Chapter 1
Financial Statements: Personal Accounting
16
Even though your cash decreased by $500 when you made a payment to reduce the loan, your net
worth decreased by $400 as a result of the expense.
Buying and Selling Assets
Buying or selling assets (according to the value stated in the balance sheet) has no
impact on net
worth. For example, you purchase a new car for $10,000; pay $3,000 cash and take a loan from the
bank for the remaining $7,000.
The cash used to purchase the car is just an exchange of one asset
for another (cash for the car), so there is no change in net worth.
The loan is borrowed to pay for the car, so the liability increases
as does the asset (car). Again there is no change in net worth.The
affect on the accounts is shown in Figure 1.29. Although you now
own a $10,000 car, there has been no change in your net worth.
The transactions would appear
on the T-accounts as shown
in Figure 1.30. Cash decreases
by $3,000 and your loan
increases by $7,000. In the
end, you have an increase to
your automobile account for
$10,000.
If you exchange cash for
an item, how do you know
whether the item should be
considered an asset or an
expense? Typically, it is a question of how long it will provide a benefit to you and the cost of the
item. The $10,000 car that was just purchased is an asset because it will benefit you for several
years. On the other hand, spending $200 on food or entertainment would be an expense since
they will only benefit you for a short period of time.
Over time, the assets you own will change in value based on usage and changes in the market.
The car you purchased for $10,000 will not always be worth that amount. After several years of use,
it will be worth less than what you paid for it. Your house on the other hand may increase in value if
you maintain it and the area you live in is desirable. On personal financial statements, there are no rules
preventing you from changing the values of these assets as the market values change. In business,
though, there are strict rules on how values of assets are recorded. This will be covered in later chapters.
ASSETS
LIABILITIES
AUT
CASH
OMOBILE
+ $10,000
- $3,000
FIGURE 1.29
LOAN
+ $7,000
+
+
CASH
AUTOMOBILE
-
-
INCREASE
INCREASE
DECREASE
DECREASE
-
LOAN
+
DECREASE
INCREASE
3,000
10,000
No change in net worth
7,000
______________
FIGURE 1.30
