Understanding Accounting Methods in Legal Accounting

Modified on Fri, 8 Aug at 5:23 PM

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 Four Accounting Methods

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.
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.
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.
Modified Cash Accounting (Hard Costs as Assets, Soft Costs as Expenses)
In this form of Modified cash-based accounting, it lets firms handle hard and soft costs differently.
- Hard Costs: Treated as assets.
- Soft Costs: Treated as expenses, which can be used to offset revenue on your financial statements.

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 Cash Method of Accounting

Function	Explanation	Posting
Operating In (Payment)	Receiving payment on an invoice.	Debit: 1000.XX Bank GL Credit: 4000.XX Fees GL, and 5009 Disbursements Receivable GL
Operating In (Retainer)	A retainer entered into the operating account to go against future billing.	Debit: 1000.XX Credit: 5010.rtnr
Operating In (Firm Receipt)	When the firm receives money not related to client activity.	Debit: 1000.XX Credit: Selected GL Account
Operating Out (Firm Expense)	When the firm pays money out not related to client activity.	Debit: Selected GL Account Credit: 1000.XX Bank GL
Operating Out (Disbursement/Hard Cost)	When the firm pays out money related to the client file to be billed later.	Debit: 5010 Client Disbursements Credit: 1000.XX
Trust In	Trust funds received in trust associated with a contact and file.	Debit: 1100.XX Credit: 2100 Trust Funds Owed
Trust Out	When Trust check is produced on behalf of the contact.	Debit: 2100 Trust Funds Owed Credit: 1100.XX
Transfer Trust to Operating	Transferring clients Trust funds to the operating account (Retainer).	Debits 2100 Trust Funds Owed, Debits 1000.XX Operating account, Credits 5010.rtnr Credits 1100.XX
Transfer Trust to General Paying Invoice	Transferring Trust at the time of billing.	Debits 1000.XX, Credits 1100.XX, Debits 2100 Trust Funds Owed, Credits 5010.rtnr Operating Retainers Expenses: Credits 5009 Disbursement Receivable Fees: Credits 4000.XXX
Expense	Entering an expense to be billed to the customer but not through the operating out process.	Debits the 5010.soft, Credits the selected expense account
Release Invoice	When you bill a file with Fees and Disbursements.	No posting for fees, credit 5010 Client Disbursements, Debit 5009 Disbursements Receivable
Adjust Invoice	Writing up or down the amount of an invoice.	No posting for fees, credits 5009 Disbursements receivable, debits GL account selected at time of write-off (5080.dis Bad Debt Disbursements)
Adjust Invoice Costs	Writing down costs.	Credits the 5009 Disbursement Receivables, Debits the selected account (5060.dis Bad Debt Disbursement)
Payables	Creating a payable to a vendor.	Does not post to the GL
Batch Payables/Operating Out	Payable is processed.	Credits the 1000.XX, Debits the expense account associated to the payable

o 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.

For a quick reference on the key differences between these methods, refer to the table below. Remember, for specific advice on which method is best for your firm, you should always consult with your accountant.