Friday 17 February 2012

The Balance Sheet

Since this is a little talk on somewhere called "Fictionland", let's start by stating that their currency is called Fictions, and the currency symbol is : ₣

So without further ado here is the most recent Fictionland balance sheet:

The first thing that we can observe is that the bottom line figure on both sides of this balance sheet, in the two black boxes, match each other. That is what is supposed to happen when you prepare a balance sheet — the two sides are meant to balance!

Looking above the bottom line on the left hand side we can see all the assets that belong to this institution1. On the right side are any liabilities of this institution — all promises that it has made to anyone else.

In the liabilities column, the green section contains the equity in the system that is at the disposal of the institutions shareholders, today.

Breaking down the assets column, we can observe that this institution has chosen to make a distinction between two categories of assets that it owns — those in the light blue area, which are claims on entities within the domestic economic area, and those in the orange area, which are not claims on any domestic entities.

The assets are things that this institution can count as its own, but most of which rely on some other institution to keep their promises going forward.2

If any of the assets fall in value, there will be no solvency issue to the system — so long as the losses do not exceed the shareholder equity.

That is, basically, all there is to a balance sheet. Pretty easy huh? Now go and make your own balance sheet of your household's assets and liabilities. No, really — please, I recommend that you do! You may find out a lot about the state of your finances, which you hadn't realised before. Good or bad… it's always better to know the facts, right? ;-)

Be responsible, respectable,
stable, but gullible.

"But, DP," I can hear some of you asking now, "what happens to Fictionland's balance sheet, if one of the institutions that has promised to repay their loans due to it, defaults on the loan and the payments don't come after all?". That's a great question — thank you for stopping by and reading my humble blog today! I presume you mean, for example, Fictionland has loaned money to, say, Greece? Hmmm... to save confusing anyone that isn't interested by that question, let's take that part of the discussion to the comments section, below, shall we? ;)


DP :-)

1 All of these observations about balance sheets apply whether the balance sheet was drawn up for a company, a charity, a country, a political party, a household, an individual person - or indeed any other kind of institution you might think of.

2 It is not strictly necessary for Fictionland's balance sheets to employ this very clear colour-coding system to highlight the distinction between these two types of assets — in fact it is quite unusual for an institution to do something as visible as this. But it is very helpful of the Fictionland management team, isn't it?