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July 30, 2013 / maxpproductions

Understanding Financial Statements: The Cookie Jar Approach to Balance Sheets Part II

The Cookie Jar Approach to Balance Sheets

The Cookie Jar Approach to Balance Sheets

This article is the second of a three part series that helps explain the basic concepts, in a fun easy way, of a balance sheet of a business. It is geared towards children but anyone can benefit. The idea is to keep it to the basics.

In my first article on financial statements I talked about how a profit and loss statement can be looked at as a pizza pie. A few slices here and a few there lead to expenses and the slices left over were your profit.

The next fundamental for any business, big or small, is the balance sheet. A balance sheet is a snapshot of a businesses or a persons financial health at a certain point in time. Understanding the balance sheet is like knowing what’s in your cookie jar.

For decades, before computers, people would organize their money by placing certain amounts in cookie jars to save up for different expenses and for a rainy day emergency. To this day it is a very effective and simple tool to organize your money.

For instance, if you earned $100 a week you would place $50 in one cookie jar to save up for your monthly house payment. Then you would put another $20 aside in another cookie jar to save up for groceries. Then you would put $10 aside in another cookie jar to save for utilities and miscellaneous items. At this point you would have $20 left over (that’s $100-$50-$20-$10). Most people would take $10 and put it in the fourth jar to save for an unexpected expense or to save for a very large purchase like a car. The rest of the money, $10, would be the money you would carry in your pocket for everyday expenses and entertainment. The fifth jar you would keep your car keys or house keys for safe keeping so you don’t lose them. The final and sixth jar, you would keep your bills; anything you owed to the grocery store, utilities, etc.

Now, if you wanted to see what you are worth, simply add up what is in all the jars including the value of your car ($3,000) and house ($10,000) represented by the keys in the jar. Let’s see, cash is $50+$20+$10+$10 plus fixed assets worth $3,000+$10,000 totals, $13,090. On a balance sheet cash is simply cash of $90 dollars. A car and house are known as fixed assets ($13,000) because it is not money but it is permanent. They are not for immediate sale. A fixed asset can be machinery, equipment, furniture, house or land.

So, now we total all our cash and fixed assets and that represents our total assets of $13,090. But are you worth or valued for this much? No. You might owe money to a bank or your friend or the local vendor.

To find your real net worth or net value, you need to subtract all your current liabilities (things you owe) such as phone bills and grocery store bills. Let’s say that totals $500.  You then need to subtract what you owe on your car, for ex. $1,000, and what you owe on your house, for ex. $5,000. In total your liabilities or what you owe is $6,500.

So here is how it looks:

Cash (cookie jars) – $90

Fixed asset-car (cookie jar) – $3,000

Fixed asset-house (cookie jar) – $10,000

Total Assets (all jars) – $13,090

Then you subtract your bills – $6,500

And your net worth = $6,590

So the simple way to remember a balance sheet is A = L + C which stands for assets = liabilities + capital. This simply tells you what your value of all the things you own, less liabilities (or expenses) and what is left over is your capital or net worth. This, by the way, only is a point in time snapshot. These numbers can change on a daily basis.

I hope the cookie jar approach helps you understand the simplicity in a balance sheet. The more capital or net worth you have is good! You can have a lot of assets but if you owe a lot of bills, you do not have a lot of net worth.

My next article coming up will explain cash flow. Profit and loss statements show what you earn after all expenses. A balance sheet shows what your value is and what assets you have. Cash flow shows you at what times you get your money into your account and when you pay out that money.

Til next time…

To everyone out there, get started figuring out your personal balance sheet. How are you doing? Let us know!

And if you want to revisit part I of our three part series – Profit and Loss Statement – click here.

Max P. Productions is a children’s book publisher focused on empowering children through story. The information in this article is copyright 2013 Max P. Productions. Use of this article in part or in whole must be granted by Max P. Productions. Please contact us at cs at maxpproductions dot com if you wish to use the content in this article. Thank you.

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