The information provided serves as a general guide to appropriately book costs within CosmoLex. Please contact your accountant to determine how your firm should handle hard cost vs soft cost.
Also, if you are not using CosmoLex for full business accounting, you can record all matter costs as
“Hard Cost” is a disbursement you pay as a “direct” expense to a vendor on behalf of a client, such as filing fees, expert witnesses, court reporter, etc.
“Soft Cost” is an “in-house” or “indirect” expense attributed to a client matter, such as postage, long distance telephone calls, facsimiles, and photocopies. The disbursement is part of the general business activity of the firm and is not paid directly on behalf of a client.
Why Accounting Is Different For Hard Cost vs Soft Cost?
Expense Portion of the Accounting
Soft Cost is already expensed on the firm’s Profit and Loss. It is not a “new” expense and does not affect P&L or Balance sheet.
Hard Cost is a new expense. It affects
(Option-1) P&L when posted as “Reimbursable Client Costs (Expense)”; or
(Option-2) Balance Sheet, when posted as “Advanced Client Costs (Asset)”
Income (Reimbursement) Part of the Accounting
Soft Cost is posted to the “Inhouse Reimbursed Client Costs”. It impacts the P&L by increasing income (which offsets the expense).
If it was expensed as in Option-1 above, reimbursement is posted to “Reimbursed Client Costs (Income)”, which offsets the “Reimbursable Client Costs (Expense)” on the Profit and Loss; or
If it was expensed as in Option-2 above, reimbursement is posted to “Advanced Client Costs (Asset), reducing the amount on the Balance Sheet.
What happens if you don’t track Hard Cost and Soft Cost Separately?
Tracking reimbursable costs separately provides the firm with an accurate accounting of revenue received that offsets expenses on the Profit and Loss (Option-1). This may reduce the net income of the firm in a given tax year. Option-2 provides an accurate value of Assets on Balance Sheet.