanding Accounting Methods in Legal Accounting

In this article:

• The Three Main Accounting Methods
• What are Hard and Soft Costs?
• How Entries are Posted in Each Method of Accounting

This guide explains the four different accounting methods you can use in Legal Accounting and how they handle transactions. Choosing the right method is important for your firm's financial reporting and compliance. If you're not sure which method is right for you, please consult your accountant.

The Three Main Accounting Methods

1. Cash-Based Accounting
   This is the simplest method. Fees and expenses are recorded only when cash is actually received or paid out.
   • Fees: Not counted as revenue until the client pays the invoice.
   • Costs: Hard costs are recorded as an expense when you pay them. Soft costs are recorded as an expense when you enter them, and then that entry is balanced out once the client pays.
     
     To check if you are in Cash accounting, please follow these steps:
     1. Go to Admin > Firm > General Ledger Accounts.
     2. Under the Account Usage column, search for "Receivables" to confirm the following:
        • Accounting Type is set to Expense
        • GL Account Name is 5009
        • Account Description is Disbursement Receivable
          
          
          
2. Accrual-Based Accounting
   This method records income and expenses at the time they are earned or incurred, regardless of when cash is exchanged.
   • Fees: Counted as income as soon as you create and send an invoice, not when the client pays.
   • Costs: Both hard and soft costs are recorded as assets when they are entered. When an invoice is created, these assets are then credited, and the amount is moved into an Accounts Receivable account.
     
     To check if you are in Accrual accounting, please follow these steps:
     1. Go to Admin > Firm > General Ledger Accounts.
     2. Under the Account Usage column, search for "Receivables" to confirm the following:
        • Accounting Type is set to Current Asset
        • GL Account Name is 1200
        • Account Description is Accounts Receivable
          
          
          
3. Modified Cash Accounting (All Costs as Assets)
   This method is a hybrid. It treats fees like cash accounting but handles costs like accrual accounting.
   • Fees: Counted as revenue only when the client pays.
   • Costs: Both hard and soft costs are recorded as assets as soon as they are entered, rather than as expenses. This method does not use an Accounts Receivable account.
     
     To check if you are in Modified Cash accounting, please follow these steps:
     1. Go to Admin > Firm > General Ledger Accounts.
     2. Under the Account Usage column, search for "Receivables" to confirm the following:
        • Accounting Type is set to Current Asset
        • GL Account Name is 1209
        • Account Description is Disbursement Receivable
          

What are Hard and Soft Costs?

• Hard Cost: An expense paid directly by the firm on behalf of a client using a check, cash, or electronic payment.
  EXAMPLE: Paying for a courier service with a firm credit card. 
• Soft Cost: An expense tied to a client file that doesn't involve a direct cash payment from the firm.
  EXAMPLE: Charging a client for photocopies or long-distance calls. 

How Entries are Posted in Each Method of Accounting

No matter which accounting method you use, Legal Accounting makes it easy to reconcile your General Ledger with your client reports. Your accounts are automatically updated to reflect your transactions, from the moment an expense is recorded until the funds are collected.