In this article, we will explain the main principles of relation between the different types of personal finance in a personal balance sheet template. We will start with Cash balance and then continue with assets and liabilities.
A personal balance sheet is one of the financial statements; it allows you to analyze the state of assets and funds/financials and balance between them. Managing the balance sheet is a good financial practice.
Cash in Balance Sheet
Aurora’s personal balance sheet template contains two accounts that are balancing assets and liabilities. These accounts are Cash and Earnings. Imagine a situation when we do not yet have assets and liabilities. We’ve got 15,000$ paid and spent 5,000$ for goods, rent, taxes, and entertainment. So, our earnings amounted to 10,000$. Figure 1 shows the balance sheet example for these financials.
In this case, Cash and Earnings accounts are calculated as follows:
- Cash = revenue – expenses = 15,000$ – 5,000$ = 10,000$
- Earnings = revenue – expenses = 15,000$ – 5,000$ = 10,000$
Liabilities in Personal Balance Sheet
Consider an example when we decided to get a 14,000$ loan. Our cash balance will increase after the bank transfers the money to our account. But our earnings will stay the same because the loan is a capital type of personal finance. As Figure 2 shows, additional row created in the balance sheet template to account that liability.
Now, Cash and Earnings accounts are calculated as follows:
- Cash = revenue – expenses + loan = 15,000$ – 5,000$ + 14,000$ = 24,000$
- Earnings = revenue – expenses = 15,000$ – 5,000$ = 10,000$
At this stage, the reasonable question is why we don’t use Net Worth instead of Earnings? Net Worth is calculated as the difference between assets and liabilities. It may seem easier when you try to set the initial balance. But financial planning generally begins with budgeting/forecasting of incomes and expenses, and only then goes planning of capital expenditures in assets and loans in liabilities. It is easier to feel the sense of the relationship between financial statements if we are using Earnings in the balance sheet.
Assets in Personal Balance Sheet
When it’s enough cash in our balance, we can make capital expenditure and buy an asset. We will consider a car as an example. Figure 3 shows the state of the personal balance sheet when the deal is made, the seller received the money, and we own the car.
Take a look at Cash and Earnings accounts calculations:
- Cash = Earnings + loan – car = 10,000$ + 14,000$ – 22,000 = 2,000$
- Earnings = revenue – expenses = 15,000$ – 5,000$ = 10,000$
As you see, there is a straight logic in Cash equation: earned money, got a loan, and bought a car.
Personal Balance Sheet App
There are many free personal balance sheet templates for excel or google sheets. Everyone can download and update them for personal use. They are very well adapted to work on a computer, but a mobile level of usability is questionable. Several personal finance apps provide users with a balance sheet interface. They are friendly to mobile but not as flexible as computer spreadsheets. It is recommended to choose a balance sheet app carefully and watch all the functions. Thus you can find the app you need to manage money wisely.
