Personal Financial Statement
Before we discuss what should be included, let’s talk about why you may need a personal financial statement and what a personal financial statement does for you.
A personal financial statement summarizes the net worth of a person or a group of related people on a specific date. It summarizes all assets (including cash, bank accounts, investments, receivables, homes, other real estate, cars, boats, jewelry, etc.) and subtracts all liabilities (including all loans, credit card balances, income taxes owed, and estimated income taxes on the difference between the value of the assets and liabilities); the difference between total assets and total liabilities is net worth. In other words, it’s the difference between what you own and what you owe.
Some people may find that a statement of changes in net worth statement is also useful. This statement details the change in net worth between one date and another. Examples of changes include: income earned, expenses incurred, capital gains on investment, increases or decreases in the market values of real estate.
Personal financial statements may be needed for many reasons including tax planning, financial planning, retirement planning, estate planning, banking requirements when obtaining a loan, personal guarantees, lease commitments, divorce negotiations, or monitoring your own financial health.
There are different ways to value assets:
- Historical cost (original cost)
- Estimated current value (published or quoted market prices)
Generally, a personal financial statement should be prepared using the estimated current values of all assets. Liabilities should be listed at the estimated amount of cash to be paid. If a loan can be paid at an amount less than face value, then that lesser amount is what should be listed on the personal financial statement.
Now that we have a base understanding of what a personal financial statement is and what it does, we can begin discussion of examples of items that should be on your checklist when preparing a personal financial statement.
Actual cash on hand
Reconciled bank account balances
Investments in mutual funds, common stocks, and bonds
Brokerage statements including market values of assets held within the brokerage accounts, including tax basis for purposes of calculating any income tax liability on the sale of those investments
Market value and tax basis of investments not held in brokerage accounts
Balances and tax basis of any amounts due to you
Cash surrender value of life insurance policies
Loans against the cash value Investments in closely held businesses
Estimated current value and tax basis
Personal Residences and other real estate, including rental properties
Estimated current value
Oil and gas interests
Estimated current value and tax basis
Vested interest in pension, profit sharing plans, and individual
- Market value and tax basis Other Assets (estimated current value and tax basis), including:
- Personal vehicles
- Collector vehicles
- Furniture and other household goods
- Art and antiques
- Credit card balances
- Utilities, property taxes, insurance
- Other notes or loans payable
- Mortgages if not included in the personal residence and other real estate section
- Income taxes payable
If you’re presenting a statement of changes in net worth, you’ll also need:
- Salary and bonuses earned
- Income from dividends and interest
- Gains and losses on the sales of investments
- Income tax expense
- Real estate taxes
- Total of personal expenditures
- Any other items of income or expense
- Change in market value of assets that weren’t sold (for example, the difference between the market value for your home at the end of the prior year and the end of the current year)
Now that you’ve gathered all of the information, it’s time to summarize. You have choices.
If you work with a CPA, financial planner, banker, or other professional an option is to give that individual all the information and they will prepare the statements for you.
If you would prefer to prepare the statement on your own, use a spreadsheet, paper, or software that includes a personal financial statement preparation application.
We’ll being with your statement of net worth:
- List all of your assets at estimated current value and calculate a total.
- List all of your liabilities at the estimated amount of cash to be paid and calculate a total.
- Total the estimated tax basis of your assets and subtract that from the estimated current value. Multiply the difference by your estimated income tax bracket. This is your estimated income tax liability that would result if you sold all of your assets as of the date of the personal financial statement for the values listed.
- Add the total assets, subtract the total liabilities, and subtract the estimated income tax liability calculated. This is your estimated net worth.
For the statement of changes in net worth:
- List and total all of your items of income
- List and total all of your items of expense
- List and total the change in market value of assets that weren’t sold
- Add the total income, subtract the total expenses, and either add or subtract the change in market value of assets, as appropriate.
- The net number is the change in your net worth.
- To verify that you haven’t missed anything, look start with your net worth at the beginning of the year, add or subtract the change in your net worth, and the net should equal your statement of net worth.
To keep abreast of your financial condition, you should consider updating your personal financial statements on a regular basis: monthly, every few months, or at least on an annual basis.
The above list by no means covers every item that should be included in your personal financial statements. The items included will vary by individual or family group. If you have questions consult with your CPA or personal financial planner.
Sue Price-Scott, CPA is a partner at Alegria & Company and specializes in business and personal income tax and is accredited in business valuation. She can be reached at firstname.lastname@example.org