Many moms have it rough. Not only are they raising their children, but they are also responsible for running a household. From taking children to practice, doing homework and providing nutritious meals, who has time to balance the books!? Here are 10 Accounting Principles to help keep you on track.
What is accounting? Accounting is the story of your finances. You record, classify and summarize your financial matters in a coherent summary and interpretation of where all your money goes. After balancing your income and losses, you will be able to determine if you are making money or losing money. If you are making money, you will be able to see where it is coming from and maybe exploit this path for further wealth. If you are losing money, you will be able to tell where it is going and maybe deter further losses.
Assets represent all the resources you own or control. This includes cash, income, positive credits in your bank accounts, and valuable holdings such as real estate, land, buildings, and equipment. These can be further divided into current and non-current assets. Current assets include cash, checks, positive balances in your accounts, interest receivable, assets held for immediate sale, and prepaid expenses. In other words, current assets are resources readily at your disposal. Non-current assets would be assets for the long-term. Examples would include long-term investments like stocks and bonds. Assets held for future sale such as land, buildings, vehicles, and other equipment. Non-current assets increase your net worth, but are more likely to pay off in the long run.
Liabilities are all the bills you have to pay. They encompass all of your economic obligations and represent claims made by other parties against your assets. Just as with assets, liabilities can be divided into current and non-current liabilities. Current liabilities can be thought of as bills that need to be paid in the immediate future. Bills such as rent or the mortgage payment, taxes taken out of your paycheck, short-term loans, and utility bills are current liabilities. Non-current liabilities encompass annual taxes, the entirety of a long term loan and your whole mortgage. Think of non-current liabilities as the whole of your loan with interest, paid off as a current liability in easy monthly installments. This allows you to know what it will take to make those payments without a hitch. Do you need to make a little extra cash on the side? Should your spouse or yourself talk to an employer about needing a raise?
Capital are your net assets or equity. This is what remains after your liabilities have been fulfilled by your assets. Capital is increased by income, but decreased by expenses. Think as your capital as everything left over at the end of the month. Once you have satisfied all of your expenses, you can use your capital to invest and create more income. Or, you can put this aside for college funds, emergency fund, or future known expenses.
- Capital Equals Total Assets Minus Total Liabilities (C = A – L )
Capital is the money that is left over after all of your bills (liabilities) are paid (with your assets). Capital can be transferred to assets to be balanced against future liabilities or invested to create revenue as income. Every time you increase your income, you will increase your capital. By keeping your liabilities at a low, or at least consistent, you will be able to increase your equity. Perform this calculation on a monthly or even weekly basis to ensure your family is staying ahead of your liabilities.
For most households, income is based primarily on the parents’ wages. Income is therefore limited to the amount of available hours and the rate of pay. This can be viewed as the household’s revenue. Additional sources of income for the household can be seen as gains. Gains would include infrequent sources of money. These are not necessarily reliable or expected, but serve to increase your family’s assets. Examples include modest winnings from a scratch off ticket, cash from a family member in a birthday card, finding money on the sidewalk, and inheritance from a wayward uncle. Thinking of those surprise contributions to your family’s income can help you use them wisely.
An expense in the decrease in assets or an increase in liability. Monthly bills are a good example of an expense. They decrease your assets in a reliable manner. Each month you need to plan to have sufficient assets in your account to cover rent, food, water, electricity and other recurring bills. Losses are another aspect of expenses. These unfortunate and unforeseen expenses include loss by fire, theft, and injury. While you cannot foresee all of these losses, you can anticipate that they are inevitable. Try to plan for vehicle repair, appliance replacement, or household maintenance. You might not need a new winter coat every year, but creating a fund for these types of expenses will further aid you in managing your finances.
- Accrual or the Expense and Revenue Recognition Principles
When balancing our checkbooks, we often neglect to immediately add or subtract our balances.
Instead we wait for the expenses to clear into or from our accounts. However, accounting teaches us that expenses and revenue should be recognized immediately. Expenses should be deducted when they are incurred, as revenue should be added when generated. This allows us to never overdraw on our accounts and to know what we have to cover for future expenses. However, make sure you also plan for instances in which accruals don’t pan out. For example, you may be waiting on a support check or a payment from a side-job client but always have a plan B for if those payments don’t come through right when you expect them.
- Matching Principles
Related to the Expense and Revenue Recognition Principles are the Matching Principles. The Matching Principles tell us that expenses should be recognized in the period where the related income is earned. Income should be recognized in the period where related expenses are incurred. Consider that you have to pay for your transportation costs to get to work each month. These monthly fuel and insurance costs directly relate to your monthly income. For a business, your monthly revenue must be used to pay monthly overhead costs for running your establishment. A household should be run in the same way. Keep monthly expenses and incomes grouped together.
- Going Concern Assumption
The Going Concern Assumption states that an entity will continue to operate indefinitely. For a company, that means at least another calendar or fiscal year. They organize their books with assumption that the company will go on in perpetuity. For your household, that means your family will live forever. So while eventually your income will become supplemented by your children or your retirement fund, you should organize your household accordingly. Plan for retirement, your children’s college education, and the need for a new vehicle years down the line. Chip away at these expenses via your savings whenever you have the opportunity.
The 10 Basic Accounting Principles above should provide you with the foundations you require to make accounting a breeze. When implemented, they allow you to plan for contingencies, manage the predictable, and save for the inevitable. Put simply, while most families live pay-check-to-paycheck, you don’t have to. Preparing for the future allows you to avoid going into debt when unforeseen circumstances threaten your financial well-being. And, they allow you to plan for those times when a little extra would help make a family vacation magical. Running a household has enough challenges without the difficulties of chaotic finances. Take the initiative to lay down the understanding you need to ease your bookkeeping.
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