Assets And Liabilities: This Ratio Can Be An Indicator Of Your Financial Health
Whenever an individual or a company wants to get clear insights into their financial situation, financial statements are a critical piece of information to have and to review. One of the key elements of any financial statement is the listing of all liabilities and all assets in order to understand the liabilities assets ratio, which helps determine if one is on the path to wealth building or is stuck in a hole of debt.
In addition to financial statements, a balance sheet is also a very 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 vehicles 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 looking at the liabilities column of a balance sheet, the debts and financial obligations that are currently owed to others are listed. Also, when figuring the liabilities assets ratio some accountants will include other items that are sometimes overlooked, such as pending taxes, professional licensing and required fees to stay in business, obligations entered into via contracts, and other types of arrangements that requires an eventual transfer of current assets to another 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 things 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.
A major reason to go to the trouble of compiling the financial information needed for detailed financial statements is so that the company or individual can have a true and realistic picture of their financial situation. With this in mind, there needs to be complete honesty regarding any and all liabilities so that the liabilities assets ratio is an accurate reflection of reality.