Table of contents
- What expenses constitute Legal Fees?
- Legal fees are the expenses relating to the following services:
- Can Deferring Legal Expenses possible?
- Why are Legal fees incurred?
- Legal Fees Journal Entry:
- What is the Legal fees journal entry?
- Recommended Articles:
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 lawsuit filed by or against the entity
- Court Costs/Statutory fees
- Legal Consultation fee
- Retainer-ship fees
I think the above list helps to get a sense of the term “Legal Fees.” All these are expenses that are of a revenue nature. Therefore, recording these as expenses in the same year is appropriate unless the expenses are having enduring benefit. This case of expense being of enduring nature is very unusual.
Can Deferring Legal Expenses possible?
The short answer is yes.
The Long answer is
Legal fees is also an expenditure. If any expenditure benefits for more than a year then it can be deferring and carrying over in the balance sheet as miscellaneous expenditure is possible. This deferment is in line with matching concept as well.
ABC Company notes that its copyright is infringed by XYZ company. Copyright is related to the ABC Company’s most profitable product. ABC Company’s reputation is at stake. So, Legal proceedings are initiated by the ABC Company against XYZ.
Losing the lawsuit might question the survival of ABC Company. So, ABC Company hired the best legal counsels. Expenses are huge.
A lawsuit filed against the company is favorable and 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 the expenditure as Miscellaneous expenses under the assets side.
Why are Legal fees incurred?
- Ensure compliance with Laws and Regulation
- Ensure smooth running of the business
- Initiate or Defend Legal proceeding
Also Read: TDS receivable Journal entry
Legal Fees Journal Entry:
Debit Side of Journal Entry:
Legal Fees are expenses. This is a nominal account. If we go back to the Golden rules of accounting, we debit all the expenses & losses and credit all the incomes & gains.
Therefore, debit the Legal fees GL in the journal entry.
Credit Side of Journal Entry:
The short answer is Bank or Liability.
The long answer is 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 naming of Liability GL account can be 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
Legal Fees A/c….Dr
To Bank A/c
Approach II – Deferment of liability:
1. Recording liability and expenses:
Legal Fees A/c……Dr
To Legal Fees Payable A/c
2. Payment of liability:
Legal Fees Payable A/c
To Bank A/c
The net effect of the above two journal entries is a debit to Legal fees and credit to the bank account.
Legal fees is also expenditure and falls under the nominal account. Per Golden rules of accounting, all expenses needs to be debited. So, the corresponding credit will be bank or liability based on full payment or deferring payment respectively. This accounting treatment isn’t a new one. Just that we need to understand the nature of transaction and shall confirm if we need to effect the legal fees GL or not. Hope this article gives a good understanding for the legal fees journal entry. Let us know your thoughts or questions in the comments section.