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How Liabilities Assets Ratio Determines Financial Status

Jun 21, 2008
Whenever an entity, whether it is a company or an individual, wants to know exactly where they stand financially, having financial statements compiled is one of the best ways to gain this kind of insight. A key component of a financial statement is a detailed and complete accounting of the assets and the liabilities associated with the person or company in order to discover the liabilities assets ratio that they have, which can help to illuminate if the financial road they are on is leading to acquiring wealth or debt.

In addition to financial statements, a balance sheet is also a very valuable financial report, which can provide 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 things 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 between 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 receiving regular 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 exclude such items from a balance sheet in order to provide a more accurate view of true household wealth.

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.
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