Cash vs. Accrual Accounting for Law Firms
Cash-basis accounting records revenue when payment is received and expenses when they’re paid. Accrual accounting records revenue when it’s earned and billed, and expenses when they’re incurred. Many small law firms file taxes on a cash basis but still benefit from accrual-style reporting to manage the firm.
How Cash-Basis Accounting Works
Revenue is recorded when the client’s payment arrives.
Expenses are recorded when you pay them.
Reports closely follow what’s happening in your bank account.
Billed but unpaid invoices don’t show up as revenue.
How Accrual Accounting Works
Revenue is recorded when you bill for the work, whether or not it’s been paid.
Expenses are recorded when you incur them, even if they’re paid later.
Receivables and payables appear on the balance sheet.
Reports show how the firm performed in a period, not just when cash moved.
How the Choice Changes Your Reports
Profit and loss: a cash-basis P&L can swing month to month with collections. An accrual P&L ties revenue to the work billed in that month. See: Law Firm Profit and Loss.
Balance sheet: on a cash basis, receivables may not appear at all. On an accrual basis, they do. See: Law Firm Balance Sheet.
Year-end: the method affects when revenue and expenses count for the year, which is why the choice matters for tax planning.
What Doesn’t Change: Trust Funds
Under either method, client trust funds are never firm revenue. Retainers and settlement funds belong to the client until they’re earned and properly transferred out of trust. See: Trust Account & IOLTA Reconciliation.
Which Method Should Your Firm Use?
For taxes: your CPA decides, based on your firm’s size, structure, and the rules that apply to you.
For managing the firm: many firms review both views. Cash basis shows cash flow. Accrual shows how much work was billed and how much is still owed.
Most important: use a method consistently and keep your billing software and books in agreement.
How Azar Insights Helps
Books kept on the method your CPA recommends
Management reports that show both cash collections and amounts billed
Fractional controller support to explain what the numbers mean for your firm
Frequently Asked Questions
Do most small law firms use cash or accrual accounting?
Many small firms use the cash method for taxes because it’s simpler and tracks closely with the bank account. Your CPA can confirm which methods your firm is eligible for.
Can a law firm use cash for taxes and accrual for internal reports?
Yes. Many firms file on a cash basis while reviewing accrual-style reports, such as billed revenue and receivables, to manage the practice.
Are retainers revenue under accrual accounting?
No. Unearned retainers belong to the client under either method. They become revenue only when earned and transferred from trust.
Why does my P&L look different from my CPA’s numbers?
It may be on a different method, or include year-end adjustments your monthly reports don’t. Ask your CPA which method the tax return uses, and make sure your books match.
Can a law firm switch from cash to accrual?
A change in tax accounting method has specific requirements, so talk with your CPA first. Your internal reporting can include accrual-style views at any time.
Azar Insights provides bookkeeping and accounting services. Consult your CPA for tax advice.
Related Reading
Profit and Loss · Balance Sheet · Year-End Checklist
About Azar Insights
Azar Insights provides outsourced bookkeeping, accounting, and fractional controller and CFO services for law firms nationwide. With 15 years of accounting experience, we work remotely with solo attorneys and multi-partner firms using secure, cloud-based tools.