What is the purpose of a balance sheet?
All businesses, including law firms, use three reports to analyze their financial position – the balance sheet, the cash flow statement, and profit & loss (income) statement.[1][2] The purpose of the balance sheet is to capture the law firm’s financial position at a specific instance of time and is used to evaluate the firm’s financial health.[2]
The balance sheet shows all of the law firm’s assets and liabilities as well as the partners’ equity in the firm. It is called a balance sheet because the liabilities and equity should “balance” with the firm’s assets.[2] In other words, the assets and liabilities should add up to the exact same amount as the firm’s assets. A healthy firm should have more current assets than it does current liabilities, and should have an equal amount of debts (liabilities) and equity.[2][3] The balance sheet allows partners to evaluate the firm’s liquidity (its ability to readily convert assets to cash) and allows them to determine if the firm is over-leveraged (has more debts than assets).[3] It is a key tool that law firm managers and partners can use to figure out whether the firm is in or is heading toward financial problems.
References
1. What Is a Balance Sheet Used For?
2. Using a Balance Sheet to Analyze a Company
3. The Purpose of a Balance Sheet & Income Statement