Many law firms feel that accrual accounting has no bearing on their business and doesn’t provide relevant information to decision makers. I am here to say that the information is the same as cash accounting however it occurs in different time frames, and more importantly if used properly can provide even more info.
Setting up a law firm with the accrual accounting has many benefits. The first of which is that you can record your expenses when they occur but then pay them when they are due. This allows you to issue checks when you want but still have a profit and loss statement that reflects accurate expenses. Another benefit of accrual accounting is that you can see the firm’s mark-offs from billing and credit memos against accounts receivable on your profit and loss statement. By recording these values, you are able to see from month to month what billable work your firm may be walking away from.
Question: How is an attorney like a financial analyst?
Answer: They don’t care about net income, they care about cash received!
The three primary questions are – What came in, what went out, and how much is left for me. A cash flow statement can easily provide the firm with a cash-in versus cash-out scenario which also includes any cash flows to accounts not on the profit and loss statement. This way the profit and loss can help the firm match their potential earnings (hours worked) with the expenses that occurred at the same time (expenses recorded). This data is incredibly useful as you are no longer comparing dollars received that could have been worked in some distant time frame against dollars paid for current expenses.
Another added benefit to using accrual method of accounting is that client cost accounting simplifies too. By going accrual, you now setup the software to automatically adjust unbilled/unpaid expenses down when cash costs are marked-down or written off which automatically flow to the P&L. This helps firms with clients costs kept on their balance sheet maintain supportable accounting balances with less manual entries forcing them to balance.
By: Tyler Chapman