A personal finance blog dedicated discussing such topics as budgeting, asset allocation, 401K, IRA, cash flow, insurance, financial planning, portfolio management, and other areas in personal finance.


Thursday, March 31, 2005

Net Worth Statement - Part II

Yesterday, I began a new series called "Financial Planning Basics" and started with a post about the net worth statement. Today, I'll take the net worth statement a little further and show some various transactions and their effect on the net worth statement. While studying these examples, keep in mind the net worth equation:

Assets = Liabilities + Net Worth

Example One

Withdraw $5,000 from your savings account to pay for a vacation:

Assets = Liabilities + Net Worth

-$5,000 = No Change + -$5,000

Example Two

Withdraw $2,000 from savings to purchase a $2,000 personal computer:

To reflect the withdrawal from savings:

-$2,000 = No Change + No Change

To reflect the purchase of the computer (considered an asset):

+$2,000 = No Change + No Change

Example Three

Withdraw $5,000 from savings and charge $2,000 to your credit card to pay for a new dining room suite:

To reflect the withdrawal from savings and the additional liability on your credit card:

-$5,000 = +$2,000 + No Change

To reflect the addition of the dining room suite to asset-side of the equation:

+$7,000 = No Change + No Change

Those are a few examples to study. With my next post, we'll dive a little deeper into net worth statements.