A Personal Financial Statement (PFS) is a detailed breakdown of an individual’s financial position at a specific point in time. It is often used by financial institutions to assess an individual’s creditworthiness and financial health.
Structure and Components
Accrual Basis vs. Cash Basis
The Personal Financial Statement is often prepared using the accrual basis of accounting rather than the cash basis.
- Accrual Basis: This method records revenues and expenses when they are incurred, regardless of when cash is exchanged.
- Cash Basis: This method records revenues and expenses only when cash is exchanged.
Statement of Financial Condition
A Statement of Financial Condition within a Personal Financial Statement includes:
Assets
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Classification: Assets are listed by order of liquidity and maturity without classification as current or noncurrent.
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Valuation: They are shown at their estimated current values.
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Business Interests: When business interests constitute a substantial part of total assets, they should be specified separately from other investments.
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Joint Ownership: Only the individual’s interest, the amount that the person is entitled to as a beneficial owner, should be included for jointly owned assets.
Examples of assets include:
- Cash and Cash Equivalents
- Investments (Stocks, Bonds)
- Real Estate
- Business Interests
- Retirement Accounts
Liabilities
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Classification: Liabilities are generally shown by order of maturity without classification as current or noncurrent.
Examples of liabilities include:
- Mortgages
- Personal Loans
- Credit Card Debt
- Student Loans
Examples and Use Cases
Example of a Personal Financial Statement
| Assets | Estimated Value |
|---|---|
| Cash and Cash Equivalents | $50,000 |
| Investments | $150,000 |
| Real Estate | $400,000 |
| Business Interests | $250,000 |
| Retirement Accounts | $200,000 |
| Liabilities | Outstanding Amount |
|---|---|
| Mortgage | $300,000 |
| Personal Loans | $50,000 |
| Credit Card Debt | $10,000 |
| Student Loans | $40,000 |
Applicability
- Loan Applications: Used by banks to assess loan eligibility.
- Financial Planning: Helps individuals plan their financial future.
- Legal Situations: Used in divorce settlements or estate planning.
Historical Context
The concept of a Personal Financial Statement has evolved with the banking industry and standardized accounting practices, thus providing a clear and systematic way to present an individual’s financial situation.
Related Terms
- Net Worth: The difference between total assets and total liabilities.
- Balance Sheet: A financial statement showing a business’s assets, liabilities, and equity at a specific point in time.
- Income Statement: A financial statement showing the revenue and expenses over a period.
FAQs
What is the difference between a Personal Financial Statement and a Balance Sheet?
Why is the accrual basis preferred over the cash basis?
References
- Accounting Standards Codification (ASC): Financial Reporting
- Financial Accounting Standards Board (FASB)
Summary
A Personal Financial Statement is a crucial document for evaluating an individual’s financial health. By presenting assets and liabilities clearly and comprehensively, it serves multiple purposes from obtaining loans to financial planning. Understanding the components, structure, and applications can help individuals better manage and communicate their financial position.
Complete with detailed explanations and examples, this guide is intended to assist both financial professionals and individuals in understanding and preparing a Personal Financial Statement.
