How do invoice payments need to be allocated?

CosmoLex Team

Not all invoice payments can be directly recorded as revenue, and doing so can have negative repercussions for the firm including an unnecessary tax liability. Law firms need to apply payments in the appropriate order once payments are received. Payments should be applied in the following order once taken in: Taxes Cost recovery, including reimbursable client costs Late fees and … Read More

Is recovering advanced client costs taxable?

CosmoLex Team

Correctly allocating advanced client costs to ensure the appropriate tax impact is applied is critical in order to avoid the Internal Revenue Service (IRS) audits and violations. These costs need to be allocated directly as hard (direct expenses) or soft costs (support expenses), with the tax treatment being applied differently to each. Hard costs as those associated with payments for … Read More

Should my firm use accrual or cash basis accounting?

CosmoLex Team

There are two methods law firms can run their accounting by: accrual basis or cash basis. The primary difference between the two is the point at which revenue is realized. In cash basis accounting, revenue is recognized once the payment is received. In accrual basis accounting, revenue is realized when the sale is made even if the payment isn’t complete. … 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

How do I read my law firm's balance sheet?

CosmoLex Team

The balance sheet provides a crucial tool in understanding your firm’s financial health at a glance and determine its current value. Many accounting programs can easily produce this report for you. Not only can this help guide decisions, but you may also need to present this information in order to obtain a loan. The balance sheet follows a straightforward formula: … Read More

Can general accounting programs like QuickBooks generate required legal reports?

CosmoLex Team

There are some specific reports that law firms are required to generate due in order to meet ethical obligations – such as a three-way reconciliations report for trust accounts. But there are also other non-trust account-related reports that attorneys are required to produce in certain situations. For example, under the lodestar method of calculating a reasonable attorney fee recovery, the … Read More

Why are accounts receivables considered an asset?

CosmoLex Team

When a law firm provides services and issues an invoice for those services, the law firm is essentially extending credit to the client. Your firm’s accounts receivable (A/R) tracks the amount each client owes for services rendered in the past, e.g. the amount of credit your firm has extended to each client.[1] (Attorneys can avoid having to extend credit to … Read More

How is law firm accounting different from other types of business accounting?

CosmoLex Team

Law firms, like all businesses, need to produce in order to evaluate their operations, financial position, and cash flows.[1] All general and many legal-specific accounting programs can produce these statements provided the business enters all financial transactions into the software. Because law firms receive retainers and advanced fee deposits from clients and must hold these funds in trust until earned, … Read More

Why should I use a specialized legal accounting program?

CosmoLex Team

A law firm is like any other business in that it must have a system for recording its financial transactions in order to generate the reports that the owners and officers can use to evaluate the company’s financial health. General accounting programs meet most companies’ needs because they allow the business to record financial transactions and generate the , profit … Read More

Does my accounting program use double-entry bookkeeping?

CosmoLex Team

bookkeeping is a simple type of financial recordkeeping used by individuals and businesses that don’t carry unpaid client balances, have only a few employees, and don’t owe people money.[1] Generally businesses that 1) have less than $5 million in annual gross sales or less than $1 million in gross receipts for inventory sales, 2) are not a C Corporation, 3) … Read More