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Resources highlighted in the episode
Today, we discuss accounting for personal finance. We cover many examples, which are all represented visually below. The podcast is broken down into the following sections:
- Quote of the Week
- Why is accounting important?
- What is a Balance Sheet and a P&L?
- How do they relate to personal finance and the Savings Challenge?
- Definitions
- Simple Examples
- Complex Examples from listeners
- Inspirational Article of the Week
In this episode, we refer to a couple of resources, which are linked below:
Free Resouce: Moneystepper Savings Challenge Spreadsheet (Moneystepper)
Ebook Kindle: How to Build Wealth: One Step At A Time (Amazon)
Inspirational Article: Nanny’s wild rice idea inspires giant (Boston Globe)
Examples discussed in this episode
The following definitions and examples were also covered in today’s epsiode. Please use these images as you wish:
How do Debits and Credits impact certain areas?
Definitions of each area
o Assets: objects that have, or will generate, value (e.g. cash, computer systems, buildings, cars…), or something owed to you by another party
o Liabilities: something that you owe to another party (e.g. mortgages, vehicle loans, credit card balances…)
o Income: money earned
o Expenses: money spent
Example 1: Accounting for salary
Example 2: Buying something with no lasting value
Example 3: Buying something with lasting value
Example 4: Buying a brand new car
Example 5: Increase in the value of your share portfolio
Example 6: Accounting for an annual bill for a regular expense (Tom’s question)
Example 7: Lending money to another family memeber (Greg’s question)
If you have any questions or opinions on this episode, please leave a comment below. I respond to all comments and it would be great to hear from you!
[cunjo layout=”inline_buttons”]
Moneystepper, I love your discussion about accounting for personal finance. Many people have little understanding about the basics in accounting. This is evidenced by record-setting credit card debt per household and increased bankruptcy filings each year. Learning basic accounting concepts and apply them to protect the financial health is really important nowadays.
Hm. But wouldn’t the car better fit under CAPEX since we should hope it will last more than a few months? 🙂 For example, if my expectation was to keep the car for five years and sell it for $5000, I would add and take away a $10,000 asset, equipment and cash respectively, then expense $1000 each year as depreciation.
Thanks for your comment Mario. It is indeed “CAPEX”, which is a form of an asset. However, today, the asset should be valued at the lower of cost and net realizable value (NRV). NRV is essentially what you can sell the item of Capex for today. If its therefore only worth £7,000 today, this is how much its measured for in your net worth today.
Then, if you thought that in 5 years time the car would be worth £5,000, you would expense another £400 a year (5 x £400 = £2,000 which is the difference between the value today and in 5 years time) in the form of depreciation. Effectively, that depreciation is an estimation of the fall in the value of the car every year over that period.
Just because you bought the car today for £10,000 and it’ll be worth £5,000 in 5 years, you cannot depreciate on a straight line basis if the item is significantly impaired today, which unfortunately all new cars are as soon as they are driven off the forecourt!!
Hope that makes sense.