Personal Accounting 101...Understanding the Basics to Accounting

I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs. -Thomas Jefferson (1743 - 1826), Letter to the Secretary of the Treasury Albert Gallatin (1802)

With the new year right around the corner, I have decided that one of my resolutions this year will be to track every dollar earned as well as every dollar spent in my personal finances. I am going to start up a new pseudo-company called "Jonathan Torian Inc." and become my own personal accountant. In order prevent failure and ensure a promising financial future, I am going to begin learning the basics in accounting and apply it to my every day life.

Two Types of Accounting

Cash Basis of Accounting

An accounting method wherein revenues are recognized when cash is received and expenses are recognized when paid. This method is inferior to the accrual basis of accounting where revenues are recognized when they are earned and expenses are matched to revenues or the accounting period when they are incurred (rather than paid). The cash basis of accounting is usually followed by individuals and small companies, but is not in compliance with accounting's matching principle. (Citation)

Accrual basis of accounting

The accounting method under which revenues are recognized on the income statement when they are earned (rather than when the cash is received). The balance sheet is also affected at the time of the revenues by either an increase in Cash (if the service or sale was for cash), an increase in Accounts Receivable (if the service was performed on credit), or a decrease in Unearned Revenues (if the service was performed after the customer had paid in advance for the service). (Citation)

Cash Basis Accounting is the most applicable to the individual consumer.

Main Financial Statements

1. Income Statement
2. Balance Sheet
3. Statement of Cash Flows

Income statements

Show how profitable you are during the time interval. Profits will be measured in the amount able to be saved after a given time period. This can be used to show what time of the year money is more likely to come in or go out. Profitability involves two things, amount of money earned (revenue) and expenses.

Revenues

The amount of money that a company actually receives during a specific period, including discounts and deductions for returned merchandise. It is the "top line" or "gross income" figure from which costs are subtracted to determine net income. (Citation)

Expenses

The economic costs that a business incurs through its operations to earn revenue. (Citation)

Matching Principle

The principle that requires a company to match expenses with related revenues in order to report a company's profitability during a specified time interval. Ideally, the matching is based on a cause and effect relationship: sales causes the cost of goods sold expense and the sales commissions expense. If no cause and effect relationship exists, accountants will show an expense in the accounting period when a cost is used up or has expired. Lastly, if a cost cannot be linked to revenues or to an accounting period, the expense will be recorded immediately. An example of this is Advertising Expense and Research and Development Expense. (Citation)

Balance Sheet

A financial statement that reports the amount of a company's assets, liabilities. (Citation)

A "snapshot" of a individual's financial position at a given moment in time.

Previous Article about using Financial Snapshots

Assets

Assets are things that an individual owns and are sometimes referred to as the resources of the individual. (i.e. Personal vehicle(s), its cash in the bank, home, etc.)

cost principle

The accounting guideline requiring amounts in the accounts and on the financial statements to be the actual cost rather than the current value. (Citation)

Depreciation

Depreciation is required by the basic accounting principle known as the matching principle. Depreciation is used for assets whose life is not indefinite—equipment wears out, vehicles become too old and costly to maintain, buildings age, and some assets (like computers) become obsolete.

In accounting, an expense recorded to allocate a tangible asset's cost over its useful life. (Citation)

Liabilities

Obligations of the company; they are amounts owed to others as of the balance sheet date. (i.e. Loans, credit cards, etc.) (Citation)

Statement of Cash Flows

Shows how Direct Delivery's cash amount has changed during the time interval shown in the heading of the statement. Good for helping to determine your financial circumstance and whether or not things need to be adjusted.

The goal of these articles will be to get a basic understanding of accounting principles then determine ways to integrate them into my personal finance. I am hopeful in being able to become the Chief Financial Officer of my finances for 2009.

Too often we rely on others' book keeping to determine if our finances are balanced. How many times do you check your bank account after you receive a bill to make sure that the power company debited the correct amount? How many times have you been overcharged by a department store or did not receive a store credit for returning an item. Unfortunately, I believe we can attribute much of the economic woes today due to not tracking expenses correctly and understanding the underlying debt trap that many Americans laid out.

By tracking my expenses, I hope to avoid this trap and being in less debt than what I owe today.

What are some of the financial resolutions you plan on doing for 2009?

Stay Disciplined!

Surviving the Recession...Getting Back to the Basics

To use fear as the friend it is, we must retrain and reprogram ourselves...We must persistently and convincingly tell ourselves that the fear is here--with its gift of energy and heightened awareness--so we can do our best and learn the most in the new situation. -Peter McWilliams, Life 101

Earlier this week I took a trip to New York for my job. Now, I am by no means a fan of airplanes, but I understand that they are relatively safe and each time I have flown, I made it safely to my destination. So in my mind, it was going to be business as usual as I settled comfortably in my coach seat, although there was a slight drizzle coming down and the sky was painted gray with clouds at Hartsfield Airport.

The most fearful part of flying for me is taking off as I have heard that many say that the highest risk of something going wrong is during that part and landing. As we aligned ourselves straight on the take off runway, I hear the engines roar and we are off. As I feel the plane separate from the ground, I notice that everything seems to be going normal. Just as I get ready to breathe a sigh of relief, the plane takes a sudden drop. My stomach goes to my chest and we hear the captain of the plane say "Please remain in your seats with your seatbelts fastened as we are going to be in rough air".

Shortly after the intercom turns off, the plane takes another dip and I look around to see other people with fear obviously on their faces. I begin to think to myself that this is the end and say a short prayer as I may be getting ready to meet my Maker. However, the captain continues to push the engines full throttle and after we experience a few more dips, we finally level off at 41,000 feet where the air is a little smoother. Needless to say, although we experienced a few more bumps in the air, we arrived to our final destination safely and in one piece.

Later that day, I realized that the airplane ride was a strong analogy to what our economy is going through right now. We are currently at the point where most Americans are looking at each other with fear on our faces thinking some variation of "this is the end". However, just as the captain did what it took to navigate through the turbulence in the air, our government will do the same. Although we may go through a few more bumps while trying to get to our final destination, ultimately we will arrive safely.

If you do not know that a recession is going on right now, then this is your wake up call. All the times of spending more than we make, eating out, burning gas, etc are coming to an end. Below are some of the basic principles that I am using to survive this recession.

1. Budget.
• One of my friends always budgets and sets aside a specific amount of cash that he can spend at his discretion (eating out, partying, etc). He does this because it really resonates with him as he sees cash leave his fund as well as allows him to think twice before spending the money. Once that money is gone, he knows that he has to wait until his next paycheck before he can do any further discretionary spending.
  
2. Save at least 10% per paycheck.
• One of the most important assets to have during tough times is a fund that is highly liquid (Emergency Fund). This comes in handy to carry you in between pay periods as well as cover any unexpected expenses that can occur while money is tight.
• Devoting 10% of each paycheck to a high-yield savings fund will add up quickly. Recommended bank where I keep my Emergency Fund: HSBC
  
3. Plan out trips.
• Having a car is quickly becoming a larger and larger expense because of the cost of gas. Planning out the trip and knowing exactly where you are going prior will allow you to consolidate trips and conserve gas rather than having to make multiple trips in one day.
4. Cook.
• On average, I spend about $7/meal when I eat out at a (decent) fast food restaurant. When I eat at a sit-down establishment, that goes upward to $13 - $15 (tip included).
• My average meal at my house costs about $15 to make, however, it typically lasts for 3 days. I typically eat leftovers twice a day for those three days which roughly equals 6 meals total. Doing the math, you see that my average cooked meal costs $2.50. Big big savings!
  
• Below are some useful websites with quick and easy recipies.
  
• Kraft
  
• All Recipies
  
5. Work Overtime (if your job allows it).
• Overtime is great because it typically pays 1.5 times your hourly rate as well as it typically does not require any extra work outside of your regular job.
• Overtime gives extra unbudgeted income that can be used to weather the recession period.
6. Turn a hobby into Entreprenuership.
• One of my biggest hobbies is computers. I have turned my hobby into a small entreprenuership where I help out people with any computer problems they may have. This is a double win because I get money for doing something I would do for free as well as people save money by using my services rather than some big company that charges an arm and a leg for the same service.
  
• Some other entreprenuer ideas...fashion consultant, tutor, dance instructor, bartender, party planner...get CREATIVE.
  
7. Find creative (cheap) sources of entertainment.
• Game nights have become a regular routine amongst my friends. Rather than going out to spend money, we typically organize a game night or crank up some Rock Band and have a blast..
  
• Another interesting idea to do is have a potluck dinner where each of your friends cook an item and create a buffet of food. Just make sure your friends can cook.
  

No one said this was going to be easy, however, it is very doable. The key is to not give up and become very resourceful to make it through these turbulent times. So fasten your seatbelts and hold on because the ride is going to be bumpy, but if we stay the course, we will make it through it. What are some of your tips to make it through this recession period? Please share them in the comments below.