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It is also important to know the value and structure of your assets and liabilities. Your net worth should be a positive number. The older you are the bigger the number should be. That is because you will need this net worth to finance your retirement when you can no longer work to provide income to your budget. The assets in your balance sheet fund your retirement in three ways. They keep costs down. The best example of this is home ownership. If you own your own home you will not have to pay a mortgage payment. That means you need 30% less to live on each month. The second way that assets fund your retirement is that you invest them in income producing assets such as Certificates of Deposit Bonds or dividend producing stocks.
This could be cash or real estate or stocks and bonds or machinery and equipment or accounts receivable or other moneys due to you. It could also include inventory which is product that you have produced but not yet sold. So to summarize assets are usually either cash something that you have bought something that you have made and that you expect to sell or something that is owed to you. Clearly then if you want to make your balance sheet you must have a list of your assets and how much each is worth. The rub lies in the worth or valuation of the assets. "Hmm you think I bought this asset ten years ago at 10 grand I added 5 grand in improvements to it it would cost me 20 grand to replace it and I could get about 18 grand on the open market for it so what value should I put down for it?" Clever question my dear reader! Well as you may have assumed we accountants have put a great deal of thought into these issues and we continue to think about and tweak the ways we value things to this very day.
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The line items falling into the "current" category are assets that the company expects to be converted into cash within the next 12 months or liabilities that are expected to be paid off over the next 12 months. "Long-term" assets and liabilities have a longer time horizon for being liquidated or covered respectively. A balance sheet is a financial statement that lists assets liabilities and equity. These items must show a net balance of zero for the balance sheet to be considered "balanced." This means that for every entry into an asset account there must be a corresponding entry into either a liability or an equity account. Since asset accounts increase by debits this means that either the liability or the equity accounts must be credited when new assets are purchased. Likewise when assets are sold or gotten rid of in some way there would be a credit in the assets account to reduce it. There would have to be a corresponding debit in the liability or equity accounts to balance this.