Week 2: Understanding Financial Statements for Law Firm Admins

TLTurner Group Marketing
5 days ago
4 min read

Financial statements are the end result of all the accounting activity in a business. They serve as a snapshot of the firm’s financial performance, helping you and others make informed decisions. As a legal administrator, understanding these documents—even if your role is not purely financial—is critical to supporting strategic planning, compliance, and transparency.

Overview: Why Financial Statements Matter

Think of financial statements like the ultimate book report on your law firm’s business operations. They summarize everything that’s happened financially—income, expenses, assets, liabilities, cash flow—and help decision-makers understand where the business stands.

Whether you’re handling all non-legal operations or focusing on a more defined role, understanding these reports will make your contributions more impactful.

Key Concepts and Tools

1. Your Accounting System

Your accounting system is the software or structure used to record, classify, and report your firm’s financial data. Common systems include QuickBooks Online, Xero, and PCLaw. These systems integrate with other tools like payroll, trust accounting, and billing to streamline financial workflows.

Why it matters: A well-maintained system leads to cleaner reports, better decision-making, and faster responses to audits or partner requests.
Your job: Ensure that the accounting system is updated regularly, reconciliations are completed, and integrations with practice management tools function properly.

2. Accounting Methodologies: Accrual vs. Cash vs. Cash-ish

Understanding how revenue and expenses are recognized affects everything from budgeting to tax filing.

Cash Basis: Recognizes income when received and expenses when paid. Simple, but may not show the full financial picture.
Accrual Basis: Recognizes income when earned (e.g., invoice issued) and expenses when incurred (e.g., bill received). Gives a more accurate long-term view.
Cash-ish: A hybrid approach common in law firms where revenue is recognized when invoices are sent (accrual), but expenses are recorded when paid (cash).

💡 Example: Your firm sends a $10,000 invoice in April, but the client pays in May. On accrual books, April shows $10,000 revenue. On cash books, it shows in May.

3. Accounting System vs. Practice Management Software

These two systems often produce different numbers for the same financial concepts.

Practice Management: Tracks revenue when legal work is done.
Accounting Software: Tracks revenue when money is received or invoices are sent.

🧠 Example: A partner asks, “How much did we make in May?” You need to clarify: Are they asking how much work was done (practice management)? Or how much was collected (accounting)?

Additional differences:

Practice management systems might not track expenses or debt.
Accounting software shows a more complete financial picture: income, expenses, loans, credit cards, owner distributions, etc.

4. Chart of Accounts (COA)

The Chart of Accounts is like the table of contents of your financial story. It categorizes every transaction into buckets: revenue, expense, assets, liabilities, and equity.

Why it matters: A good COA makes reports easy to read and keeps your firm compliant.
Your job: Understand the main categories. Know where items should be posted. Ensure new accounts are added consistently.

Example: In the P&L, you might see a line for "Marketing Expense." If you drill down, the COA lets you see subcategories like digital ads, sponsorships, and print materials.

Core Financial Statements

Profit & Loss Statement (P&L or Income Statement)

Shows revenue earned and expenses incurred during a specific period.
Helps determine profitability: Are we making money?
Key sections: Revenue, Cost of Goods Sold (COGS), Operating Expenses, Net Income.

Balance Sheet

A snapshot of what the firm owns (assets), owes (liabilities), and what’s left over (equity) at a specific point in time.
Key sections: Cash, Accounts Receivable, Accounts Payable, Trust Liabilities, Loans Payable, Owner Equity.

Cash Flow Statement

Tracks the movement of cash in and out of the business.
Divided into: Operating Activities (client payments, vendor payments), Investing Activities (equipment purchases), Financing Activities (loans, owner draws).
Helps assess if the firm can meet obligations.

General Ledger (GL)

A detailed record of every financial transaction.
Shows where each transaction was posted in the COA.
Used to create all financial reports.

Other Key Reports (Often Misunderstood as “Statements”)

Revenue Reports

Break down revenue by:
- Practice area (e.g., immigration, criminal, family law)
- Billing type (hourly, flat fee, contingency)
- Staff member or timekeeper
Helps assess productivity and profitability across service lines.

Aging Reports

Accounts Receivable (AR) Aging: Lists unpaid client invoices by age (e.g., 0–30, 31–60 days).
- Helps identify collections issues.
Accounts Payable (AP) Aging: Lists unpaid bills by age.
- Helps manage vendor relationships and avoid late fees.

Bank and Credit Card Statements

Show actual cash movement.
While not formal accounting statements, they’re used for reconciliations.

Who Cares About Which Reports?

Different stakeholders care about different aspects of financial reporting:

Group	Statements of Interest	Focus	Goal
Legal Admins	P&L, Balance Sheet, Aging Reports	Proper classification, compliance	Accuracy and transparency
Partners	P&L, Balance Sheet, Partner Equity	Firm performance	Understand firm financial health
Tax Professionals	P&L, Balance Sheet, Tax Filings	Deductibility, timing	Minimize tax liability
Opposing Counsel	Bank Statements, Asset Reports	Asset ownership, tracing	Evaluate evidence and legal positioning
Banks/Lenders	P&L, Balance Sheet, Tax Returns	Loan risk, solvency	Issue financing with reduced risk
Grant Providers/Gov’t	P&L, Balance Sheet, Specific Use Forms	Fund utilization	Ensure funds are used as intended
Investors/Private Equity	P&L, Balance Sheet, Tax Returns	Profit potential	Assess ROI and exit strategy

Final Thoughts

Understanding financial statements is less about memorizing terms and more about learning to read your firm’s story. By mastering the basics, you empower yourself to:

Contribute more meaningfully to firm decisions
Answer questions with confidence
Spot financial issues before they become major problems

Whether you’re the point person for all operations or just need to speak the language in meetings, this knowledge gives you a strategic edge.

Stay curious, ask questions, and use each report as a learning tool.