UNDERSTANDING INCOME STATEMENT AND BALANCE SHEET! · Millionaire Investing Roadmaps

Aug '24 (edited) • Tips

UNDERSTANDING INCOME STATEMENT AND BALANCE SHEET!

One of the most important things that you can do in achieving wealth is to understand an Income Statement and a Balance Sheet! An Income Statement shows Income and Expenses. A Balance Sheet shows Assets and Liabilities. This post is intended to help you understand reading an Income Statement and a Balance Sheet and creating your own personal balance sheet.

By now you have learned the following:

Income - Brings you $

Expenses - Costs you $

Assets - Put $ in your pocket

Liabilities - Take $ out of your pocket

At the top of the diagrams below is the Income Statement. At a basic level, it includes your Income and Expenses. On the bottom is the Balance Sheet, which includes Assets and Liabilities. Together, these make up what is called "cash flow". Please reference the two diagrams in this post below.

The person in the first diagram, let's call her Mary, has a job and earns income. Before she gets her paycheck, the government has already taken out their cut of it in the form of taxes (often as high as 25%), meaning that her "bring home" money is that much less. Let's suppose that Mary owns a small house and a car for which she has a loans. She also has incurred some credit card debt from furnishing the house and car repairs. In the diagram, we see that she has some student loans from her time in college. These show up in her Balance Sheet as Liabilities. Remember that liabilities take $ out of your pocket. The taxes, plus her mortgage, car, loan, credit card debt, and school loans represent expenses that she must pay from her job income. Other things would also be in the Expenses block such as groceries, entertainment, clothing, internet, phone, and all other living expenses. Basically Mary's income is reduced, and deducted, and sucked out until it's replenished by her next paycheck. No wonder so many feel like they're living paycheck to paycheck. They are. Additionally, when Mary does her personal income tax returns on April 15th, she may find out that she owes the IRS even more money!

Compare this to the second diagram, let's call her Juanita. She has a small business selling guidebooks and coaching online. Juanita also owns a rental property and invests in stocks that give dividends. As a self-employed person, she pays income taxes when she files yearly (and may make quarterly estimated tax payments to the IRS). Juanita is able to deduct many expenses that can be legally written off such as her phone bill, internet, laptop, workshops, meals, travel, car, and so much more. Those write offs are deducted from the amount of income tax that she owes. Juanita gets to keep more of her income from the income producing Assets in which she invested or created.

Mary's cashflow is: Earn -> Taxed -> Spend

Juanita's cashflow is: Earn -> Spend -> Taxed

1 comment