WHAT IS A BALANCE SHEET?
Throughout one’s life, a person acquires property of a certain value and contracts debts and obligations of different amounts. To draw up a personal balance sheet is to determine one’s financial worth. One must prepare a list of assets/property and compare it to the list of liabilities/debts, at a given date. It is from this statement of financial worth that realistic goals and objectives can be set. Businesses are not the only entities that prepare a balance sheet. A personal balance sheet should be prepared annually in order to follow one’s financial evolution and adjust one’s goals and objectives accordingly.

The balance sheet is comprised of three elements: the assets, the liabilities and the equity.

THE ASSETS
The assets represent all of the property held by an individual. When listing the assets, it is important to estimate their market value, as certain assets depreciate with time. Particular examples would include vehicles, furniture and computer equipment. On the other hand, some assets may increase in value over time, these can include such assets as a house, land, art, and other collectibles.

Certain assets may quickly and easily be converted into cash, these short-term assets may include savings account, short-term deposits, the cash surrender value of a life insurance policy, etc.

Other assets, generally of greater value, can only be converted into cash over a longer period of time: these are referred to as long-term assets. Such example may include a house, guaranteed investment certificates, RRSP’s, etc.

THE LIABILITIES
As was the case with the assets, liabilities are composed of short-term debts, those debts or portion of debts where payments must be paid within a year, that is to say, the monthly payments of a bank loan, credit card, income tax arrears, etc., and the long-term debts where repayment terms extend beyond a year, these would include house mortgages, the car loans or leases, etc.)

EQUITY
The equity or financial worth is the calculation result obtained after you subtract the total liabilities from the total assets.

CONCLUSION
In short, the balance sheet has proven itself to be a vital management tool, as it allows one to draw an accurate picture of one’s financial health, but also to plan, set and adjust one’s goals and objectives. It is also an invaluable tool when applying for a loan from a financial institution. The time and effort spent in the preparation of a balance sheet is a worthwhile investment that will also facilitate the preparing of a budget.

Click here to obtain a printable balance sheet model.

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