- Lessons Earned
- Posts
- Your Balance Sheet
Your Balance Sheet
Post #11
Puneet Khushalani
February 07, 2024
Mathematics expresses values that reflect the cosmos, including orderliness, balance, harmony, logic, and abstract beauty.
The Balance Sheet is the cross-bar of a business. On the left, it shows what the company owns. On the right, what it owes.
Everything a company or person owns must be paid for, and the balance sheet shows what you got (asset) and what how you paid for it (liability/debt or equity):
Asset: something owned
Liability/debt: something borrowed
Equity: something paid for by an investor
Imagine you bought a house at the start of the year. The sale price of the house is $1,000,000. You have $200,000 in cash as a down payment, and take out an $800,000 loan. Here’s how your balance sheet would look like:
January 1, 2024
ASSETS | LIABILITIES | EQUITY |
HOME: $1,000,000 | Loan Payable: $800,000 | Home Equity: $200,000 |
Total Assets: $1,000,000 | Total Liabilities and Equity: $1,000,000 |
Now imagine you pay off a portion of your loan over one year, approximately $30,000. In this same year, let’s say your house also appreciates by 10%.
January 1, 2025
ASSETS | LIABILITIES | EQUITY |
HOME: $1,100,000 (+10%) | Loan Payable: $770,000 (-4%) | Home Equity: $330,000 (+65%) |
Total Assets: $1,100,000 | Total Liabilities and Equity: $1,100,000 |
Because Liabilities and Equities have to add up to the value of your asset, we see a reduction in Liability (because you’re slowly paying your loan off) and an increase in Equity (due to the payment of the loan and the increase in home value). Building equity is the equivalent of paying yourself.
Your year over year balance sheet shows exactly how much your assets have grown, how much left you have to finance, and how much your ownership stake has grown.
Buying a house is technically a leveraged buy out (LBO) transaction, but that’s a story for another time…
PK