By any standard, today’s culture is enamored with acronyms. Everything from LOL to YOLO gives us reason to scratch our heads to make sense of today’s shorthand. One abbreviation every adult should become familiar with is BS…but not the BS you are probably thinking of! We're referring to balance sheet, the accounting term for your financial health. Over the years, we’ve heard plenty of business owners talk about their net income and income statement. There is a temptation to believe that if your income statement shows a profit your financial health is fine. That may not always be the case. It is important to put the balance sheet at the top of your personal monthly financial review, along with the profit/loss statement.
The balance sheet is a listing of assets, liabilities and equity. In personal finance, this becomes a summary of things you own such as bank accounts, brokerage investments, home, car, coins, and other assets. These assets are “balanced” with the sum of liabilities and equity. Liabilities include mortgages, lines of credit and items such as auto loans. Equity is what you’ve put into to your financial health over the years. Let’s take a look at each of these items.
After you have compiled these items, you can review your personal balance sheet. Monthly, all of the items on the list should be reconciled to statements you receive from banks and other financial institutions. After the items are reconciled, you can feel confident that you have an accurate picture of your personal financial situation. Only then can you flip over to the income statement and find out exactly how your money is spent. The two statements work together to give you a complete picture, but often the balance sheet is neglected. A sample balance sheet would look like this:
Checking - $100
Savings - $200
Home - $100,000
Cars - $50,000
IRA - $300,000
Total Assets - $450,300Credit Card - $300
Mortgage - $50,000
Total Liabilities - $50,300Equity $400,000
In this balance sheet, you can see the assets are greater than the liabilities. This person has spent their money wisely and has very little debt. They have positive equity. Use an Excel spreadsheet to create a balance sheet, or just jot it down on a piece of paper. Either way, you can give yourself a better, bigger picture of your financial health. That’s no BS! Need help getting your balance sheet set up? Someone from our Business Accounting Services group would be happy to talk with you! Call us today at 574.289.4011.