How to close out Prepaid Expense account when costs are incurred after settlement?

I have just started doing the accounting for a law firm, and I don't know the best way to close out a client's expense account, after final payment has been made. Often a case will settle and we will do the distribution to the client and close out our accounting by writing a check for "advanced costs" and "attorney fees", and THEN a bill will come in for that case. I still code the expense to the client's prepaid expense account, but I am not sure if I should then create a credit for the expense and apply it to the invoice coded to "Uncollectable Expense" or if I should write a check from our operating account back to us, applying the payment to the client's outstanding balance.

Answer

"and I don't know the best way to close out a client's expense account, after final payment has been made."

You start out with Items linked to your Other Current Asset account for Advanced Costs. You list them on purchases made from the Operating account, such as Filing Fees, Courier Costs, etc. You Job Track that this is for that client, and mark it Billable.

"Often a case will settle"

When you are ready, you will use Create Invoice. There is an icon for Add Time & Costs; select all the Billable entries. Add here any Income items, such as Service Items for tasks, or they were also already seen in Add Time & Costs, because you used timesheets to track the tasks for that client/customer and as Billable there. If the time was not to be Charged but there is a Contingency or other agreement, you would still Job Track the tasks, but these are Not Billable = not to be directly charged.

"and we will do the distribution to the client"

Next, then, let's address that you would have a retainer, or not, and you got a settlement check.

"and close out our accounting by writing a check for "advanced costs" and "attorney fees""

You overlooked that Invoice already handles this. Remember that the Trust Bank is only supposed to show ins and outs relative to the Client Liability balances. So, you can, for instance, write a Monthly Check from Trust to the Operating account for the Firm as Payee. You list in QB on the Items tab the same Liability Item you used for getting the retainer that you put on the sales receipt or that you used on the sale receipt for the deposit of the Settlement check. Remember that Trust Bank gets all Inflows from Sales Receipt, not Deposit.

On the check From the trust bank to pay the firm, you list the Liability account item as many times as needed to allocate Per Client, the amount of trust funds you are using this Payment cycle.

Then, you pretend that is individual checks arrived in the mail, and you use Receive Payment, to apply each Client's amount to their open Invoice, for clearing Advanced Costs and showing income from fees.

To give a client their remaining balance, that would be a Trust Check payable to their name, still listing the Liability item(s) on the Items tab. Example:

My check might be my full retainer item and the settlement liability item remaining balance, two lines on my check, from Trust bank to me.

"and THEN a bill will come in for that case."

A Late Bill owed by you for something you didn't include when Closing the Matter?

"I still code the expense to the client's prepaid expense account, but I am not sure if I should then create a credit for the expense and apply it to the invoice coded to "Uncollectable Expense" "

You are no longer Advancing anything. This is your Expense, directly, then, and you can still Job Track it as Not Billable. Example: Shipping expense.

"or if I should write a check from our operating account back to us, applying the payment to the client's outstanding balance."

You would not have any funds left in Trust for this. You don't write a check from your operating account to yourself. You simply Pay this incoming late expense. It isn't "coded" to Uncollectable from prepaid, at this point. If you want to track it as Uncollectable Expense, you do that when you Pay for it. But the tax form doesn't provide for reporting "Uncollectable" expense. It provides for you reporting Your Expenses. This is Job Tracked for purposes of reporting, but it is Your Expense, directly.

Your Liability account can be managed by custom Transaction Detail reporting, set to total by Name, so that you can Reconcile it. Only and Always using an Ending Balance of 0, because the left and right sides you will checkmark only the activities for the name that is now at 0.

Make two versions of this report. One is All Transactions. The other is filtered on Cleared Status = No and this is Current Balances Only. And the reporting on that "retainer/Settlement" Item(s) also shows balances and activities; or make one item for Retainer Received and the other is for Retainer Applied/Returned, but they both link to that same Liability account.

And you need a report that proves Trust Bank = Trust Liability by name, of course.

Please see my attachments.

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