Personal Financial Statements

Investors use financial statements to assess the financial condition and performance of companies. However, equally important is for investors to assess their own financial position through the use of personal financial statements, in particular a Balance Sheet and Income Statement.

A personal Balance Sheet lists an individual’s assets, liabilities and net worth, just like a company’s Balance Sheet. Assets include bank accounts, investment accounts, retirement accounts, education accounts, real estate, and various other assets that may not be as liquid as financial investments. For example, cars, jewelry, and furniture are examples of less liquid assets that could be used to raise cash through liquidation. Liabilities generally represent the value of loans. For most investors these liabilities could include credit card balances, student loans, automobile loans, and mortages, among various other types of lending facilities. Assets minus Liabilities equals the investor’s Net Worth. The Balance Sheet lists those accounts that affect an individual’s financial position at a specific point in time.

In contrast, the personal Income Statement lists all cash flows that affect an individual’s financial position over a specific time period, and unlike the Balance Sheet that has accounts, the income statement for an individual shows income and expense cash flows. This type of Income Statement is based on cash accounting, whereas public companies are required to use accrual accounting. The major difference between cash and accrual accounting is cash accounting recognizes the economic impact when cash is exchanged, while accrual accounting recognizes economic impact when service is rendered - not when cash is exchanged. This difference is why public companies have a Cash Flow Statement as part of their financial statements. A personal Income Statement starts with income based cash flows (paycheck, retirement distributions, Social Security…), while expenses could include utilities, food, insurance, and various loan payments.

Personal financial statements provide a means through which an investor can assess their own financial condition and performance, and potentially improve their financial planning to ensure they meet their financial objectives.