Chapter 1
Financial Statements: Personal Accounting
3
On the other hand,
liabilities
are what you owe, your obligations. Usually, these obligations mean you
owe cash to someone else.One example of a liability would be unpaid accounts.Unpaid accounts include
amounts owing on credit cards, and bills for items like utilities or cell phones that you have not yet paid.
Other longer term liabilities include items such as bank loans and mortgages.Unpaid Accounts is listed
first since this is the debt you have to pay first.
Net worth
is what is left if you cash out (i.e. successfully sell all your assets and get the value equivalent
to the recorded amount) and pay everything you owe, your liabilities. Tracking the amount you are
worth is a fundamental component of accounting in both your personal life and your business life.
Assets
= all that you
OWN
Value of Assets = $75,000
Liabilities
= all that you
OWE
Value of Liabilities = $50,000
Net Worth = $25,000
The balance sheet provides a snapshot of your financial position.The difference between the value of
what you own and what you owe represents your net worth.The date of the balance sheet is presented
as “As at ...” because it represents a snapshot of your finances at a particular point in time. For
example, a balance sheet prepared on December 31, 2016 would have the date “As at December 31,
2016.”
In Figure 1.3, note that
you have only $7,000 in
cash. At this point, if you
needed to pay everything
that you owe ($105,500),
you would need to sell
some of your assets (i.e.
convert the value of your
assets into cash, also
known as
liquidating
your assets). Although
you may think that you
are worth only the $7,000 you have in the bank as cash, your true value (or net worth) is $36,500.
Personal Balance Sheet
As at December 31, 2016
Assets
Liabilities
Cash
$7,000 Unpaid Accounts
$500
Contents of Home
5,000 Mortgage
100,000
Automobile
10,000 Bank Loan
5,000
House
120,000
Total Liabilities
105,500
Net Worth
36,500
Total Assets
$142,000 Total Liabilities +
Net Worth
$142,000
FIGURE 1.3
