Definition
A Personal Financial Statement is a document prepared to showcase an individual’s financial condition. The statement often employs the accrual basis of accounting rather than the cash basis. It provides a comprehensive view of the individual’s financial health by listing assets and liabilities.
Key Components:
- Assets: These are listed at their estimated current values, organized by order of liquidity and maturity, without classification into current and noncurrent assets. Special attention is given to business interests, which should be shown separately if they constitute a large part of total assets.
- Liabilities: These are typically ordered by maturity, again without categorizing them into current or noncurrent liabilities.
Ownership Considerations:
When assets are jointly owned, only the individual’s proportionate interest, i.e., the amount to which they are beneficially entitled, should be included.
Examples
-
Individual Investor: Jane Doe prepares her personal financial statement for obtaining a mortgage. Her assets include her liquid savings, stock investments, and a 50% stake in a family-owned business. Jane lists the estimated current market value of these assets and her corresponding liabilities, such as her student loans and car loan.
-
Business Owner: John Smith, who owns a small printing business, prepares a personal financial statement to secure a business loan. John’s statement highlights his business interests separately, detailing his share of ownership and excluding assets held jointly with his spouse.
FAQs
Why is a Personal Financial Statement important?
A Personal Financial Statement provides a snapshot of an individual’s financial health, assists in financial planning, and is crucial when applying for loans, mortgages, or other financial opportunities.
How does the accrual basis differ from the cash basis?
The accrual basis records revenues and expenses when they are earned or incurred, irrespective of cash flow. Conversely, the cash basis records transactions when cash changes hands.
What should be included in the assets section?
Assets should be listed at their estimated current values, organized by liquidity and maturity. This ranges from liquid savings to long-term investments.
How are liabilities categorized in a Personal Financial Statement?
Liabilities are generally shown by order of maturity without classification as current or noncurrent.
Can jointly owned assets be fully included?
No, only the person’s beneficial interest in jointly owned assets should be included.
Related Terms
- Accrual Basis of Accounting: Recording revenues and expenses when they are incurred, regardless of when cash transactions occur.
- Cash Basis of Accounting: Recording revenues and expenses only when cash is exchanged.
- Liquidity: The ease with which an asset can be converted into cash with minimal impact on its value.
- Maturity: The date on which an investment becomes due for payment.
- Beneficial Owner: A natural person who enjoys the benefits of ownership, even though the title of the asset may be in another name.
Online References
Suggested Books for Further Studies
- Personal Finance for Dummies by Eric Tyson
- The Total Money Makeover by Dave Ramsey
- Financial Intelligence by Karen Berman and Joe Knight
Fundamentals of Personal Financial Statement: Accounting Basics Quiz
Thank you for exploring the concept of Personal Financial Statements. Stay proactive in managing your financial health to secure a prosperous future!
