does your law firm sometimes collect money on behalf of your clients
well then you need to know how to record collecting on behalf of clients
if you have any questions about this topic you can leave them in the comments section
below and i'll do my best to help you and of course if you feel the video helped you
i hope you will click like and don't forget to subscribe to get updates on new videos that come
out all the time sometimes attorneys must collect funds from the third parties that are payable
back to the clients a common situation would be that our law firm is successful
in a legal action that resulted in a large payout to the client
clients usually agree to have the funds collected by the attorney and allow the attorney to first
apply the funds to any open invoices that the client may owe the attorney for past services the
remainder is paid out to the client so how do we set up our quickbooks file to be able to collect
on behalf of clients well we must add an account to represent what is owed back to the client
the account is a current liability and the balance in this account represents the amount of funds
that must be available to pay the clients on the agreed upon remittance date or
payout date the funds that are owed to the clients for this reason do not have to be all in one bank
account as long as funds are available to pay the balances this account represents how much money of
any bank account that we own is needed to be appropriated or reserved for payouts to clients so
we will use a separate bank account in our example even though we don't really have to if we have
several bank accounts we must add the bank account for the client lawsuit collections and payouts
the name will be savings for client lawsuit payouts and the type of account
is bank type of account and this is where the money physically is when we collect and
it will be there until we pay it back to the client so from the main menu we click list
chart of accounts in the bottom left we click account new and we know this is a bank type of
account and what did we say the name is savings for client lawsuit payouts capital letters
you can just put collected payouts
because you might run out of room so then click save and close click no and that's the bank
account that the money goes into when we collect on behalf of clients and that's where the money
comes from when we pay the money back to the client so now we will add the liability account
we must also input the into the attorney's chart of accounts an account called payable collected
clients funds it's a current liability and it represents what we owe the clients
specifically for lawsuit payouts that's a different liability than unearned legal fees
it's what we owe because we collected from the client and we have to pay them back so
we go here account new this will be other current liability and again the name will be
the payable collected clients funds
maybe just payable
leave out the word client because you might run out of room save and close okay now
what's the procedure for recording the collected funds before recording collected funds we must
input any invoices for services that we have rendered or will soon render then
when we record receiving the client's money we use the same receive payment window because this will
affect the client's balance even though there are different accounts in the chart of accounts
that the money really belongs in you have to make sure that all
invoices that were open before were are applied to the money that you collected
and then on payout day just write a refund check exactly the way we learned to write a refund check
to uh from the previous video so we only use the liability account payable collected clients funds
if we need to make financial reports after we collect but before we pay the money to the client
so watch the example of the whole situation let's imagine april 22nd we perform legal
services for candy and build her twenty eight hundred dollars for the lawsuit that we won that
gets her the money we're going to collect for her so first let's just record that invoice invoice
and this is of 2017 so it should be april 22nd
of 2017
because that's the example year we're using and of course the service was for candy
and we used our legal services rendered
and candy usually we're going to leave it as unearned legal fees because that's the
most common one and we already learned how to switch and we said that the amount we earned
from this lawsuit is twenty eight hundred dollars save and close
uh click no we don't want to apply any credits to invoices yet okay now
april 25th we collected 50 000 from candy's lawsuit to be paid later and we will use
the same receive payment window for candy because regardless of what accounts in the
chart of accounts it gets recorded in it still has to reflect candy's balance so we go to uh
payment we make the payment date uh april 25th and the customer is candy or the client is candy
and make sure it says unearned as long as you know what account the lawsuit payout went into
you'll know how to adjust it so in a way it's like collecting a big fat payment from a client
and you can see that this automatically gets applied to any of the open invoices
that were available and we can just click save and we have the right date and everything yes
oh oh oh oh the one thing you have to be really careful of you're using the same receive payments
window but you physically deposited this 50 000 into the special bank account that's separate
for collections that we will pay out later so when we click save and close and click ok
when we open the trial balance the savings physically represents 50 000 that we collected
but unearned has become 50 000 more negative because we owe the client okay now let's imagine
on april 30 we need to report our financial statements well we can't leave that money sitting
in unearned legal fees because it's not really under legal fees it's a different liability it's
money that's payable to the client so the way to fix this is to make an adjusting journal entry the
way accountants normally do before reporting their numbers but what exactly needs to be adjusted well
the money that we collected on behalf of the client is sitting in unearned legal fees we have
to pull out only the payout balance that does not belong there and put it into the liability account
that we created earlier payable collected clients funds and we do that with a simple journal entry
so watch how it goes from the main well first we'll open the trial balance to see
that legal uh legal fees or unearned legal fees is going to decrease by the 50 000 and it's going
to be placed in the new account so from the main menu we click company make general journal entry
now the date is april 30th of 2017 because that's the day we have to report our numbers
now this is an adjusting entry and will make the window a little taller the account that needs to
be corrected is the unearned legal fees we have to remove it and because it was placed there as
a credit we have to make a debit to remove that liability now on the same line as the unearned
legal fees because unearned legal fees is an accounts receivable type of an account
we are required to put the name of the client remember the client's balances in total match
the receivable account so we put candy's name on the second line we put candy's name as well
but the credit is the new account that we just made to represent what we owe
payable collected funds so this is the adjustment that i'll make this longer the receivables account
we're removing the money from so that we can put it into the correct liability account
at the moment we report so when we click save and close now you can see that um payable collected
funds is now 50 000 and unearned legal fees has its proper balance of three thousand three hundred
and if you click reports company and financial balance sheet standard you would see
that the liability section is correct you may see a negative number for under legal fees
and that would have to be adjusted as well in the same way before making your reports but you
can see the liability that's holding the money we owe is correctly in the liability section
of the balance sheet now after you finish making your adjustment you must reverse or remove
the adjustment so that you can go ahead and pay the client the way we learned how to pay back the
client in the video where we discussed refunds so first let's go ahead and remove it now you could
delete it or you could reverse it if you really want very meticulous documentation about your
bookkeeping but basically to find the adjustment just double click on the account that we use to
adjust and the journal entry is right there double click and again click edit now we're back in the
window that we used to record the journal entry we could add an additional adjustment to reverse it
as a formal procedure or now that we have already submitted and reported the balance
sheet and the income statement we can go ahead and delete this and operate normally and we do
need the numbers to go back the way they were in the trial balance and in the client's balance
so that we can easily record paying the client the remaining balance so let's imagine on may 5th we
paid candy the balance of what we owe her and we we know the amount that we're going to pay candy
is the 53 thousand three actually no we're going to pay candy 48 300 because 48 300
is candy's balance we click banking write a check just like we learned when we gave refund payments
but be careful remember the savings for client payouts is the account that the money is coming
from and the date we're paying her is may 5th and we're paying our customer candy charles
and we're not paying her fifty thousand the reason we're paying her the balance of forty
eight thousand three hundred is because she had open invoices that were unpaid
and we know attorneys keep the money that they're entitled to for legal services and deduct it
from the payout that they give when they collect it on behalf of the client
so it's forty eight thousand three hundred so we click on the check window the money amount
and of course the account is unearned legal fees because that's the that's the account that is now
holding the money that we owe and we owe it to candy charles
and now that we pay her the balance and click save and close you can see that the customer
balance detail properly reports candy's balance as zero and you can see there is no 50 000 in the
unearned legal fees it is simply the balance of whichever clients still owe us oh excuse me it's
simply the balance of what we owe other clients in for future service uh future legal services
you