Week 3 – Balance Sheet Accounting to Track Success

Balance Sheets don’t sound very sexy until you see the bottom line. That’s where the appeal comes in.
Knowing your net worth is motivating.
You may not be a millionaire yet, but the best way to find out is to have a balance sheet.  You may be surprised at the result.
I’ve always been a balance sheet accountant. In my long-ago corporate job, I focused more closely on the accuracy of the balance sheet than on the income statement.  I knew that since we used proper accounting rules, the income statement’s bottom line would be accurate if the balance sheet was accurate. Maybe we got an expense in the wrong category on occasion, but at least it was there.
Each year, in closing the books, I focused on each line item of the balance sheet to ensure its accuracy. That’s a time-consuming task in a lot of cases but not insurmountable.
Businesses use historical value on their balance sheets. That’s the Generally Accepted Accounting Principle; everything is shown at cost.
As an individual, you can create a historical value balance sheet – it has value in recording things like the price you purchased property for. This provides an easy source to find that basis for tax purposes, but the better numbers are in the Fair Market Value of your assets.  In other words, this is what I own, and this is what it’s worth today. That’s Fair Market Value.

What is a Balance Sheet?

So what is in a balance sheet?  All your assets and all your liabilities – the difference between the two is your net worth.
Here’s what it might look like (accounts and numbers are fictional):
You can and should create this document for yourself. I have one that dates back to 12/31/2010 and has been updated each quarter since.  Some of the amounts are dead-on accurate – anything that has a third-party source telling me the balance is recorded at that balance – bank accounts, brokerage accounts, loans, credit card statements, retirement accounts. If someone else services it, it is easy to find the balance on any given day. Other amounts are estimated, but always very conservatively – real estate values, value of vehicles, tools, other fixed assets that may be sold in various ways.
Still, other assets are valued at historical costs, including any businesses that are impossible to establish value until you are ready to sell and have a buyer.  In this day and age, it’s tough to know whether you could sell your business. Here’s a caveat for you though, if you have a business, especially one that holds inventory, you should have a complete set of books that includes a historical cost balance sheet, then you could adjust your personal balance sheet to reflect the basis of that business. At least the business will be reflected on the balance sheet that way. If you have a personal services business, where you are the sole person doing the work, and you don’t hold any assets in that business. There probably isn’t much to list since it would disappear if you stopped doing the work. That doesn’t mean it has no value, just that the value is impossible to record.
The advantage of having a balance sheet is two-fold. One, you can track your progress each year as you build your net worth. The balance sheet lets you know exactly where you stand. The second is when you die, this gives your heirs a place to start looking for assets. It may sound morbid, but it seems impossible to keep your lists up-to-date.  A balance sheet, updated quarterly, is easier to maintain because it helps you reflect on your financial life regularly. It’s easier to remember that you recently opened a bank account if you’re trying to keep everything accurate.
Here’s how you start.
Identify all your assets:
  • Cash
  • Checking and Savings Accounts – list each separately
  • Investment/Brokerage Accounts/Stocks held (if not inside a brokerage account)
  • Property held – include
    • real estate (by address)
    • Personal assets (furnishings, tools, etc.)
      • List personal as a whole unless you have something specific of significant value
        • antiques
        • Jewelry
        • art
        • firearms, etc.
    • Vehicles owned
  • Retirement accounts
  • Businesses
  • Debts owed to you by someone else
  • LLC/Partnerships
  • Other Receivables
  • Trusts
You may have something else, but these are the most common assets owned.  Be sure to total the value of these assets.
Next up is to list your liabilities:
  • Credit cards
  • Mortgages
  • Personal lines of credit
  • Auto loans
  • Home equity loans
  • Revolving loans
  • Property taxes
  • Income taxes
If you owe someone, whether an institution, a business or a person, put it on the list. I recommend including the balance of any loan you have co-signed for as well, even if it hasn’t defaulted to you. This keeps you from being surprised.  If you pay a bill monthly, like rent or utilities, that should not go on the list unless you have some past due amounts.  Past due amounts should be included.
Total your liabilities.
The difference between your assets and your liabilities is your Financial Net Worth.
Remember, Balance Sheets are valued at a specific date. It can be any date, but typically it is at the end of the year, or quarter, or month. It’s not the value of bank account A last week and bank account B next Thursday. Pick a date and use only that date.
I’m a big fan of Balance Sheets. I keep mine in a spreadsheet and add one more calculation – the difference between my Net Worth last year on the same date and this year. I want that to grow. It helps me make decisions on whether I invest in something permanent or temporary.