Law Firm Cash vs Accrual Accounting: What Changes

Law Firm Cash vs Accrual Accounting: What Changes

Law firm cash vs accrual accounting is a choice about timing. Both methods record the same work and the same money. They disagree about the month in which each dollar counts. A firm that bills in arrears can look busy on one method and slow on the other in the same month, and neither report is lying.

Legal Ease Bookkeeping, a Fort Worth firm that specializes in law firm bookkeeping, is the firm written up in this piece, as one place to ask about the practical side. This is an explainer, not a ranking. Legal Ease is a paid featured member of Sam's List.

Law Firm Cash vs Accrual Accounting: What Each Method Counts and When

Under the cash method, revenue is recorded when money is received and expenses when money is paid. Under the accrual method, revenue is recorded when it is earned and expenses when they are incurred, whether or not cash has moved.

	Cash method	Accrual method
Revenue counts when	Payment is received	Work is performed and billed or billable
Expense counts when	Payment is made	The cost is incurred
Unpaid bills from clients	Not shown	Shown as accounts receivable
Work done but not yet billed	Not shown	Shown as work in progress or unbilled revenue
Bills you owe but have not paid	Not shown	Shown as accounts payable

A short invented example. A firm finishes a matter in October and sends a $20,000 bill. The client pays in December. On the cash method, the firm's October looks light and its December looks strong. On the accrual method, the $20,000 is October revenue, and it sits in accounts receivable until the payment arrives.

The limitation: neither method is more truthful than the other. Each answers a different question, and a report built on one can look wrong to someone reading it as the other.

What Neither Method Changes: Client Funds Are Not Income

A law firm has a complication that does not depend on the method. Money held for clients in a trust account belongs to the client. It is not revenue under cash accounting when it arrives, and it is not revenue under accrual accounting until it is earned and moved to the firm.

That means the same rule applies on either basis: a deposit into the trust account is a liability to the client, not income. A fee becomes revenue when it is earned and taken, as your state's rules allow. This article does not state any state's trust account rule, so ask your bar or ethics counsel what applies.

Mixing the two is a common way for a cash-method firm to overstate its income. A large settlement deposit looks like revenue in a quick glance at the bank balance, and it is not.

The limitation: keeping the books on a given method does not satisfy a bar rule, and a clean ledger does not prove that a transfer was allowed. Those are questions for your bar and your ethics counsel.

Accounts Receivable and Work in Progress: What Accrual Reports Show

The reason many firms look at accrual numbers, even when they file taxes on the cash method, is that accrual reports show things a cash report cannot.

Work in progress, the time and costs spent on matters that have not yet been billed, shows how much future revenue is waiting to be invoiced. A long, growing balance can mean billing is behind. Accounts receivable shows what clients owe, and an aged report shows how old it is. Together they show the gap between what the firm has earned and what it has collected.

Accrual reports also show liabilities. Unpaid bills, accrued payroll and client deposits all appear on the balance sheet. A cash report can look healthy right before a quarter in which a lot of bills come due.

For a firm that bills on contingency, the timing is even more uneven, since fees may arrive long after the work and in lumps. Many firms treat contingency matters and costs advanced with extra care, so ask your CPA how they should be shown.

The limitation: accrual reports depend on estimates, especially for work in progress, and an estimate can be wrong. A report with a large unbilled balance may mean strong work or unbilled work no one will ever collect.

Law Firm Cash vs Accrual Accounting: Books One Way, Taxes Another

A firm is not required to keep its management books on the same method as its tax return. Many small firms file taxes on the cash method and still keep monthly accrual reports for management. Which method a firm may use for tax depends on its entity type, its size and the tax rules that apply to it, and some professional service businesses have rules that differ from other companies.

Switching a tax accounting method is a formal step. It generally involves notifying the IRS and adjusting income so that nothing is counted twice or missed, so do not change it informally. Ask your CPA before you change it, and ask whether a change would alter your tax bill in the year you make it.

The practical result is that a firm may track receivables and work in progress for its own use while the tax return follows the cash method. That works as long as someone keeps the two views connected and can explain the difference.

The limitation: running two views adds work and a chance for error. If the person who keeps them leaves, the explanation leaves too, so write down how the books convert to the return.

Who Should Decide, and Where Legal Ease Fits

The decision belongs to the owners, advised by a CPA who knows how the firm is organized and how it is taxed. Ask your CPA which method your return must or may use, and ask your bookkeeper which management reports the firm needs.

Legal Ease Bookkeeping is based in Fort Worth, Texas, and was founded in 2016. Its profile lists about 12 employees and says it serves clients nationwide, with a minimum of $500,000 in revenue. Law firm bookkeeping is its stated specialty.

Legal Ease has 9 verified client reviews on Sam's List as of 2026-10-02. Each review is submitted by an individual who identifies as a client of the firm and rates it on communication, subject-matter knowledge, and overall satisfaction. Reviews reflect those individual experiences and do not represent an endorsement by Sam's List. Legal Ease is a paid featured member of Sam's List. Ratings and rankings are not indicative of future performance or results.

The limitation, plainly: the profile does not say that Legal Ease sets a firm's accounting method, prepares accrual reports or converts books between methods, and choosing the method for tax is a CPA's decision. Ask whether it keeps books on both views and what each costs. The revenue minimum means a firm below $500,000 may not fit.

Frequently Asked Questions

What is the difference between cash and accrual accounting for a law firm?

Cash accounting records revenue when payment is received and expenses when they are paid. Accrual accounting records revenue when it is earned and expenses when they are incurred, so it shows receivables, unbilled work and unpaid bills. Neither changes that client funds in trust are not firm income.

Can a law firm use the cash method for taxes?

Many small firms do, but eligibility depends on the entity type, the size of the firm and the tax rules that apply to it. Ask your CPA which method you may use and whether a change is advisable. Switching methods is a formal tax step.

What is work in progress at a law firm?

Work in progress is the time and costs recorded on matters that have not yet been billed. It shows revenue the firm has earned but not invoiced. It is an estimate, so ask your bookkeeper how it is valued and how often it is reviewed.

Why does my law firm's profit look different on cash and accrual reports?

Because the methods count timing differently. A bill sent in one month and paid in another lands in different months on each report. Receivables, work in progress and unpaid bills explain most of the difference, so ask your bookkeeper to reconcile the two.

If you are not sure which view your firm needs, ask your CPA what your return requires, then browse bookkeepers on Sam's List, including the firm above, and ask each how it keeps law firm books.

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About the author: Kimberly Green is cofounder of Sam’s List, a directory and matching platform for financial professionals.