(R)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.
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.
This authoritative book, written with rigor and
thoroughness is being published by Matador, Troubador Publishing Ltd
(http://www.troubador.co.uk) and further information can be found on the
author's web site at http://www.dwba.co.uk
copyright © 2006 John Passmore
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