Write-downs and write-offs in law firm billing: what the difference means for your books

A litigation firm we work with ended the year with $940,000 in billed time. Collections came in at $720,000. The partner assumed the difference was a reconciliation error. When we reviewed the books, $90,000 was time attorneys had removed from invoices before sending them, and $130,000 was invoices clients had never paid. Both were labeled “write-downs” in the firm’s QuickBooks file. Neither had been properly distinguished from the other, and the Profit and Loss report (P&L) was reflecting the wrong numbers because of it.

What sets them apart

A write-down is an adjustment that happens before the invoice goes out. An attorney logs 12 hours on a matter and decides 10 is what the client should be billed. The other 2 hours are removed from the draft invoice. That time never becomes revenue on the P&L. A write-off is an adjustment that happens after billing, when an invoice sits unpaid long enough that the firm decides the money will not come in. The revenue is already on the books. Removing it adds a bad debt expense to the P&L. Both adjustments reduce what the firm nets, but they hit the books at different points and leave different footprints.

How each adjustment works in practice

Where the adjustment starts in the billing cycle. A write-down lives in the unbilled time stage, before any invoice exists. An attorney discounts hours from the draft, and no accounts receivable (the total of outstanding invoices owed to the firm) is ever created for the discounted portion. A write-off starts with an issued invoice that has been sitting unpaid. It removes that invoice balance from accounts receivable.

The P&L records them differently. A write-down means the firm bills $8,000 instead of $10,000. Revenue is $8,000 and no entry exists for the discounted $2,000. A write-off means the firm billed $10,000, recorded $10,000 in revenue, and later added a $10,000 bad debt expense to offset it. Net income ends at zero on that matter. Revenue stays at $10,000, but so does the expense against it.

The accounts receivable balance tells a different story. After a write-down, no receivable entry exists for the discounted amount. After a write-off, a receivable balance of $10,000 was on the books and had to be removed. If a firm delays recording write-offs, the receivables report shows money the firm will not collect. The balance sheet looks stronger than it is, and the ratio of collected revenue to billed revenue (the realization rate) looks worse than it deserves, because the denominator includes phantom balances.

Trust funds are not part of either adjustment. An IOLTA account is the separate bank account where a firm holds client funds before applying them against earned fees. Write-downs and write-offs are adjustments to unbilled time and issued invoices. Neither touches trust funds. Any client balance in trust should be applied against the invoice first. A write-off is only appropriate for what remains unpaid after trust funds are exhausted.

What the numbers look like on the same matter

Here is how a $10,000 matter lands in the books depending on which type of adjustment applies.

Both situations leave the firm collecting nothing on the discounted or unpaid portion, but the P&L and accounts receivable look completely different.

Why recording both the same way causes problems

When a firm uses the same QuickBooks entry type for write-downs and write-offs, three problems follow.

Revenue gets misreported. If a write-off is coded as a write-down, billed revenue drops by the written-off amount and no bad debt expense appears. A firm with $940,000 in billed revenue and $130,000 in uncollected invoices reports $810,000 in revenue with no corresponding expense. The error compounds at partner compensation review time, because the profit figure the distributions are based on is wrong.

Accounts receivable becomes inflated. If write-offs are not recorded on time, the receivables balance carries invoices the firm has informally given up on. A balance sheet showing $180,000 in outstanding client invoices may look healthy. If $60,000 of that is from matters closed eight months ago with no payment plan in place, the number is not reliable.

The realization rate becomes harder to trust. Partners tracking which practice areas or clients generate the best returns are working with a metric that includes phantom balances in the denominator. Decisions about client intake and staffing follow from a distorted picture.

Best practices for billing adjustments

A few practices that keep write-downs and write-offs accurate over time:

• Record write-downs in the billing software before the invoice is finalized. If an invoice has already been sent, a credit memo (a document that reduces what the client owes on the original invoice) is the correct tool. Do not retroactively edit the original invoice amount.
• Establish a firm-wide write-off policy. A common threshold is 180 days from the invoice date, or immediately when a client account closes with a balance outstanding. Documented timelines remove the guesswork about who decides and when.
• Run an accounts receivable aging report every month. Any invoice past 90 days without a payment plan or active dispute should be flagged for a partner decision.
• Keep write-down totals and bad debt expense as separate line items on the P&L. Both reduce net income but measure different things. A rising write-down total suggests billing decisions are happening too late in the matter cycle. A rising bad debt total signals a collections or client selection issue.
• Apply any IOLTA funds against the invoice before recording a write-off. The order matters for the books and for bar compliance.

Three questions worth asking

If you are not sure how your firm handles these adjustments today:

1. What was our total bad debt expense last year, and is that tracked separately from the total time attorneys discounted before invoicing?
2. What is the oldest invoice on our accounts receivable aging report, and has a write-off decision been made on anything past 120 days?
3. Are write-downs and write-offs coded as the same entry type in our QuickBooks file, and if so, what would separating them reveal about our billing practices?

If the answers are uncertain, the firm’s P&L and accounts receivable balance are probably not reflecting actual billing results. The fix is a workflow adjustment in the billing software and QuickBooks, and it is worth completing before the next partner distribution review.

If you want a second look at how your billing adjustments are hitting the books, send us a copy of your accounts receivable aging report and the last two months of write-off entries. We will tell you whether the adjustments are landing in the right category.