Financial Statements (Part I) – Balance
Posted on Mar 02, 2007 under Financial Literacy, Financials | 8 CommentsFinancial 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…
Subscribe to Fiscal Musings | Digg This! | Stumble it!
by The Hojnackes, on March 15 2007 @ 6:43 pm
So our net worth is negative at this point. You add up the mortgage, car payment, credit cards, and student loans, and we don’t have a leg to stand on. We are working on that now , though.
by limeade, on March 15 2007 @ 9:17 pm
While I don’t consider the house one lives in to really be an asset(for reasons I’ll discuss later), realize that it is worth a large chunk of money. For piece of mind, you can list the house’s value in the asset column and things won’t look so bad. Just realize that you have to live somewhere, so it’s not a very liquid asset at all. Thanks for reading.
by Fiscal Musings » » Financial Statements Revisited, on February 6 2008 @ 5:46 pm
[...] I first started this site, I wrote about financial statements; in particular, the balance sheet and the income statement. People typically think of these in conjunction with companies, but they [...]
by Weekend Edition: More Coupons and Digital TV | Fiscal Musings, on March 8 2008 @ 8:02 am
[...] Musings Throwback (FMT): Financial Statements – Balance. In order to understand and better track our finances, it’s good to have a basic [...]
by cartuse, on July 24 2011 @ 1:38 am
cartuse imprimanta
by Chestnut Classic Minis Sale, on November 10 2011 @ 7:12 pm
Yay?| brilliant items listed here. When i?|d very delighted to seem this page. Many thanks and i’m looking in advance to touch an individual. Do you want to kindly lose me a post?
by firefox vps, on December 10 2011 @ 10:53 am
I definitely wanted to send a small comment so as to thank you for some of the stunning hints you are giving on this website. My time-consuming internet investigation has at the end of the day been recognized with wonderful facts and techniques to share with my family. I ‘d tell you that we visitors actually are undoubtedly endowed to be in a fine place with very many perfect people with helpful principles. I feel truly grateful to have come across your entire website and look forward to plenty of more thrilling minutes reading here. Thanks a lot once more for a lot of things.
by franchise convention, on January 23 2012 @ 6:13 am
I recently wished to come up with a quick comment so as to express gratitude to you for those wonderful pointers you’re posting at this site. Time