Why Attorneys Need to Look at Their Balance Sheet
Most attorneys look at the profit and loss statement and skip the balance sheet. The balance sheet is where problems like mixed trust funds, uncollected receivables and draws that outpace profit show up first. A few minutes a month reviewing it can catch issues before they become expensive.
What Is a Balance Sheet?
A balance sheet is a snapshot of your firm’s finances on a single date. It shows what the firm owns (assets), what it owes (liabilities), and what’s left for the owners (equity).
Your profit and loss statement covers a period of time, such as a month or a year. Your balance sheet shows where the firm stands right now. You need both to see the full picture. See: Why Law Firms Need to Pay Attention to Their Profit and Loss.
What’s Different About a Law Firm’s Balance Sheet?
Trust funds are not firm money. If your trust account is recorded on the firm’s books, the trust cash should be matched by an equal liability for client funds held. If those two numbers don’t match, find out why right away. See: Trust Account & IOLTA Reconciliation.
Unearned retainers are liabilities. A retainer belongs to the client until you earn it and bill it. Until then, it isn’t income.
Advanced client costs are owed back to you. Filing fees and expert costs you’ll bill to a client are money the firm is owed, not a firm expense.
Receivables tell you what’s coming in, and when. The age of your receivables matters as much as the total.
What shows up on your balance sheet also depends on whether your books are kept on a cash or accrual basis. On cash-basis books, receivables may not appear at all, so review an aging report from your billing software alongside the balance sheet.
5 Things to Check Every Month
Trust cash equals the trust liability, and your three-way reconciliation ties out.
Operating cash covers what’s coming due, including payroll, rent, and other bills.
Accounts receivable aging: how much is more than 60 or 90 days past due?
Credit card and line of credit balances: are they growing month over month?
Owner draws compared with profit: are partners taking out more than the firm earns?
Warning Signs on a Law Firm Balance Sheet
A negative client trust balance or unexplained trust differences
Retainers sitting in the operating account
Receivables growing faster than revenue
Equity shrinking even though the P&L shows a profit
How Azar Insights Helps
Monthly bookkeeping that keeps trust funds, operating funds and client costs correctly separated
A reviewed balance sheet each month, with issues flagged before they grow
Fractional controller support for firms that want someone to walk through the numbers with them
Frequently Asked Questions
What should a law firm’s balance sheet include?
Cash in operating and trust accounts, receivables, advanced client costs, equipment, and any loans or credit balances. If trust accounts are on the books, it should also include a matching liability for client funds held. Owner equity and draws make up the rest.
Should client trust funds appear on the firm’s balance sheet?
Firms handle this in different ways. If trust funds are recorded on the firm’s books, they must be offset by an equal liability, because the money belongs to clients. Either way, trust funds should never be counted as firm cash.
Are retainers income or a liability?
An unearned retainer is a liability. It becomes income only when you earn it, bill it, and transfer it from trust to operating.
How often should an attorney review the balance sheet?
Monthly, alongside the profit and loss statement and the trust reconciliation. A monthly review catches problems while they’re still small.
What’s the difference between a balance sheet and a profit and loss statement?
The profit and loss statement shows revenue and expenses over a period of time. The balance sheet shows what the firm owns and owes on a single date. The P&L tells you how you performed, and the balance sheet tells you where you stand.
Attorneys remain responsible for complying with their state bar’s trust accounting rules.
Related Reading
Law Firm Profit and Loss · Attorney Effective Rate · Trust Account & IOLTA Reconciliation
About Azar Insights
Azar Insights provides outsourced bookkeeping, accounting, and fractional controller and CFO services for law firms nationwide. With 15 years of accounting experience, we work remotely with solo attorneys and multi-partner firms using secure, cloud-based tools.