Does your Balance Sheet balance?

Author: Craig Hertel
Greene County Extension Education Director
ISU Extension


Are you making financial progress? How much are you worth? Can you meet your short-term obligations? The simple answer is to compare what you own and owe from year to year.

One of the important financial tools to measure these items is a form called a balance sheet. It is a snapshot of finances in a moment of time. For personal finance, a well-designed and constructed balance sheet taken the same day each year is essential. A balance sheet is also sometimes called a net worth statement or a financial statement (not to be confused with the plural term financial statements meaning the coordinated accumulation of income statement, balance sheet, cash flow statement, and change in owner’s equity). A balance sheet lists the assets on the left side, and who has claim to those assets on the right side. Those claims are known as liabilities (debt) and the residual is called net worth or owner’s equity.

One way to look at a balance sheet is the book-ends of the cash flow & income statement. The first date gives a point of reference on financial position in a given point of time. The second book-end wraps up the period. Done correctly, it can be the ultimate test of whether one improved or went backwards financially.

There are five tricks in preparation:

1.Do it! The most important point is to be disciplined to prepare this document at minimum each year, preferably on the same date.

2.Completeness. This is especially true on the liabilities side. Have they all been noted? Have accruals been prepared?

3.Valuations. A conservative approach is to value your assets at the old accounting principle called “lower of cost or market”. The ultimate approach is to have a two column asset side – conservative market on one side, and investment amount or tax basis for the other column.

4.Coordination.For accuracy, the asset valuations, and liability amounts should be coordinated with your bank statement, credit card purchases, assets purchased, accrued interest, etc. Where personal income tax accounting is on a “cash accounting basis”, balance sheets are most accurate when they are constructed with accrual bookkeeping thinking.

5.Contingent taxes. When asset values rise, it is easy to over-estimate your net worth if you forget contingent income taxes that would be due upon sale. Even with death, those 401K type of instruments will have income taxes due on the earnings.

After the balance sheet is prepared, verified to be correct, then the analysis begins. That is the subject of a subsequent article.