Personal Financial Statements – An Introduction

What are personal financial statements? Financial statements are documents prepared by an entity, such as a corporation, a government, a not for profit organization, a supranational organization (as the United Nations), presenting the financial position at a certain date and activities for a period of time.

A set of financial statements is usually composed of a Balance Sheet, an Income Statement, a Statement of Retained Earnings, a Statement of Change in Equity, a Statement of Cash Flows, and Notes to financial statements. Financial statements prepared for an individual, or a family are Personal Financial Statements.



As an individual or a family, preparation of personal financial statements sometimes becomes necessary. Before issuing a loan or a mortgage, banks usually require the applicant to fill out certain forms detailing his/her assets, loans, income etc. Those hardly qualify as financial statements in a strict sense, they nonetheless demonstrates the applicant’s financial well-being. A formal set of financial statements properly prepared by a professional would go a long way. Other uses of personal financial statements include financial planning, estate planning, or divorce.

Cash basis or accrual basis, or a mixture of the two?

Accrual basis is usually preferred so as to have a truer and better picture of the individual’s financial situation. Some payments from the government might be better accounted for on a cash basis, i.e., included in the statements only when received. Though financial statements for tax purposes are normally on a cash basis.

For individuals, a separate set of statements should be prepared for income tax purposes. If all the assets need to be disposed of and all liabilities paid off, what will be the net taxes owned to the tax authorities? Such items include real estate properties (not principal residence, as any gains or losses realized on principal residences are non-taxable), taxable investments, holdings in private businesses, etc.

What Statements to include in a set of personal financial statements?

A Balance Sheet is a must. It provides a snapshot of the financial situation of the individual at a given time. Total assets net of liabilities is net worth. An Income Statement might not be very practical, as very few people would keep track of all the daily expenses. A partial income statement, however, should be prepared. Regular and recurring expenses, like electricity, phone, internet, cable TV, insurance, alarm system, property maintenance, mortgage payments (banks usually provide an annual statement of mortgage payments which separate principal and interest payments. Only interest should count towards expenses. ) Income comes from salaries and wages earned, business income, investment income, grants, etc.

Special attention should be given to the amount of interest paid on credit card debts.

The following items could potentially show up on a Balance Sheet (list not exhaustive):



Assets

• Cash on hand
• Cash in bank accounts
• Deposit Certificate
• Tax refunds receivable
• Childcare expenses reimbusement receivable
• Loan to individuals/businesses
• Stock options
• Trading accounts
• TFSA accounts
• RSPs
• Pension plans
• Life Insurance
• Real estate properties (investments)
• Shares in private businesses
• Land
• Principal residence

Liabilities

• Payday loans
• Credit card balances
• Unpaid bills
• Property Taxes payable
• Income taxes payable
• Personal line of credit balances
• Mortgage balances
• Personal loans
• Car loans

Total Assets minus Total Liabilities equals Net Worth. Net worth could be negative, as well as positive. A high net worth individual or an HNWI is an individual whose net worth is substantial, normally $ 1 million in liquid assets is considered the threshold.

We will follow up with a sample set of personal financial statements and some tools to help in preparing those statements. We will also apply certain techniques commonly used in financial statements analysis.