Cash vs Accrual Accounting for Law Firms: What Bookkeepers Need

Law firms sit at an awkward junction of accounting methods. The cash method is common in the profession, yet accrual keeps creeping in through unbilled work and trust accounting. Here is how the two methods actually play out in a law firm's books, and what you need to track regardless of which one the firm uses.

Cash or accrual: where does a law firm actually land?

Most small law firms use the cash method: revenue is recognized when the client pays, and expenses when they are paid. That is simple, and for many firms it is defensible. The accrual method recognizes revenue when earned and expenses when incurred, which better matches the work to the period it belongs to.

Tax rules in the United States generally permit the cash method for many small entities, but the rules have thresholds and exceptions, and they change. Whether a specific firm must use accrual is a question for its tax preparer, not something a bookkeeper should decide alone. Our job is to keep the books able to support whichever method applies.

Why unbilled work forces the issue

A firm on the cash method can have substantial earned but unbilled work, often called work in progress. That work is invisible on a cash-basis balance sheet. The managing partner may believe the firm had a weak quarter when the ledger simply has not billed it yet.

This is where a bookkeeper adds real value. Even on cash-basis tax reporting, you can keep the internal books on accrual, record unbilled time as a receivable, and produce cash-basis figures at filing time. The internal ledger then answers the question the partners actually ask: what did we earn this period?

Trust accounting does not care which method you chose

Client trust and IOLTA accounting is separate from the firm's method choice. Earned fees move from trust to operating when they are earned and withdrawn, not when convenient. The trust ledger must track each client's balance individually, and commingling is prohibited.

A firm can be perfectly cash-basis for tax purposes and still need meticulous accrual-style discipline in its trust records. If the trust sub-ledgers do not reconcile to the trust bank account to the penny, every month, the method debate is the smaller problem.

What the close looks like either way

Whether the firm reports on cash or accrual, the monthly close should include:

• Reconciling the operating account and every trust account.
• Tying each trust sub-ledger to its bank balance.
• Reviewing unbilled time and unbilled disbursements with the billing partner.
• Confirming that earned fees withdrawn from trust hit revenue in the right period.
• Checking that retainer receipts recorded as liabilities are not sitting in revenue.

That last point is the classic error: a retainer hits the operating account and gets posted as income on day one. It is a liability until it is earned. Fixing that pattern is routine bookkeeping, and it matters far more to the firm's accuracy than the method election itself.

Where the method question gets decided

The choice of accounting method for tax purposes belongs to the firm's CPA or tax preparer, and jurisdiction and firm structure both affect it. Our role is to keep clean records that can produce either answer. If the books are reconciled, the trust ledgers tie out, and unbilled work is visible, the method question becomes a short conversation instead of a scramble.