Advance Client Costs is a temporary contra asset account. The account is expected to be used when the firm makes a payment for a client for fees that will be later billed to the client for reimbursement.
For example, the most classic case of this are Filing Fees - A firm sends out a check to the court on behalf of their client and passes that fee down to their clients.
Below you can see an image with all the journal entries made at each step of the process.
- Blue - Entries from creating a new check that has a billable line item with
Advance Client Costs
- Green - Entries from creating an invoice with the billable expense from above
Red - Entries from receiving payment
Firm's also have the opportunity to expense the fee into their Filing Expense account, rather than the Advance Client Cost: Filing Fee account. The fundamental difference between using an Advance Client Cost account vs. an Expense account is the effect it has on the Statements.
When an Advance Client Cost account is used there is no effect on the Profit and Loss Statement as the accounts affected are those that are on the Balance Sheet. On the other hand, Expense accounts show on the Profit and Loss Statement, but not the Balance Sheet.