A legal fees journal entry isn’t very different from the other expense journal entries. It’s just that the name and nature of the expense are different. So, the accounting treatment is the same.
Table of contents
What expenses constitute Legal Fees?
Legal fees are the expenses relating to the following services:
- Fees paid to Legal Counsel or Attorney Fees
- Expenses incurred by Directors of the company or other persons representing the company or individuals themselves for attending the legal proceedings
- Expenses incurred in respect of a lawsuit filed by or against the entity
- Court Costs/Statutory fees
- Legal Consultation fee
- Retainer-ship fees
The above list helps to understand the term “Legal Fees.” These expenses are not like capital. Therefore, recording them as expenses in the same year is appropriate unless the expenses have enduring benefits. These cases falling under the enduring nature bucket are very unusual.
Can Deferring Legal Expenses be possible?
The short answer is yes.
The Long answer is
Legal fees are also an expenditure. If any expenditure benefits last more than a year, they can be deferred and carried over in the balance sheet, as miscellaneous spending is possible. This deferment aligns with the matching concept as well.
Example:
For instance,
ABC Company observes that XYZ violates its copyright. The copyright covers ABC Company’s most profitable product, and ABC Company’s reputation is at risk. So, ABC Company starts legal action against XYZ.
The lawsuit threatens ABC Company’s survival, so ABC Company hires the best legal counsel. However, the expenses climb quickly.
A favorable lawsuit against the company resulted in high legal and court fees. However, these expenses result in benefits that do not relate to only one period. Further, the amounts can be so high that they can distort the current year’s income if charged off as expenses. This is the best example of recording expenditures as miscellaneous expenses under the assets side.
Why are Legal fees incurred?
- Ensure compliance with Laws and Regulations.
- Ensure the smooth running of the business
- Initiate or Defend Legal proceedings
Also Read: TDS receivable Journal entry
Legal Fees Journal Entry:
Debit Side of Journal Entry:
Legal Fees are expenses. This is a nominal account. According to the Golden Rules of Accounting, we debit all expenses and losses and credit all incomes and gains.
Therefore, debit the legal fees GL for recording the journal entry.
Credit Side of Journal Entry:
The short answer is Bank or Liability.
The long answer is that it depends. If the payments are made immediately, then it would be a bank account. However, if a credit period is allowed and payment is deferred, then the liability account comes into the picture.
For more convenience, the Liability GL account can be named with due respect to its nature. If it relates to Legal fees, then it’s called Legal fees payable.
What is the Legal fees journal entry?
Approach I – Payment is made immediately
Approach II – Deferment of liability:
1. Recording liability and expenses:
2. Payment of liability:
The net effect of the above two journal entries is a debit to Legal fees and a credit to the bank account.
Conclusion:
Legal fees are also expenditures and fall under the nominal account. Per the Golden Rules of Accounting, all expenses need to be debited. So, the corresponding credit will be bank or liability based on full or deferred payment. This accounting treatment isn’t a new one. We just need to understand the nature of the transaction and confirm if we need to affect the legal fees GL or not. Hope this article gives a good understanding of the legal fees journal entry. Let us know your thoughts or questions in the comments section.
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