If you have an attorney-client or two—or just landed your first one—you probably already know that there is some complexity surrounding doing the bookkeeping for the legal industry.
Maybe you have heard some terms like retainers, hard costs, and IOLTA accounts, and wondered what they all mean? This article will break down these key terms and more to get you started.
Case or matter
These terms are sometimes used interchangeably. It’s the work to be performed on behalf of the law firm client. Examples of this would be:
- Client name: Lynda Artesani
- Matter/Case name: Estate Planning
- Client name: Sarah Prevost
- Matter/Case name: Trusts and Wills
The first, and most likely most important, term to your client is retainers. Attorneys receive upfront deposits as a way of working with their clients. Much like a contractor receiving a deposit before the construction project begins, a law firm retainer means that the law firm client paid the attorney before starting the legal work.
As the bookkeeper, you must enter this transaction appropriately into the accounting platform. When you receive the deposit for a client, it will look like this in QuickBooks®:
Because the work has not been done, you must enter this as a trust liability type of account in QuickBooks. First, you must create a parent liability account called “funds held in trust.” We use a sub-liability account, and the funds collected are considered a liability because the work is owed to the client for the money that the lawyer is holding.
Trust bank account or IOLTA bank account
The retainers are then deposited into a special bank account called a trust bank account, or an IOLTA bank account. IOLTA is an acronym for Interest on Lawyer Trust Account. This special type of bank account is unique to law firms. It’s an account that will accrue interest. The interest is deposited, removed from the account, and moved to a fund designated to help those who cannot afford legal representation.
Direct/indirect costs: hard and soft costs
These clients will have expenses during their case or matter at the law firm. How these expenses are used or paid will determine how you enter them in QuickBooks.
If an expense is paid out of the law firm operating bank account and designated for one specific client’s matter, it will be a hard or direct cost. This is entered into QuickBooks to the Advanced Client Cost Account, which is an asset account. Per the IRS, this “expense” is deemed a mini loan to the client until the client is billed. At that time, the expense is reimbursed.
This expense shouldn’t be entered into your attorney clients’ books as an expense transaction. The only exception to this rule is if the expense is not reimbursed. We typically see this when working with personal injury law firms, when they don’t receive the retainer upfront. Also, if they lose the case, all the expenses for the case become expenses to the law firm, if the matter is lost.
If the expense is paid out of the Trust or IOLTA bank account, these expenses are booked as direct expenses, and the client trust liability account is the account you would use in that transaction. It’s not a mini loan, as you use the clients’ funds for expenses.
The soft costs are costs that a law firm may have for their own firm, but are also used for a client. Examples of that would be postage or copying expenses. These are booked as firm expenses, but a portion used for the client will be booked in, as they are reimbursed as billable expense income transactions.
My last piece of advice is that if you have a new law firm client, I highly recommend you familiarize yourself with the bar association rules for all locations that your law firm client practices law.
I hope this article helps get you started with your attorney-client. If you want to learn more. or possibly start to move your accounting firm towards specializing in working with law firm clients, we have a private group that can help you. It’s called The Accountant’s Law Lab. We would love to have you join us!