Accounting as you know is the process of recording and reporting financial transactions in a business. Accounting is governed by certain basic principles as well as has 3 golden rules. Here is a quick summary of the personal finance lessons which one can learn from accounting:
1.Record all transactions: Accounting rests on the concept of recording each and every transaction by collecting vouchers or relevant proofs for the same. These vouchers form the basis for which a transaction is recorded. Similarly, sound personal finance principles calls for diligently recording every single transaction - be it an income or expense. Although this can be a painful process, keeping a record of all transactions can go a long way in maintaining financial discipline. You can alternately use personal finance apps to make this work easier.
2. All actions culminate in the Balance Sheet: Accounting is governed by 3 Golden Rules, which is - (1) Debit the Receiver and Credit the Giver (2) Debit what comes in and credit what goes out (3) Debit all expenses or losses and credit all income and gains. Based on these rules, the accountant first records journal entries, next draws up ledger accounts and finally posts everything in the balance sheet. Preparing the balance sheet is therefore the final step in the accounting process. This signifies the health of the entity for which the accounting is done - if it is good or needs improvement. Similarly, in personal finance also, how you conduct yourself financially will finally get reflected in your individual balance sheet and this is what will ultimately signify if your finances are healthy or need improvement.
3. Use of the Suspense Account: In accounting, if there is an unclassified transaction or item, this is moved temporarily to an account called a suspense account, before allocating it to the correct account. The idea behind this is that the entity knows its accurate financial position at any point in time. In the same way, even in your personal finances, if you have any extra money, you should put it into a temporary account and move it to an investment over time. This will prevent you from spending it on unnecessary things.
5. Economic entity principle: This principle states that the owner of the business is different from the business itself for accounting purposes. For example, the accounts of the sole proprietor are different from the accounts of the proprietorship concern he runs. Similarly, for personal finance purposes also, your accounts are different from your spouse’s accounts, although this may be aggregated at the family level. For example, life insurance taken in your name is different from the one taken for your spouse, and these cannot be used interchangeably by a common beneficiary, say your son or daughter. Similarly, it cannot be taken for granted that investments made in the husband’s name belong to the wife and vice versa, although this may be the intention. The beneficiaries named in the Will are separate entities and cannot be construed to be the same. Therefore, one should specify the different entities clearly in the nomination forms or the Will to avoid confusion.
Can you think of any more parallels that can be drawn between accounting and personal finance? Do let us know if you can think of any more similarities.
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