Creating a balance sheet is recommended for both experienced and beginner investors. It is the foundation for any investment account, providing a clear picture of how well any investment portfolio has done over a specific period of time. Your balance will indicate a net worth, and provide insight into how profit has been achieved.
The Benefits of Balance
A balance sheet has one primary purpose: to give you a comprehensive overview of your current financial status. This information can help you to identify strong and weak points in your investment plan, and to make any necessary changes to ensure that your investments – and finances – remain in the black.
The primary equation you will need for your balance sheet is this: assets = liabilities + owner’s equity. If you’re good with excel you may wish to create a template that includes this equation, which you will be able to use and re-use at any point in the future. Using excel is recommended, and there are many online tutorials which will help you create an easily understandable, yet comprehensive, balance sheet.
Allocating Value to Assets
Sometimes, allocating value isn’t as straightforward as we would like. Particular assets may have value which is calculated in the long-term, rather than the short. These are referred to as ‘fixed assets’. All fixed assets depreciate, so this is a really important reason for why you should aim to update your balance sheet at least once a month. You may also find that your assets comprise many smaller items or investments which transform on a regular basis. Stock is a good example of this kind of fluid asset. As well as a balance sheet, you should also make sure your fluid assets are catalogued and tracked.
Creating Your Balance Sheet
The basics of creating a balance sheet are fairly simple. To begin, you will need to examine three areas – any assets you own, any liabilities you have, and any funds you draw from. A balance sheet can be used for both individuals and businesses so, for example, when examining funds you might end up looking at either a pay check or the sum of your company’s shareholder funds. Each balance sheet will end up telling a different story, depending on the status of each individual or business. The final figure you arrive at will be your equity. This is the magic number which represents your worth, your success, and what financial possibilities there may be for you in the future.