Accountants are occasionally requested to compile personal financial statements. Unless these financial statements are specifically presented under another comprehensive basis of accounting such as cash basis or tax basis, these financial statements will generally be presented in accordance with generally accepted accounting principles (“GAAP”). However, there are a few key differences between GAAP for personal financial statements and GAAP for businesses.
- An asset in personal financial statements is presented at its estimated current value, which is the amount at which the item could be exchanged between a buyer and seller under normal circumstances. In some circumstances this could mean that an asset would be valued differently in personal financial statements than it would in business financial statements. For example, a vehicle owned by an individual would be valued at the estimated price that the owner could sell it for, but if it were owned by a business, it would be valued at its historical cost less accumulated depreciation. Likewise, liabilities are presented at their current amounts.
- The titles of personal financial statements are the statement of financial condition, which is the equivalent of a balance sheet, and the statement of changes in net worth, which is the equivalent of an income statement. The statement of changes in net worth is intended only to present major sources of increases and decreases to net worth and it is an optional statement to include in personal financial statements. In practice, the statement of changes in net worth is infrequently included in personal financial statements.
- Assets and liabilities are not presented as current or non-current in personal financial statements as there is no operating cycle involved. Instead, assets and liabilities are shown in order of liquidity and maturity.
- Disclosures are required in personal financial statements; however, those disclosures are drastically different from the disclosures you would typically find in the financial statements of a business.
There are many other important factors to consider when preparing personal financial statements. Thankfully, as with most accounting matters, there is a lot of guidance for preparing them. If you are researching this topic, a great place to start is FASB Accounting Standards Codification 274 – Personal Financial Statements. Let us know if you learn something interesting.
By Rex Platt, CPA