In Cash Basis Reporting, revenue is recognized when received, and expenses when paid. For example, the financial statements are not impacted until an invoice is paid by your client (revenue) or a payment is made or check disbursed (expenses).
In this method, only the profit and loss (income statement) is impacted, and not the Balance Sheet. In the US, Law Firms generally use Cash Basis Accounting.
Profit & Loss
As explained above, your Profit & Loss report (Income statement), will reflect only income you have received and expenses you have actually paid. So, for example, if you have $20,000 in unpaid invoices for FY17, you will not see that reflected as income on this report. Likewise, if your firm has $5,000 in unpaid vendor bills for the same time period, that money will also not appear as expenses on this report.
While those monies will not affect your income statement, you can keep track of your Accounts Receivable and Accounts Payable separately for your own knowledge and convenience.
Your Balance Sheet is not affected by Cash Basis Reporting.
The Balance Sheet reports on Assets (something owned by the firm that can provide future economic benefit), Liabilities (obligations of the firm, for example money that must be paid), and Equity (the owner(s) value in the assets of the firm). However, remember that Cash Basis Reporting only refers to ‘cash on hand.’ So, your Balance Sheet will not include your Accounts Receivable or Accounts Payable amounts.