Your guide to meet your Financial Needs: Balance your Assets to know Actual worth

Monday, 2 January 2017

Balance your Assets to know Actual worth

When we ask any client if he is aware of his total outstanding loan amount across different categories of liabilities, his usual response is I will check with my bank and get back to you. Or else they give a rough estimate of paid EMIs. Similarly if we ask their total personal net worth there is a blank look on their face expressing their ignorance on the topic. As a financial planner, one of important aspect we present to our client in his final plan is his net worth. It is a statement of his net assets. Although in our practice, we avoid personal assets i.e. assets for personal use like home, jewellery, designer art etc. but it does form a part of your net worth if you are ready to part with it if financial needs arises. So let’s today discuss a simple approach to record our balance sheet.

Some of common points to record your assets and liabilities

Follow the practice review assets on regular basis. Be aware of their maturities dates and valuation changes.
Record Assets at their cost price. Only if you have done assessment of the same from a third party then feature them at market value. This is particularly true for real estate and precious stones.
Valuation of capital market instruments should be done on market value except for debt instruments (like bonds, bank deposits)
After sale of asset, the sale proceeds can be split as cost and profit (if any). So automatically, the cost gets reduced from balance sheet and profit is added to your cash/bank account. Over the years, your balance sheets balloons up with increasing investment either in business, advance given or capital markets.
The cash bank balances are fluctuating and so should be not considered as long term asset. It is grouped under current asset or spendable source.
There is no point of adding personal receivable in the assets if the loan is given in personal capacity without any fixed tenure of recovery.
In liabilities, ignore the total loan amount and only worry about the outstanding payment.
The loans can have a section for likely loan as contingency loan (It stands for likely to happen but not still occurred) – like giving a share to your siblings as part of your father’s will or wish- to be fulfilled by you.

Beyond this many times, our small proprietary business owner clients insist of adding their business goodwill and real estate in the personal balance sheet. This is only allowable if you are ready to dissolve your business and get rid of your business assets. Until then only tangible business assets can be shown as your recoverable portion. Further when you add asset, you should consider all the investments put by you in different family members’ name and it a family net worth including spouse, children and dependent parents. Also, this style of accounting is only for Personal finance simplification and would not necessarily match with your CA’s books. There is no fixed date to review your balance but it preferred to be done following financial or calendar year. So, go ahead and get a hang of your assets and liabilities. BE ALERT AND BEWARE.

A snapshot of recording your assets and liabilities