Wealth Scribbles: A Balancing Act

Welcome to the Wealth Scribbles Series, a place to providing you with the basics about a variety of important wealth topics.

We kick things off with a look at some main points about the Balance Sheet.

In the personal finance domain, this report is also known as the Net Wealth Statement, although I prefer to call it your Net Wealth Statement.

When dealing with the world of high finance, it’s also likely you’ll see its fancy name as the Statement of Financial Position. No matter how you slice it, all these terms line up to mean one and the same.

Generally speaking, a Balance Sheet is a financial statement which summarizes assets, liabilities and equity (or net worth) at a specific point in time. Think of it as a snapshot of what a person, company or government institution owns at an exact point in time and how they finance those ownership stakes.

In a standard form Balance Sheet, all assets are listed on the left side while the right side details the liabilities and equity. As such, it’s called a Balance Sheet because the left side (the assets) must balance and equal the right side (the liabilities and equity).

In simple mathematical terms, we have Assets = Liabilities + Equity, or A = L + E. For anyone liking a good ALE, this should be easy to remember.

But jokes aside, why is the Balance Sheet an important concept to understand?

When it comes to companies, a study of the Balance Sheet, along with two other statements – the Income Statement as well as the Cashflow Statement – highlights a company’s financial health. When investing in a company, it’s important to understand what the company owns to produce revenues and how it bankrolls those assets to generate profitability.

For personal Net Worth Statements, the idea is very similar. Your own statement gives you and others who may lend to you an idea of your financial health. Again, it’s about what you own and how you own it – through debt, sheer sweat equity or a mix.

As I counsel my clients in their journey of creating, protecting and enjoying their wealth, I find their Net Wealth Statement a useful tool to evaluate progress towards their goals. It helps to identify strengths in their wealth portfolio, as well as opportunities to shift assets and liabilities into more prolific approach.

Of course, any serious investor would also do well to be able to get a handle on corporate balance sheets as a means of better evaluating their investment decisions.

I trust you found this quick introduction into Balance Sheets valuable. If you have any questions, be sure to send us a note through the Contact section and we’ll gladly help you out.

Together to self-ownership and happiness so we can win at life,

Adrian Harasymiw Wealth Counsel Pinnacle Sovereign Wealth Inc.

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