Evolution In Home & Personal Accounting
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Evolution In Home & Personal Accounting. Accounting for a Better Life’ is a book in which John Passmore proposes a new, simplified and fun approach, to home and personal bookkeeping and accounting.
The new methods, based on what he calls, domestic well-being
accounting, enable people to gain control of their personal and domestic,
financial affairs. The system provides the necessary visibility so that users
will know exactly what their money is being spent on, and how well balanced
their spending is, in relation to its distribution.
The balance is across basic domestic needs and responsibilities, discretionary spending on holidays, leisure and entertainment, and provision for future well-being.
Knowing about the current
and past spending patterns, users can determine where and by how much, changes
might be needed. Budgeting and associated feedback, facilitate the monitoring
of such financial planning.
The author believes the new methods have the potential to be
adopted as a formal, sub-discipline of business accounting, eventually perhaps,
with suitable certificates and diplomas for those who learn how to use it
successfully.
With such recognition, the motivation for appropriate
investment from industry and the state becomes real, so that domestic
accounting, its further calibration and an associated training infrastructure,
can all be further developed and refined.
He proposes that in time, such methods should become an
established part of the school curriculum. Through this, youngsters will be
able to achieve the best possible foundation to accept and take on the
financial responsibilities that are associated with success, in modern life.
Evolution In Home & Personal Accounting
In the prevailing UK situation, of a very severe debt crisis, the new approach, almost in passing, provides the required visibility on the state of a family's financial affairs, to provide warnings of potential difficulties so that the necessary defensive actions can be taken, to prevent falling into the debt trap.
For those already experiencing some debt, the new
methods provide the necessary visibility on their finances to facilitate the
required planning and control, required to best manage debt recovery.
If people realized the extent and value of the average, domestic,
cash turnover, in the course of a lifetime, it seems amazing that serious,
financial management is not already, demanded. If an equivalent, small
business, with similar turnover was not effectively managed, the owners would
probably have shareholders, accountants and Company House, knocking on their
doors.
Accounting has traditionally been thought of as a rather
boring, difficult and tedious activity by most people. It is also recognized as
somewhat of a challenge, in considering the length of training required to
achieve professional status, as a Chartered Accountant, or similar.
Having started to manage his own accounts at home, soon
after the arrival of the PC, in the late eighties, John Passmore tried to adapt
the traditional, business-oriented way of using accounts, with all the usual,
end-of-period reports. He uses commonly available, general purpose software, an
accounting package (Microsoft Money) and a spreadsheet package. He has adapted
the maturity of double entry accounting and has also had to ensure his methods
could cope with multiple currencies in use, whilst working overseas for thirty
years.
Although it was basically satisfactory, in so far as it
produced the overall figures on net worth, John realized two things; first, the
traditional business focus and motivation on profits and shareholders’ value,
understandably, had little relevance to the domestic situation, and second;
there was no visibility on the nature of the bulk of the day-to-day, domestic
income and expenditure. In addition, the terminology and the overall style of
business accounting, he found, not at all conducive to successfully and easily
running accounts, for a home environment.
Over a decade, John Passmore has gradually evolved a new
approach to personal and domestic accounting. At a fundamental level, he has
made everything much easier to understand and use. This was achieved by a range
of simple techniques, such as rigorous naming conventions and a simplified
version of the so-called, accounting equations. More importantly, he introduced
a new focus for home and personal accounting, which he calls, domestic
well-being. Essentially, domestic well-being, or DWB, provides a hierarchical
structure for defining and recording, the increases and decreases, making up day-to-day,
domestic financial activity.
At the top level, there is a 3-way split into Basics, Discretionary and a catch-all, of Others.
The Basics are sub-divided into Essentials (utilities, food
and drink, clothing, health, etc.), Responsibilities (taxes, mortgage,
licenses, maintenance, insurance, etc.) and Family (presents, and personal
commitments, etc.). Similarly, Discretionary includes asset purchases and
sales, Nice to Have (holidays, leisure, entertainment, etc.), Investment for
the Future (Home improvements, pension contributions and other investments,
etc.). Others are for uncontrolled changes, such as prizes, inheritance, gains
and appreciation, fines, losses and depreciation, etc.
This DWB structure is used as the basis for the domestic
reports and for categorizing all the transactions, as they entered into the
accounts, as part of bookkeeping.
A sub-title of his book 'Accounting for a Better Life', is 'Gain Control of Personal Finances'. Following an overview of control and a comparison of a number of typical control environments, the book describes how control can be applied to financial situations.
The visibility now afforded by
DWB means that a new set of financial reports can be defined. These replace the
business style, Trading Account, Profit & Loss Account, Balance Sheet and
Cash Flow Statement. The new set of statements, tailored directly for the
domestic situation, include the Domestic Well-Being Statement, the Domestic
Balance Sheet and the Domestic Cash Flow Statement.
Readers will be generally aware of the typical, business ratios such as Gross and Net profit margins, Return on Capital Employed, and over twenty other ratios. Although vital for management and control in business, these ratios have absolutely no bearing on domestic finances.
However, with the visibility provided by DWB, a whole new group of Domestic Financial Factors suddenly become evident. John has defined five, major new factors and a host of secondary factors. For example, the Basic Cost of Living Factor (BCLF) is the ratio of Basic Domestic Decrease to Total Household Increases, whilst the Well-Being Contribution Factor (WBCF) is the proportion of Discretionary Domestic Decreases, compared to the Total Household Increases.
These factors provide the yardsticks, by which various characteristics of
domestic life can be both qualified and quantified.
These factors open up new areas for comparison, measurement and control of domestic, financial situations, based on family size. Their real benefit however, has to await calibration and an accumulation of data, so that a parallel can be achieved with the business concepts of comparison to industry averages, or norms.
The domestic averages will have to be built-up, over time.
In the future, a BCLF 3 of 0.43, for a family of three for example, could be
compared with the value of the factor, found for other families of three, across
regions, or internationally, across continents.
Even without this capability until later, other forms of
financial control suddenly become immediately feasible, in a practical way. For
a start, with the new visibility provided, balancing or redistribution of
expenditure across the Basic and Discretionary categories for example, now
becomes possible, with due attention always being given to Investment for the
Future (IFF).
John Passmore provides the necessary background and information for anyone to get started with setting up and running their own, domestic accounting system.
Because of the simplification and visibility provided, which gives relevance to the financial activities of each and every domestic environment, with its own character and content, the author believes he has developed a system which can be fun to use.
Once familiar with the
set-up, a couple of hours a month is all that is required to keep the
bookkeeping under way; and a couple of half-days at the end of any financial
year, to produce the annual reports, should be all that is required at that
time.
With basic computer literacy, access to a computer with
preferably, an on-line connection, and maths competence, no higher than GCSE
level, John believes that benefits are potentially available for a domestic
situation with a shared annual income, of around £20,000 and upwards. It will
also be appropriate for accountants in their work on behalf of domestic
clients.
A sense of personal responsibility towards the members of the domestic situation is paramount.
The benefits are that with the accumulation of a few months' worth of figures, a realization of the actual spread and balance of the family outgoings will become apparent. With this, decisions can be made on any changes required to the pattern of financial activity, in order to obtain a better balance.
The whole purpose is to achieve an overall and improved sense of
domestic well-being.
With the new-found information, family members will know in detail about what has to be done in order to achieve a better life-style. Accounting, in itself, will not achieve this. Discipline will be required to change spending patterns to obtain the desired changes.
The new accounting
system can help keep track of progress, using budgets and targets. In this way,
users will obtain early warnings of where and when they are not keeping to
target, so that concerted efforts can be directed at coming back, on track. (*)