Financial statements are how we measure and track our financial success (or failure for that matter). You’ve got to begin to see your personal finances as a business on some level. If you work at a job, you’re selling your time to your employer. If you’re self-employed, you’re selling your services to others. This is your income. You also have expenses (think house/rent payment, groceries, gas, electric, children’s music lessons, etc…). With this basic understanding, you can now start to profitably run your “business”.

The first financial statement to talk about is what’s called the Balance Sheet. You’ve probably heard the term before, but it isn’t something that only a Wall Street analyst can figure out. For our purposes here, we’ll keep it simple. The balance sheet is a detailed representation of one simple equation:

ASSETS = LIABILITIES + (owner’s)EQUITY

In one column we’ll list all of our assets. These are our economic resources. They include such things as the cash in your checking and saving accounts, the value of any stocks and bonds, investment real estate holdings and any amounts owed to you (accounts receivable) by another party.

The other column consists of our liabilities and equity. Liabilities are all amounts owed to others. Examples of this are car loans, mortgages, credit card balances and don’t forget the money you borrowed from grandpa Jack. The equity portion of this column is what balances the sheet. Another term for this equity is ‘Net Worth”. Rearrange the preceding equation and you get:

Net Worth (equity) = Assets - Liabilities

Simple and logical. What we own minus what we owe tells us how much we’re worth (this is purely financial; I’m not discounting our intrinsic worth as human beings; I’m just leaving it for another blog).

These are the basics of the balance sheet. It’s also important, however, to understand that the balance sheet only gives you a snapshot in time of your financial picture at one instant (say December 31 of last year). Everyday, you could tabulate new figures, but that would get tedious and truthfully isn’t worth it.

Now, if you’re confused about where your job factors in and the expenses I talked about earlier, we’ll get to that next time when we talk about the Income Statement…

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