What is a personal financial statement?
A personal financial statement is a document or spreadsheet that describes a person’s financial situation at a given time. A personal financial statement usually includes general information about the person, such as name and address, as well as a breakdown of total assets and liabilities.
The statement is useful for tracking goals and wealth. It is also often required when applying for credit.
Key points to remember
- The personal financial statement lists all the assets and liabilities of an individual or a couple.
- Subtract the liabilities from the assets to see the net worth. A positive net worth shows that the person has more assets than liabilities.
- Equity can change over time as the values of assets and liabilities change.
- Personal financial statements are useful for tracking wealth and goals, and for applying for credit.
- Income and expenses can be included, but ideally, they are placed on a separate sheet called the income statement.
Understanding the personal financial statement
A financial statement can be prepared for a business or an individual. The statement shows the financial health of the entity named in the statement. An individual’s financial statements are called personal financial statements and it is a simpler version of the corporate statements.
A person’s financial statements show their net worth, which is their assets minus their liabilities. Net worth reflects what an individual will have in cash if they have sold all of their assets and repaid all of their debts.
If the liability is greater than the asset in the personal financial statements, then the individual has a negative net worth. If the individual has more assets than liabilities, he has a positive net worth.
Personal financial statements are most often used when a person applies for a credit, such as a loan or mortgage. Financial statements allow loan officers to easily gain insight into the applicant’s financial situation in order to make an informed credit decision. In many cases, the individual or the couple may be asked to provide a personal guarantee for part of the loan, or may have to pledge some of the personal assets as collateral to secure the loan.
By comparing personal financial statements over time, a person can track how their financial health is improving or deteriorating.
What is included and excluded from a personal financial statement?
The personal financial statements are broken down into assets and liabilities. Assets include the value of securities and funds held in chequing or savings accounts, retirement account balances, trading accounts and real estate.
Liabilities include personal loans such as credit card balances, student loans, unpaid taxes and mortgages. Also include debts held jointly with someone else, for example, if you co-signed a loan.
A married couple can create a joint personal financial statement that shows all of the assets held and the debt owed.
Business-related assets and liabilities are generally not included in a personal financial statement, unless the person is directly and personally liable. For example, the person has personally guaranteed a loan for their business. This is similar to co-signing, so it would be included in personal financial statements.
Everything that is leased is not included in personal financial statements because the asset does not belong to the person. Although, if you own the property and rent it to someone else, the value of that property is included in your asset list as it belongs.
Personal assets, such as furniture and household items, are generally not included as assets on a personal balance sheet, as these items cannot be easily sold to pay for a loan. However, personal property of significant value, such as jewelry and antiques, may be included if the value can be verified with an appraisal.
If you use the statement to get a credit or to show the overall financial situation, income and expenses are also usually included. This can be tracked on a separate sheet, called the income statement. This includes all forms of income and all expenses, usually expressed as monthly or annual amounts.
Example of a personal financial statement
Suppose Henry wants to track his net worth as he heads for retirement. He has paid off his debts, saved money, invested and is getting closer to owning his house. Each year, it updates the statement to see the progress it has made.
Suppose Henry had assets of $ 20,000 for a car, $ 200,000 for his house, $ 300,000 in investments and $ 50,000 in cash and cash equivalents. He also has stamps and collectibles valued at $ 20,000. Its total assets are $ 590,000.
As for the liabilities, Henry owes $ 5,000 for the car and $ 50,000 for his house. He pays for things with a credit card, but pays the balance every month, so there is no balance owed. Henry co-signed a loan for his daughter and $ 10,000 remains. Even if it is not Henry’s loan, he is still responsible for it, so it is on the statement. Henry’s liabilities are $ 65,000.
By subtracting the liabilities from the assets, Henry’s net worth is $ 525,000.