Understanding your financial health is important as you navigate such life decisions as applying for credit for a loan or mortgage or as you undertake retirement and estate planning. To help in that process you can prepare a personal financial statement – a document that presents a snapshot of your financial health at a point in time.
Purpose of a Personal Financial Statement
Financing institutions are the most common users of a personal financial statement. A bank that holds a loan of an individual with a personal guarantee may want a personal financial statement of the guarantor to make sure that there is significant wealth to act as additional collateral on the loan. An individual who is planning on investing in a company, typically a closely-held company, may need to provide a personal financial statement to a lender as part of the process in securing financing for the investment. If third parties are using a personal financial statement, they may have their own institutional forms to fill out for the statement, or they may require a CPA-provided statement under Generally Accepted Accounting Principles (GAAP).
Even for those who are not personal guarantors or aspiring investors, a personal financial statement provides a worthwhile overview of personal net worth, which can be used for goal-setting, especially toward retirement.
Components of a Personal Financial Statement
Let’s breakdown the basic information in a personal financial statement: assets (what you own), liabilities (what you owe), income taxes and net worth.
Assets – what you own – should be listed in order of liquidity and include items such as cash, IRAs, cash surrender values of whole life insurance policies, receivables, stocks and bonds, real estate, net investment in closely held businesses and personal property. GAAP require assets be presented at their estimated current values as of the date of the financial statement.
Liabilities – what you owe – should be listed in order of maturity and include items such as accounts payable, credit card debt, and home, auto, and school loans. GAAP requires liabilities be presented at their estimated current amounts as of the date of the financial statement. You can run a credit report to help capture a full list of your liabilities.
Income taxes are calculated based on your taxable value, assuming assets and liabilities are liquidated as of the date of the financial statement being presented. When determining your income taxes, be sure to use applicable income tax law, regulations and current tax rates.
You have gathered your assets, liabilities and income taxes. Now it’s time to calculate your net worth: Assets – (Liabilities + Income Taxes) = Net Worth
Providing a complete, accurate snapshot of your financial health will give the user of your personal financial statement a high level of trust of the values you have presented. In addition to using a CPA to help prepare the personal financial statement, a financial planner can help make educated decisions regarding your assets, liabilities and wealth creation, so do not hesitate to include multiple financial professionals in your journey to produce a personal financial statement.