In order for any organization, including a family, to understand what their current financial status is, it is a good idea to generate financial statements in order to gain insights into the complete financial picture. One of the most important aspects of a financial statement is the rundown of current net assets, as well as all debts and liabilities so that the liabilities assets ratio can be determined. This ratio is a valuable indicator of whether the organization is moving toward amassing wealth or is mired in debt.
In addition to financial statements, a balance sheet is also an extremely valuable financial report, which can provide a very quick, bottom-line snap-shot of the financial stability of a company, individual or family. A balance sheet typically will include everything that is considered to be property, or current assets, which contribute to wealth building. These types of total assets include such things as stocks and bonds, equity in real estate holdings, cash on hand and other liquid assets, reliable cash flows, tools and equipment, and also intellectual property.
On the liabilities side of the balance sheet are found all forms of debts and obligations that are owed by the entity or person. In addition, when calculating the liabilities assets ratio, some people also include in the liabilities column other things such as taxes, professional fees, contractual obligations, and any other arrangement that involves current assets being transferred to another party.
A simple example of formulating the ratio between liabilities and assets can be seen in looking at an individual's particular situation. For someone who owns their own home, the picture of their current assets would include the fair market value of their home, deposits in all checking and savings accounts, the portfolio of all shares, stocks and bonds, investments in gold, silver, other coins, stamps, artwork, fine jewelry, and similar items of value that typically appreciate over time. In addition, total assets could also include retirement funds and expected pension rights, and any type of promissory note from which they are getting regular payments.
For individuals, other types of personal property can also be included in the listing of total assets. Some of these other assets would be assets such as vehicles, boats, recreational vehicles, equipment and implements, household furnishings, and also clothing. However, these are the type of things which depreciate in value over time, and as a result, some accounting professionals will exclude such items from a balance sheet in order to provide a more accurate view of true household wealth.
Having balance sheets and complete financial statements worked up for organizations and individuals is to have clarity regarding their financial state. With clarity as the goal, it is vitally important to be completely and totally honest about the debt load and it can be useful to even underestimate total assets so that the most realistic picture of the liabilities assets ratio can be obtained.
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