In a previous post, we mentioned how legal practice management software can be useful in tracking Advanced Client Costs. The answer to why to do it with QuickBooks Online and in what manner is what we aim to give in this article.
Since QuickBooks Online does not come out of the box to handle different types of costs separately on its own, legal bookkeepers are required to do it manually. It is required that law firms make it clear to their legal bookkeepers in what manners they want the costs to be tracked and recorded. This helps with any complications when it comes to taxes. To be able to do that, legal bookkeepers first must differentiate between the two types of reimbursable costs that a law firm bills for a client.
- Soft Costs
Costs that a law firm makes due to a client fee agreement, even if the law firm does not write a physical check to the vendor for the item. Postage fees, delivery fees, document copies, software expenses etc are examples of soft costs. They can be tracked by legal bookkeepers as either regular billable expenses or “soft cost incomes”.
- Hard Costs (Direct Litigation Costs)
Expenses made from a law firm’s own funds to pay a vendor for an item, on behalf of a specific client, are known as hard costs. Other examples include medical record expenses, witness fees, court reporting fees, court filing fees etc.
Best Practice to Record Costs
Soft costs are usually harder to track, and for the best interest of both parties, legal clients should be charged a flat rate for these expenses by the law firms. Legal bookkeepers can record them in the business expense accounts in QuickBooks Online.
For hard costs though, the records are entered within the client’s account in QuickBooks Online. This helps with an easier report and free-of-complication reconciliations.
Recording Reimbursable Employee Expenses using QuickBooks Online
Apart from client expenses, small law firms are also required to record employee expense reports in QuickBooks Online. Employees must be reimbursed for business expenses. That way, the law firm’s actual expenses stay accurate.
1. Employee Expense Report
Once all information regarding a client reimbursement is obtained, entries must be made by employees once every month in QuickBooks Online for tracking purposes. This will keep the reports updated.
2. Employee Payroll Reimbursement
Employees can be reimbursed by adding it to their payroll in QuickBooks Online. Employees get paid and reimbursed for expenses at the same time.
3. Record Reimbursements Separately on QuickBooks Online
If the payroll software is separate from QuickBooks Online, the reimbursable employee expenses should be carefully recorded. This is to avoid counting these expenses as employee payment, which adds up to taxes, and subsequently paying more taxes than required.
➡️ Press “+New”.
➡️ Select “Journal Entry”.
➡️ First line:
Account > “Select liability account” > Credits > “Amount owed to employee” > Name > “Name of the employee”
Second line:
Account > “Select expense account that matches employee expense” > Debits > “Enter expense amount”
➡️ Save and Close.
Legal Bookkeepers Who Know Their Stuff
It is necessary for a law firm’s staff to be knowledgeable on how to track and record soft and hard costs in QuickBooks Online appropriately. Invoices of billable expenses sent to the respective clients will stay clear of any discrepancies that might otherwise show up. For example, when adding a reimbursable expense or an Advanced Client Cost to an invoice, bookkeepers or accountants must use the “Job Costing” feature in QuickBooks Online.
It is crucial that a credible and experienced bookkeeper deals with the law firm’s record-keeping. For anyone without expertise in the field, using QuickBooks Online to do so will prove to be a daunting task, time-consuming and can even be the cause of losses for the law firm.
