Is a flat fee tracked as Accounts Receivable?
Law firms track accounts receivable (A/R), the amounts that clients owe a law firm for services rendered, by generating an invoice showing the amount due during a given time period. When a law firm agrees to accept a flat fee for services to be provided, however, the client either pays the fee immediately, or the firm generates an invoice for the flat fee amount after the actual services have been completed. Depending on your state and local bar rules, a flat fee paid up-front may become the firm’s property upon receipt, or it may need to be held in trust until the services have been provided. You should check with your local bar association to see how you need to treat an up-front payment of a flat fee by a client.
In a specialized legal accounting program, when the payment is received up-front and becomes the attorney’s property immediately, the best practice is to generate an invoice for the flat fee and record the payment as received. If you are using QuickBooks, the best practice in this situation is to record the payment as a sales receipt rather than generate an invoice and record the payment.
If the up-front flat fee must be deposited into the client’s trust account, or if the client isn’t required to pay the flat fee until after the services have been provided, then the best practice is to generate an invoice once the services have been provided, and record the payment when paid from trust or received from the client.
Once you generate an invoice for the flat fee, your accounting program will track the flat fee as part of the firm’s A/R until the client pays the invoice.
Whether the actual flat fee is tracked as A/R or not, there are a variety of reasons why your firm still might want to track staff time spent on the matter. Specialized legal accounting programs will allow your firm to track the costs advanced and the time spent on a client’s case without adding those fees and costs to the firm’s A/R balance.