Define Personal Financial Statement
Personal financial statements are documents that detail the financial assets and liabilities of an individual. Some people update personal financial statements on an annual basis as they prepare to file their tax returns. Personal financial statements are mostly used by business owners and company shareholders and are updated on a regular basis.
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Features
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The first section of a PFS contains the name, address and contact number of the individual whose information it contains. Typically the left-hand side of a PFS contains information about financial assets, such as balances held in checking and retirement accounts. The right-hand side of the form contains details of liabilities, such as mortgages, debt payments and unpaid taxes. The form also contains income information and details of other financial obligations, such as unsettled judgments.
Purpose
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Lenders require anyone with a 20-percent stake in a company to produce a PFS when the entity applies for a loan. Banks use the PFS to determine business owners' overall financial strength, because owners act as guarantors for business loans and are ultimately responsible for settling the debt if the business fails. Banks cannot approve loans if the PFS suggests that one or more of the owners lacks the financial strength to act as loan guarantor.
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Benefits
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Business owners who maintain and regularly update their PFS can readily view their overall financial situation and more easily view information needed to file taxes. Additionally, a PFS statement helps an individual to assess the level of debt he has when making important decisions. Many business owners invest significant sums of their own money into their enterprises. An accurate PFS enables business owners to quickly make decisions about personal or business expenditure.
Misconceptions
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Many people believe that banks only require business owners to produce a PFS when they are applying for loans. Banks also require a PFS from business owners who are attempting to set up merchant services and remote deposit capabilities. Merchant services enable business owners to accept credit card payments, while remote deposit capabilities enable businesses to accept checks and deposit them to banks through the use of a scanner. Both services put the bank at risk because business owners could easily commit fraud by processing fictitious payments. To assess the risk posed by business owners, banks check credit reports and examine personal financial statements before establishing either service.
Considerations
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Some business owners set up computer based spreadsheets to store PFS information. These spreadsheets are easily accessible and very convenient. Many financial experts recommend that business owners hire accountants to prepare their PFS. Tax laws are complicated, especially for business entities, and many times people without in-depth knowledge of the tax system think of assets as liabilities and vice versa. Additionally, tax professionals can help a business owner arrange her assets in the most tax-efficient manner.
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