How to Avoid Client Ledger Overdrafts

CosmoLex Team

Keeping track of individual client ledger balances and making sure there are sufficient funds to cover any disbursements is a requirement of trust accounting compliance[1]. To prevent a situation where there is an overdraft on a client trust account, you must keep careful track of the balances of each individual trust account. These funds are typically pooled into one larger … Read More

How do I handle interest on settlement funds?

CosmoLex Team

The handling of interest from settlement funds kept in trust accounts falls under Model Rule 1.151 regarding the safekeeping of property. Because the funds are considered to be the property of the client as long as they remain in the trust account, the client may be entitled to any interest accrued during its term in the account. In general, the … Read More

Do I need to keep original canceled checks for compliance purposes?

CosmoLex Team

Rule 1.15 of the American Bar Associations’ model requires lawyers to keep complete records for trust accounts. As part of this, lawyers should be prepared to keep supporting documentation for all transactions and balance amounts. When acting as a fiduciary for client funds[1], part of that responsibility requires lawyers to be able to substantiate their books, reconciliations, and transactions. Should … Read More

What do I do if a client overpays?

CosmoLex Team

If a client overpays, those additional funds belong to the client and at no point should the law firm keep them. It is the lawyer’s responsibility to make sure those funds make it back to the client. Those funds should be placed back in the client trust account and a diligent effort made to reimburse them for the overage. The … Read More

What is the statement of cash flows for law firms?

CosmoLex Team

The statement of cash flows, sometimes alternatively referred to as the cash flow statement, shows law firms where the cash is coming in and where it’s going. On the report, the cash flow statement will list inflows and outflows into helpful line items. It includes cash from investing returns, operating activities and financing/borrowing. This statement provides firms with a short-term … Read More

What is my law firm's tax liability?

CosmoLex Team

Tax liability occurs because of a taxable event, which is frequently is fiscal year-end financial taxes. However, there are other scenarios in which law firms can incur tax liability, including royalty income, stock or asset sales or business mergers that cause profits. In legal terms, tax liability means the government has a client on assets, which are typically those in … Read More

Are settlement funds taxed?

CosmoLex Team

Many plaintiffs are surprised to find their settlement funds are taxable. The amount and whether or not the funds are entirely taxable is dependent on several key items. Lawyers who are responsible for providing clients with a settlement sheet, so it’s important to keep this in mind throughout the process. Key items to note include the following[1]: Punitive damages and … Read More

What year-end financial reports should my law firm have?

CosmoLex Team

At the end of each year there are various financial reports law firms should have to be in compliance and have the data they need to make strategic decisions for the following year. Accounts Receivable and Collections Reports Make sure all time and billing is up to date. For invoices that are past due, create a full list of any … Read More

How should our firm record matter costs?

CosmoLex Team

Matter costs need to be properly recorded in the accounting records due to their tax implications and compliance requirements. To track these costs properly, firms need to determine which category an expense falls into: hard cost or soft cost. Hard costs are any advanced payments the firm puts out to cover matter expenses. These types of costs are typically passed … Read More