Accounting for Financial Management

Accounting is known as the language of business, but it can also be OUR personal financial language.

Accounting is the main tool in systematically recognizing and recording of businessess financial transactions. It is hugely used in order for the businesses to see the company's financial performance through it's profit and loss, and also the company's financial positions. In otherwords, accounting is use to maintain an entity's records to assist the company's performance and growth, as well as to decide how to manage company's resources and obligations.

Accounting follow a simple formula, which shows the relationships of asset to liabilities and equity/residual income:

        Assets (A) - Liabilities (L) = Equity (E)

   Assets are OWNED resources; such as cash, bank savings, investments and properties.

  Liabilities are OBLIGATIONS; such as loans, taxes, fees, subsciptions and others.

     Equity is describe as the residual interest an entity have after all obligations, it also includes the entity's income after deducting it's acceptable related expenses.

Essentially, the above formula shows the company's ONLY available resources after all required payments are made, basically - MONEY available for use.

This formula however, is a very good tool to be used in managing our finance's, most evidently on matters of spending and budgeting - either for liquidity purposes or to increase your wealth through process of saving or investment.

But how?

Here are my two options:

Option 1: "Distorted Accounting"

According to an article from livemint.com - Rich mantra: Expense = income - savings: "...income minus savings equals expense, not income minus expense equals savings. This safe mode of creating wealth gradually—without taking seemingly huge risks or a sudden episode of an infusion of liquidity—primes them for a more systematic, sustained and realistic approach to managing wealth".

This article suggest that you manipulate the accounting formula from the basic:

            Asset - Liabilites = Equity

                             to

            Asset - Savings(E) = Liabilities

By using this technique, it does not only give you the opportunity to secure your savings first, but it will also control your finances in a very disciplined manner. Since your residual cash will be your ONLY available cash for use, you will have to allocate properly per account of payables (debt) and expenses. Hence, allow you to control your spending without the probable chance to go overboard.

Option 2: "Accounting Chunk"

I call this "Accounting Chunk" because you literally have to chunk down the accounting formula.

This is my personal formulated technique after realizing that my own salary does not fit with the first option, here I also incorporated the idea from a topic in Advance Accounting called 'Corporate Liquidation':

  Income/Salary                   xx.xx - Asset

- Unavoidable Expenses   xx.xx - Liab.
=Available Cash Savings  xx.xx - Asset

- Savings                               xx.xx - Equity 
=Available for Use            xx.xx - Liab/Exp.

Here, I am trying to convey that being a typical filipino, we have certain payables or expenses that we do not have any option to differ or delay. Given this fact, it is given the first priority in asset allocation since it is a very necessary expense, and then a certain %tage (5-10% from salary) to be your contingent fund. As an example you will have your average amount of light and water bill, transportation budget, and food allowances for the month. After deducting the total amount of all unavoidable expenses including contigent fund from your income; the resulting amount will be the the base amount for savings which here given the second priority- this will be made through certain % or maybe a fix amount you desire. After deducting your required savings, the resulting amount will be the amount to be utilized and allocate for debts and other expenses that is either avoidable or can be limited.

However, this does not mean that the resulting amount will always be positive, sometimes it may reflect negative amount given the fact that, sometimes salary is not enough to even cover the unavoidable expenses; meaning, it signal's a deficiency in income - which is a bad sign and yet also an opportunity to assist your earnings or to dissect in advance some areas that you need to improve or adjust in order to better fit on the available resources. For me, this technique also directly assist your financial liquidity which will help you to plan ahead at the beginning of the period what to do in order to stay liquid up to the end.

I believe, either option will make as an effective financial management practice worth trying for. The key however, is to diligently monitor and take note of your expenses, which will help you in classifying necessary from not.

And by taking consideration of the options above we will be able to incorporate the use of business accounting in managing effectively and appropriately our financial lives. Not only by merely allocating our available resources and following the principle of saving, but also it will help us decide and plan for our budgeting and most importantly in the control of our spending capacity.