Financial Statements and Personal Finance

I am dropping the "Finance for Newbies" title from now on. Thought it was too long for prolonged usage:)

Okay, so do you think financial statements are relevant only to companies? If you do, then you must read this post. All the financial statements that I spoke about in my earlier posts are indeed relevant to individuals too. Each one of us has an income (hey kids, don't forget that pocket allowance that comes in each month!) and expenses. All of us own some assets and many of us owe money to others (read liabilities).

Just like how companies draw up their financial statements on a periodic basis to assess their financial health, individuals also can use them for regular "financial introspection".

Let's draw up a simple income statement for this young lady who works as a software developer:

Total Revenues(Net Salary)	50000
Food expenses	5000
Travel and holidays	10000
Rent and provisions	25000
Net Profit (Savings)	10000

Now let's draw up a balance sheet for her:

Assets
Fixed Assets (car, computer, microwave)	20000
Current Assets (bank balance, advance paid to the maid)	100000
Investments (in shares)	10000
Total Assets	130000
Liabilities
Retained Earnings (including 10000 from income statement)	70000
Bank Loan	60000
Total Liabilities	130000

Of course, the term liabilities is a misnomer here because unlike companies your earnings do not belong to others. You own them completely. You could see it this way: you are the sole shareholder, rather stake holder, here. Hence you are the sole beneficiary of your retained earnings.

Finally, let's draw up a cash flow statement:

Net Savings (from income statement)	10000
Less: Advance paid to maid	1000
Less: Shares purchased this month	3000
Add: Proceeds of selling old two-wheeler	5000
Total Cash Flow	11000

Easy, wasn't it? And I don't have to tell you how much simpler Microsoft has made it for us to keep a tab on our expenses. So go ahead, use Excel and start working on your very own financial statements.