A balance sheet is a worksheet for finding the difference between what you owe and what you possess. It provides a clear picture of your financial situation at a specific moment. Businesses use a balance sheet to compute their net worth and track their growth. Likewise, you can use a personal balance sheet as a tool for improving your finances.
Balance Sheet Methodology
On your balance sheet, list everything you own -- your assets -- and total them. In a separate column, list and total what you owe, your liabilities. Subtract total liabilities from total assets to find your net worth. This is what you would have left if you sold all you own and paid off all your obligations. Business balance sheets are similar but typically have different types of assets and liabilities, such as inventory and accounts payable. The net worth of a business is called its equity. For a corporation, the equity is equal to the value of all shares of stock.
Listing Your Assets
You can use lined paper, special worksheets or even software to prepare your personal balance sheet. The plus or asset side should include all your cash and bank accounts, such as certificates of deposit and checking or money market accounts. Also list the current resale value of your home, your car and personal property such as furniture and jewelry. Using your most recent statements, list the value of your investment accounts, such as stocks, bonds, mutual funds and the cash value of your life insurance. Total all your assets.
Liabilities and Net Worth
On the liability or minus side, list all the debts you owe, including the balance on your mortgage or mortgages, student loans and auto loans. Also include the balance on your credit card accounts, store credit cards and any personal loans, such as loans from relatives. List any other debts you may have, such as unpaid income taxes and current bills -- for example, utility bills. Add up all these debts to find your total liabilities. Subtract your total liabilities from your total assets to find your equity or net worth.
Reading Your Results
Your balance sheet gives a breakdown and overall picture of your financial situation at a given time. For example, your assets list shows how much cash and liquid investments you have available for an emergency. The liability column presents a true picture of your debts. A positive net worth means that if you had to sell everything and pay your creditors, you'd have something left. A negative net worth means you would be unable to pay all your obligations even by liquidating everything you own.
Advantages of a Balance Sheet
You can track your progress in decreasing debts, increasing assets and growing your net worth by preparing a balance sheet at regular intervals, such as twice a year. Your balance sheet can help you set and meet financial goals, such as paying off college loans or saving for a down payment. A balance sheet can show whether you need a new financial direction and motivate you to change. It can identify problem areas, such as credit card debt. Your balance sheet is also helpful when you apply for a home or auto loan or meet with a financial planner.
- U.S. Small Business Administration: Preparing Financial Statements
- Money Management International: How to Create a Personal Balance Sheet
- U.S. Securities and Exchange Commission: Beginners' Guide to Financial Statements
- Colorado State University Extension: Net Worth Statements
- Entrepreneur: Personal Balanace Sheet
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