Personal Balance Sheet - a tool you should know

A personal balance sheet of any individual or person lists out his/her total assets and liabilities on a particular date.

The balance sheet shows your assets such as cash in hand and bank accounts including savings/current accounts, properties like house, car, and furniture etc., marketable securities like shares and bonds. Liabilities include debts, mortgage debts, long-term liabilities such as housing loan, personal loan etc. The difference between your total assets and total liabilities is your net personal worth.

Once you prepare a personal balance sheet, you can be in a position to determine you net worth. Calculating your net worth is very important step in order to uncover what assets and liabilities are held by you as on a particular date.

You need to update each and every element of balance sheet in accordance with transactions taken place during the whole year, in order to find out a fair and exact position of your firm or yourself as a individual person. It brings the dynamism in the books of accounts and will depict more real and factual picture of the personal balance sheet as well as quantifies the Net Worth accurately.  

Financial Ratio Analysis based on your personal balance sheet

Financial ratios are the basic tools of financial analysis as they give more analytical and meaningful information of data presented in your personal balance sheet. Below are some of the balance sheet based ratios:

Current Ratio: This is one of the most famous financial ratios. It serves as a test of your personal financial strength and relative efficiency.

Way of Calculation: Current Assets/Current Liabilities
E.g.: If Current Ratio is 1.5, it means for every current liability, you are having 1.5 current assets that can be used to pay them.

Quick Ratio: This ratio serves as test for your personal liquidity and measures short term solvency.

Way of Calculation: Cash + Liquid Assets/Current Liabilities
E.g. If Quick Ratio is 1.1, then that means for every current liability, you are having 1.1 liquid assets which can be used to pay them.
 
Debt Equity Ratio or Debt-to-Worth Ratio: The debt to equity financial ratio is a calculation of the total debt you owe compared to your net worth. It tells you just how much your capitalization is against the outside liabilities. It also measures your financial risk.

Way of Calculation: Total Liabilities/Net Worth
E.g. If Debt-to-Worth ratio is 1.05 then that means for every dollar that you have invested, you owe 1.05 of outside liability.

Below is a format of personal balance sheet showing different groups and items categorized according to groups:

Balance Sheet as of ……..

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