Chapter 1
Financial Statements: Personal Accounting
15
2. Repay your friend: you have less cash, but your net worth still does not change.
The T-account entries are shown in Figure 1.26.
+
CASH
-
INCREASE
DECREASE
-
LOANS
+
DECREASE
INCREASE
1. $100
2. $100
2. $100
1. $100
______________
FIGURE 1.26
Only assets and liabilities are affected, so there is no entry on the income statement. There is no
change to net worth.
Figure 1.27 demonstrates that not all the cash you spend would necessarily be used to pay expenses.
For example, you arrange for a loan of $15,000 and your loan repayments are $500 each month.
There are three transactions to consider.
Transaction 1
Receiving the loan will
increase cash and increase
the loans liability. There is no
impact to net worth.
Transaction 2
Pay the interest
portion of
$400. Net worth has decreased
and an expense should be
recognized.
Transaction 3
Pay the principal
of $100,
thereby reducing the amount
owing to the loan company.
Your net worth does not
change and there is no need to record this transaction on the income statement.
The transactions would appear on the T-accounts, as in Figure 1.28.
+
+
CASH
INTEREST EXPENSE
-
-
INCREASE
INCREASE
DECREASE
DECREASE
-
LOANS
+
DECREASE
INCREASE
3. $100 1. $15,000
2. $400
3. 100
1. $15,000
2. $400
______________
FIGURE 1.28
Cash balance
decreased by $500
($400 to pay interest
and $100 to reduce the
debt principal).
PERSONAL INCOME STATEMENT
SURPLUS (DEFICIT)
EXPENSES
2
ASSETS
PERSONAL BALANCE SHEET
LIABILITIES
CASH
PREPAID
EXPENSES
HOUSE
AUTOMOBILE
CONTENTS
OF HOME
UNPAID ACCOUNTS
MORTGAGE
LOANS
NETWORTH
1. +$15,000
2. - 400
3. - 100
1. +$15,000
3. - 100
REVENUE
DEPRECIATION
FOOD
ENTERTAINMENT
INTEREST
MAINTENANCE
MISCELLANEOUS
UTILITIES
GASOLINE
Net worth decreased by $400
2. + $400
______________
FIGURE 1.27
