BUSINESS Demystifying Your Balance Sheet essentially just completed your personal balance sheet, albeit an oversimplified version. But, seriously, that’s the concept for both personal and business — that’s it! Many will recall the crash of 2008-2012, when the housing bubble burst and millions of homeowners found themselves “under water,” meaning they owed more on their mortgage balance than their houses were worth, if they could even find a buyer. If you were indeed under water, you would be said to have a “negative net worth” or “negative equity,” but let’s not get hung up on the jargon. I realize that we might not get our listing price and if we successfully sold our house, we would have to pay some selling expenses such as painting the house and a realtor’s brokerage fee. But let’s not complicate this for now. We could also use the relationship between your car and your car payment as another example. So far, so good. A More Complete Personal Balance Sheet As we’ve discussed, these numbers change frequently, so we include a header indicating that these balance sheet numbers represent our (Mr. or Ms. X’s) financial situation at a certain date or point in time, rather than for a period of time. For sim- plification, I am taking a few liberties in Figure 2 and will have to beg forgiveness from the accounting gods, or possibly even sacrifice a few chickens. Notice that on the bottom of the right-side column, the last number ($750,000) equals the last number on the left side column. This is because the balance sheet must be in balance. That’s based on the accounting equation Assets = Liabilities + Worth. Many accounting courses begin with ASSETS: What you own*** Cash Retirement plan (401k or IRA) Money your brother-in law owes you House, at market value Car Household goods/furnishings Other Total - all Assets = $750,000 *** includes what’s owed to you this equation stuff. I think it turns people off, but we should at least mention it since it is the foundation for a balance sheet. OK, now that I’ve reluctantly mentioned it, my con- science is clear. You can see this by looking at the “total assets” number of $750,000 on the bottom of the column on the leſt. Then, on the right-side column, we need to add the “total liabilities” ($425,000) to the equity ($325,000) for a total of $750,000, to be in “balance” with the “total assets” number of $750,000. Again: What I Own (or have, possess) less What I Owe = Equity, or what I’m worth financially. Matters get a bit more complicated when we develop a bal- ance sheet for our business, but that’s primarily because of ac- counting terminology, conventions, categories, subcategories and established formats. The underlying principles and con- cepts are similar. Pause now and re-read the previous section(s) until you have a logical feel for what has been covered and are ready to move forward. You’ll notice that the header categories (Assets and Liabili- ties) are positioned side-by-side (horizontally) in our illustra- tion to emphasize the relationships. However, because of space limitations, typical business balance sheets are formatted in a vertical format. In other words, assets on top, followed down the page by liabilities and, finally, equity at the bottom. Year- end detailed balance sheets may require more than one page and oſten feature two columns of numbers: one for the current year just ended and the other for the previous year so you can compare changes between the two years. LIABILITIES: What you owe to others Bills owed (maybe credit cards) not yet paid Tax liability when you withdraw 401K/IRA Kiss this one goodbye, if he’s a deadbeat House mortgage balance Car loan balance Cost of selling/turning into cash Other Total - all Liabilities = $425,000 Equity: aka Net Worth = 325,000 (assets, less liabilities) Total – All Assets = $750,000 Figure 2. This provides a more complete personal balance sheet. 22 KEYNOTES MAY 2021 WWW.ALOA.ORG Total Liabilities and Equity = $750,000
