If you’re learning about personal finance, learning what a financial statement is made up of, and how to make your own is a skill of vital importance. This is one of the most important things that no one in our society does regularly, unless they’re obligated to. I’ll show you what it’s made up of, how to read it, and the relationship between the statements that make it up. That way, you can write and read your own financial statements, and see how wealthy you actually are.
What It Is Made Up Of
Here’s where a little bit of background knowledge is necessary. A financial statement is made up of both the income/expense statement, and the balance statement. If you don’t know what those look like, I’ve written articles on how to write and read both of those statements separately. It is usually the income statement on top with the balance sheet below it.
How To Read
How do you read a financial statement, and what does it really tell us? That’s fairly easy, once you understand what the numbers mean. If you look at the income portion of the financial statement, you should see at least one line there of current monthly income. Any of the monthly income you receive that isn’t from your occupation must be from something in the asset column. Your income from assets plus your cash on hand minus your total expenses tell you how wealthy you are in terms of time you can go without active income.
Relationship Between Statements
There is a very basic relationship between all four of the portions of the information contained on the financial statement. If your total Income is greater than your total Expenses your Assets column must be growing. If your total Income is less than or equal to your total Expenses, then your Assets column will shrink rapidly, and you’re in some serious trouble. Usually, the only way to sustain having an Income less than your Expenses is to increase your Liabilities column with credit card debt, consumer credit debt, second mortgages, et cetera. That is why it is important to update your financial statement monthly, and to keep a close eye on it.
The financial statement is an amazing tool for keeping track of your financial health. If you follow the guidelines I’ve shown you, you will be able to use it effectively for the purpose of correcting any dangerous trends or for the purpose of growing your wealth.