We believe that individual or household finances should be managed as those of a business are managed, therefore financial statements, including the balance sheet, income statement and cash flow statement are very important. We discussed the former two in previous articles. Here we will discuss the personal income statement and how it is constructed. Unlike the balance sheet which is the snapshot of the household at a particular point in time, the income statement is related to how financial assets move through the household or other entity within a specified time period, for example monthly, quarterly or annually.
On one side of the income statement are items which may include employment income, dividend and interest income, pension income, and social security income. On the other side of the income statement are items which may include fixed and variable expenses as well as payments to service liabilities such as mortgage payments, student loan payments and credit card payments.