Your Ratio of Liabilities to Assets Says Alot About Your Financial Health
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In order for any organization, including a family, to understand what their current financial status is, it is a good idea to generate financial statements in order to gain insights into the complete financial picture. One of the most important aspects of a financial statement is the rundown of current net assets, as well as all debts and liabilities so that the liabilities assets ratio can be determined. This ratio is a valuable indicator of whether the organization is moving toward amassing wealth or is mired in debt.
In addition to financial statements, a balance sheet is also an extremely valuable financial report, which can give a very quick, bottom-line snap-shot of the financial stability of a company, individual or family. A balance sheet typically will include everything that is considered to be property, or current assets, which contribute to wealth building. These types of total assets include such things as stocks and bonds, equity in real estate holdings, cash on hand and other liquid assets, reliable cash flows, tools and equipment, and also intellectual property.
When creating the balance sheet, the liabilities that need to be listed are anything that the person or company currently owes to another party. This can be in the form of money and other liquid capital, property and services. In order to have a proper calculation of the liabilities assets ratio, many experts will also include some common liabilities that are often overlooked, such as tax obligations, fees and licenses, and other obligations which will result in a movement of any kind of net assets to a different entity or party.
A simple example of formulating the ratio of liabilities and assets can be seen in looking at an individual’s particular situation. For someone who owns their own home, the picture of their current assets would include the fair market value of their home, deposits in all checking and savings accounts, the portfolio of all shares, stocks and bonds, investments in gold, silver, other coins, stamps, artwork, fine jewelry, and similar items of value that typically appreciate over time. In addition, total assets could also include retirement funds and expected pension rights, and any type of promissory note from which they are getting periodic payments.
For individuals, other types of personal property can also be included in the listing of total assets. Some of these other assets would be assets such as vehicles, boats, recreational vehicles, equipment and implements, household furnishings, and even clothing. However, these are the type of things which depreciate in value over time, and as a result, some accounting professionals will keep such items from a balance sheet in order to provide a more accurate view of true household wealth.
Having balance sheets and complete financial statements worked up for organizations and individuals is to have clarity regarding their financial state. With clarity as the goal, it is vitally important to be completely and totally honest about the debt load and it can be useful to even underestimate total assets so that the most realistic picture of the liabilities assets ratio can be obtained.
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