Both when receiving payments from clients and when paying vendors for billable expenses, there are settings available that determine what General Ledger accounts will be affected in these situations.
Under System Settings -> Accounting -> General the five settings that affect this are:
- Default Fee & Expense G/L Posting Accounts
- Fees Received
- Hard Expenses Advanced
- Hard Expenses Received
- Soft Cost Received (Income)
- Default Matter Accounts
- Finance Charge Account
Fees Received is the account that will be Credited when you receive a client payment that is allocated to fees on the bill. This is typically an income account
Hard Expenses Advanced is the account that will be Debited when you pay for a billable expense (either partially or completely). This can include Checks with billable line items and Vendor Bill Payments.
Hard Expenses Received is the account that will be Credited when you receive a client payment that is allocated to hard costs on the bill.
Most firms will typically use an offsetting Asset account for both Hard Expenses Advanced and Hard Expenses Received. This account will go up when you pay vendors and go down when clients pay you. This gives you an idea at any given time on how much you've paid VS how much the client has reimbursed you for.
Some firms prefer to use an Expense account for Hard Expenses Advanced and an Income account for Hard Expenses Received. This will roll into your yearly Profit and Loss and you can compare your expenses VS income over a period of time. In these cases, these will roll into Retained Earnings at the end of the accounting period.
Soft Cost Received is the account that will be Credited when you receive a client payment that is allocated to soft costs on the bill.
Finance Charge Account is the account that will be Credited when you receive a client payment that is allocated to interest on the bill.
A single payment from a client could affect one or more of these accounts. For instance, if you sent a client a bill that had fees, hard costs, soft costs, and interest on it and they fully paid the bill, this payment would typically Debit your Operating Account (or Undeposited Funds) and Credit the accounts for Fees Received, Hard Expenses Received, Soft Cost Received, and Finance Charge Account.
These settings can also be overridden on a client and/or matter basis. If you open a particular client, click on the Cog icon, and select Accounting. You can then override these options for the client so payments received on any of this client's matters will affect different GL Accounts from the standard ones mentioned in System Settings. The same options are available on individual matters which will then specify what accounts that specific matter should affect, regardless of the system or client settings.
Some firms use this option to segregate their income by Practice Area, Office Location, or Responsible Attorney.
Changing these settings at any of these locations (System Settings, Client Level, Matter Level) will popup a dialog offering you 3 options:
- Apply to future transactions - No existing client or vendor payments will be affected. This will only affect when you either create a new transaction or re-save an existing one.
- Update all existing transactions - This will update the GL Accounts that were affected by all existing client and vendor payments. If you have a closing date specified in your Accounting settings, it will only affect transactions dated AFTER the closing date.
- Apply to transactions as of XX/XX/XXX - This allows you to choose a date filter. Only existing client and vendor payments dated on or after this date will be affected. This is useful for when you want to change settings as of the beginning of the year (January 1) for instance.