Depending on the case and practice area, it can become necessary to accept cash. Some firms keep a cash ledger to handle these situations. If cash must be accepted, be sure to deposit the cash right away so it’s recorded accurately on the bank statements. Once deposited, the books will also need to be updated immediately. Otherwise, the monthly reconciliations will show a discrepancy.
CASH RECEIPTS
Once the cash is accepted, a receipt is paramount. A receipt is essential for proper bookkeeping but will also provide a layer of protection if the client disputes what has been paid. By providing the client with a copy and getting a signature for your records, there is recorded, tangible proof of how much was paid should the client contest the amount down the road.
Receipts have the additional benefit of helping to prove compliance with jurisdictional limits on how much cash can be accepted. For example, the Law Society of Ontario and the Law Society of Alberta only allow lawyers to accept amounts less than C$7,500 from their clients. Within the United States, lawyers are required to report cash received over $10,000. Entering the exact amounts taken in creates a clear record in the event of an audit.
Accepting too many cash payments, even when properly alerting the appropriate authorities for larger amounts, can lead to more scrutiny and a higher chance of being audited. In the United States, the Internal Revenue Service (IRS) considers accepting a majority of payments as cash a red flag given the possibility of cash being diverted for personal use without paying taxes. If accepting cash, having the right documentation to support bookkeeping records is crucial for passing an audit.
If you need to accept cash, keep in mind these best practices:
- Accept cash only when absolutely necessary
- Maintain accurate cash receipts
- Make sure the client receives a copy of the receipt and always get a signature
- Deposit cash and record it in the books right away to ensure proper recording as payments are received
- Make separate deposits for each client payment for easier tracking
Checks are a better form of payment to receive than cash in terms of the ability to track and potential compliance issues. Yet checks also present their own set of concerns, most of which are primarily caused by issues on the client’s end.
UNCLEARED FUNDS
When accepting checks and depositing them, the bank usually makes some or all of the funds available immediately. However, if the check doesn’t clear, the funds that were advanced are taken out of the account. This change needs to be immediately entered into the books to keep them accurate. Be mindful of bounced check fees as well, as these also need to be properly accounted for. The bookkeeping should reflect the same changes to an account as seen in the bank statement.
Some jurisdictions require funds to be placed on hold until cleared by the bank, especially for retainers. In many instances, those funds will be placed into a trust during the holding period depending on local ethics requirements. This hold helps to prevent law firms from spending these funds before they’re truly available.
FRAUDULENT CHECKS
Fraudulent checks also cause problems with bookkeeping. There are times when a fraudulent check can clear if the owner of the account doesn’t catch the problem. If a lawyer processes a fraudulent check and considers the funds received, this must be rectified when the account owner realizes what has happened. Beyond needing to address this in the books, the funds at this point may have been spent. The law firm then has the burden of locating the client and trying to collect the amount due.
BEST PRACTICES
When dealing with checks, be sure to follow these best practices:
- Make sure the matter identification number is written on the check
- Scan the front and back of the check and attach it to the referenced item for which it was paid, such as the matter bill or expense items
- When possible, request a bank check or wire rather than a personal check
- Always wait for the check to clear before disbursing any funds, especially if depositing into trust accounts
Accepting credit cards offers a host of benefits. Clients are a lot more willing to pay instantly when using a credit card over writing a check. Credit card payments are usually deposited into an account within 48 hours, leading to a more even cash flow and helping to reduce the expense of collections. Clients can also benefit from this as well, especially those who can more easily hire an attorney when credit is an option.
For all the benefits of credit cards, there are a lot of reservations in the legal community when it comes to accepting them as a form of payment. External and internal points of concern raise a number of red flags for lawyers. If set up correctly, however, credit cards can be processed ethically and securely to better manage accounts receivable.
PROVIDER CHOICE & LINKED ACCOUNTS
The first piece of accepting credit cards is deciding what provider to use. While credit card providers are held to particular regulations and standards, they’re certainly not all created equal and some are better than others to help lawyers meet the compliance requirements of their profession.
Lawyers must take into account more than the normal considerations involved with deciding what card credit processor to use, such as transaction fees, equipment rental or lease and monthly minimums. The strict regulations of trust accounts mean law firms must also take into consideration how the funds are deposited. Legal trust accounts prohibit the commingling of law firm funds with client funds and staying compliant requires choosing a credit card processor who addresses this unique concern.
To maintain compliance and prevent commingling, the merchant servicer should be able to accept payments to two different types of accounts: a trust account and an operating account. While earned income is deposited directly into the operating account, retainers or client funds should go directly into the trust account.
One workaround you may be doing is depositing retainers into the operating account and then transferring to the trust account. This is not only discouraged but in many states a compliance violation, even if the funds are transferred immediately. Client funds should never be mixed with other funds. The easiest and most secure solution is to always keep the funds separate.
PROCESSING FEES
Credit card transactions generally come with fees charged by the credit card provider. It’s extremely important that the credit card processor never deducts these fees from the amount being received by the client. The funds that are being deposited should match exactly what the client has paid.
These fees should instead be paid from a linked operating account. Not all credit card providers are aware of this unique law firm requirement. Generally, providers who know about this need will also allow law firms upon request to pay the fees in a lump sum at the end of the billing cycle. This setup makes it easier to identify these charges as an expense and reduces the possibility of the amount being taken out of the individual deposits.
CHARGEBACKS
Chargebacks, an automatic withdrawal due to disputed or fraudulent transactions are another source of concern. These must be handled properly to maintain accurate bookkeeping. Whether or not the firm has already deemed these funds earned income, the books must be updated to show the chargeback.
In the event a chargeback occurs, the deduction should come from the operating account. Even if the original deposit was made to the trust account, you need to apply the deduction this way to avoid affecting client ledgers. Otherwise, a client’s account can overdraft if funds are no longer available.
Credit Cards: Internal Concerns
ONLINE PAYMENTS
Offering clients a way to pay with credit cards online can reduce the time it takes to get paid. However, online payments present an issue when a law firm has their accounting and billing functions separate. With this setup, online payments become very hard to track.
When someone uses a credit card to pay an invoice, once the card is processed the funds are deposited into the operating account. This takes care of the accounting side, but makes it hard for the billing system to know what invoice(s) the payment is for. Unless the programs are integrated, the payments must then be manually accounted for in the billing system.
CREDIT CARD BATCHING
Credit card servicers often batch credit card payments from different clients together in one lump deposit, similar to how multiple checks are batched on a single deposit slip at the bank. The difference is that with check batching, the firm knows who provided the payment as it is given to the firm directly. You can also have the matter identifier referenced on the check to easily see what client the payment belongs to, but for credit cards, this isn’t an option. When accounting and billing are part of two different systems, credit card batching can result in disaster when it comes time to perform reconciliations due to difficulty in figuring out what the payment was for.
To avoid this issue it’s helpful to have a mechanism in place to batch these items in the accounting system as well to reflect the batched deposit from the credit card processor.
BEST PRACTICES
When accepting credit cards as payment, follow these best practices:
- Choose a payment processor that follows the unique requirements of law firms and trust accounts.
- Integrate billing and accounting systems to make it easier to keep accurate records and see the big picture using tools such as PCLaw, Tabs3, Abacus for desktops or CosmoLex for cloud-based systems.
- Find a credit card provider that integrates with your billing and accounting system that also allows streamlined online payments.
ACCEPTING RETAINERS
Retainers ensure payments for lawyers prior to completing any work. These funds can be accepted in multiple ways (cash, check or credit card). Regardless of how they’re accepted, retainers generally go into a trust account to avoid any impropriety and compliance violations.
Some states require all payments, not just retainers, to be placed into the trust account first so it’s important to be aware of your state’s requirements. As discussed earlier some states require a hold on trust account deposits that can’t be earned until the hold period has ended (usually 2-3 days). All of these funds become subject to the requirements surrounding trust accounts.
TRUST ACCOUNT COMPLIANCE
As part of these requirements of bar associations and Law Societies, funds must never be pulled from one client to cover another. Only the amount belonging to a particular client can be used, even if the money is pooled in a trust account with other clients’ funds. To keep this from happening, accurate bookkeeping is essential when taking in retainers to make sure the amount shown is correct and to avoid over-drafting.
When using an accounting system created for all general businesses or conducting accounting manually, be careful as many programs don’t have mechanisms in place to prevent over-drafting or commingling of funds between clients. When earning payment from trust and retainers it’s common for these types of errors to happen. Legal-specific accounting software takes these needs into consideration and puts a safeguard in place to avoid such occurrences.
For more information on trust accounting compliance, check out The Dos and Don’ts of Legal Trust Management.
