Chapter 1
Financial Statements: Personal Accounting
2
Assets (what we own)
Cash
$3,000
Contents of Home
6,000
Automobile
15,000
House
80,000
Total Assets
$104,000
Assets (what we own)
Cash
$5,000
Contents of Home
8,000
Automobile
20,000
House
100,000
Total Assets
$133,000
Scenario 1
Scenario 2
______________
FIGURE 1.1
Scenario 2 appears to be preferable. However, some crucial information is missing.
In examining the scenarios in Figure 1.2, which one would you now prefer? You must not only look
at how much you
own
(assets) but also consider how much you
owe
(liabilities).
Assets (what we own)
Cash
$3,000
Contents of Home
6,000
Automobile
15,000
House
80,000
Total Assets
$104,000
Assets (what we own)
Cash
$5,000
Contents of Home
8,000
Automobile
20,000
House
100,000
Total Assets
$133,000
Scenario 1
Scenario 2
Liabilities (what we owe)
Bank Loan
$0
Credit Card Account
2,000
Mortgage
60,000
Automobile Loan
5,000
Student Loan
5,000
Total Liabilities
$72,000
Net Worth*
$32,000
Liabilities (what we owe)
Bank Loan
$8,000
Credit Card Account
4,000
Mortgage
80,000
Automobile Loan
5,000
Student Loan
10,000
Total Liabilities
$107,000
Net Worth*
$26,000
______________
FIGURE 1.2
Even though you may own more in Scenario 2, you also owe a lot more. The end result is that
Scenario 2 is worth less than Scenario 1.
The Balance Sheet
The
balance sheet
is a permanent document that is used to record what you own (assets), what you owe
(liabilities) and what you are worth (net worth) on a specific date. To expand a little on assets, an
asset
is something you own that will benefit you now and in the future.This would include items such as the
cash you have, the house and car you own, the furniture and electronics you have in your home, and
investments you have made. Cash is listed first since it is the asset that you use most often.
*Net worth = things you own – things you owe
