Personal Bookkeeping Is Key To Higher Individual Net Worth, Here’s Why
What helps you attribute a high-net-worth to yourself? Reaching financial autonomy and the build-up of significant wealth is among everyone’s foremost goals. However, simple tactics and professional quirks, like Personal Bookkeeping, can help all of us achieve these noble goals. Under the overarching theme of Accounting, Bookkeeping is the practice of record maintenance of where our money comes from and goes to. Together with Accounting, Bookkeeping makes a highly qualitative strategy to help one diligently and ethically approach high-net-worth goals. Therefore, every individual needs to draw up a personal ledger, concerning the walk of life they hail from. Let’s explore how bookkeeping can create a personal ledger and how services can be availed of to maintain it.
A personal ledger is composed of several entries of cash transactions and source documents such as contracts and invoices. Ledgers are the financial equivalent to diary entries. Essentially, a ledger is composed of bookkeeping. In that light, several bookkeeping records can be imagined as the elements making up a complete ledger. Once compiled for a financial year or a quarter, according to the practice of an individual or an organisation, the ledger is taken forward to the trial balance, where Accountants will be able to produce financial analysis reports.
These reports will paint an accurate picture of the cash flow transactions by the individual or the organization, and therefore conclude on the remaining payments to be made and income or fees to be received. Receipts and expenditures of both Capital and Monetary assets of the individual are included in this. Ultimately, a well-bookkept record will display the financial health of the individual at any point in time, in the form of the general ledger.
In other words, the progress of the wealth build-up of the individual will be accurately tracked, helping us to conclude on the number of profits or losses made. Additionally, we can understand the details therein, such as, items of income (Credit) that have contributed the most or least and those of expenditure (Debit) that have been most or least costly.
Bookkeeping helps us perform “financial measurements” of the individual’s business over time, which is called accounting. As a result, we can understand that Bookkeeping forms the basis of Accounting. These accounts tell what the individual has been accountable for, in terms of both income and payments. At the stage of trial balance, accountants will hence be able to study the book kept records and convey the areas of losses, profits and how to improve the process of wealth building in the times to come.
Accounts differ from Bookkeeping in the sense that the former has statements of cash transactions, while the latter is a record that helped make the statements. Account statements are typically prepared by accountants for organisations. However, for small scale businesses and individuals, the statements that can be drawn from the bookkeeping records are within one’s eyesight.
Bookkeeping differs from Accounting in the sense that only periodic or routine entries of cash flow transactions are made here. Accounting, as mentioned above, generates reports from these records. Thus, account statements, reports and financial decisions made based on bookkept records aren’t time-consuming when performed for one individual or petty business. Typically, personal book records make itemized entries of our everyday life subscriptions, rentals, bills and essential items. Additionally, payments for privileges such as Netflix and Amazon accounts, leisure and travel, memberships at elite clubs and high profile maintenance services for our properties can fall under personal book records.
At an organisational level, however, there will be numerous operational and business liabilities along with diversified sources of income. It will therefore require a separate department of bookkeepers and accountants to enter cash flow transactions of all scales and report analyses on them to the organisation owners, which is called professional bookkeeping. Likewise, a high-net-worth individual (HWNI) would have also hired personal bookkeeping assistants and auditing services who help with accounting.
If a personal ledger is to be maintained, the individual requires skills of making complex entries, like a meticulous diary of financial activities. It requires an interpersonal understanding of the individual’s cash flow transactions to be able to efficiently and effectively include within the records, at the right time. While these can be within the purview of the individual’s capacity, they can also often swamp them into an extra workload. The principal reason is that a comprehensive vision of an HWNI’s money and property is inevitable, so much so that it’s an important life skill. Let’s see the key features that we should hence be well versed with:
Elements of bookkeeping:
- Items of Debit
- Items of Credit
- Debit Statement
- Credit Statement
- Balance Sheets
- Cash flow statements (which may involve investments, equities and shares, operations, lending and more)
- Asset Accounts
- Liability Accounts
- Equity Accounts
- General Ledger
Elements of Accounting
- Tax returns filing
- Tax deduction statements
- Payroll policies (salary structures)
- Analysing performance of revenue-generating activities (if they increase or decrease)
- Statement of non-essentials that can be avoided
- Renewed or fresh financial decisions on spending and income patterns, and more.
While accounting is based on bookkeeping, on the flip side, the method of accounting directs how the latter is to be implemented. Accounting has two central themes:
Cash Basis:
- recording a cash transaction after it is completed (paid or received), and
Accrual Basis
- recording a cash transaction after it is completed (paid or received), and
This changes the nature of book records and therefore the elements therein. In accrual accounting for, instance, we only view the book records as upcoming transactions records. Such records only provide speculative conclusions. But the cash basis records can provide assertive results and conclusions. While the accrual method provides a preemptive target of our wealth build-up, the cash basis generates new targets based on financial history
Subsequently, there are two methods of recording the cash flows:
single-entry records
- In Single entry records, only a note saying cash has been spent or received is entered. Here, a single account’s activities are monitored like those in current accounts.
double entry records
- In the double-entry record, there are two columns where an entry recorded in one account marks a corresponding entry into another associated account. For example, if a loan is sanctioned, the loan amount is a credit into the asset column while being a liability entry too.
Some essentials to note while Bookkeeping
- In the accrual system of accounting, cash paid and received is to complete a transaction and is only on record, as a liability document. Hence, the book records will have to undergo adjustments as and when these accrued cash flows complete their transactions, in the meanwhile of other routine book entries.
- Sometimes, there may be unearned revenues owing to various delays and other exigencies. In such cases, an entry in the books may be pending from a previous date. Upon the receipt of such revenue, the books will have to undergo adjustments accordingly.
- Prepaid expenses too may exist wherein services may have been subscribed to, such as office supplies, but will only be used at later dates. Therefore, whenever they are used, the books are adjusted to show that the money spent is now being utilised.
- Likewise, depreciation of services and products will have a bearing on the book records to show the probable upcoming expenditure as a result of the depreciation.
- Inventory Cycling will become an inevitable part of the bookkeeping for organisations and HWNI’s business. It means, having a record of the inflow of fresh goods and raw materials, and how much of it undergoes sales. Subsequently, the unsold goods are also recorded which become a liability. Accordingly, the book records may undergo adjustments. Even for individuals who do not deal with goods inventories, their routine household or official items such as computers and other appliances become a part of their asset inventory. As and when these undergo replacements or second-hand selling, the book records will undergo adjustments.
We, therefore, understand the necessity of bookkeeping and ways of implementing it. But in what ways does it benefit an individual?
The real benefits of Bookkeeping
- Success-indicator: Bookkeeping, as a professional habit for any individual or organisation, will always act as an indicator of whether the envisioned goals are being approached or not.
- Easier tax compliance: Bookkept records have a complete history of one’s financial activity, including accounts for taxations and tax deductions. Therefore, at the time of filing taxes, residual work burdens such as identifying sources of income and respective documents, are absent, making it easier to file. Additionally, if we sort our ledgers in a format that aligns with what the government’s tax filing system expects, the job is made easier.
- Performance gauging: As a tracker of financial progress toward higher net worth, the bookkeeping records also simultaneously imply whether our business has been performing well or not. This aspect of bookkeeping helps to make declarations during accounting that a particular income channel has reduced or increased its potential of cash inflow.
Bookkeeping Services: when records spiral out of our hands
As everyone’s commitments grow, bookkeeping services unfortunately are amongst those tasks which spiral out of our control. Individuals undergo ageing, increase travel time, attend to various personal and professional issues and more. Bookkeeping services help in these circumstances where we can delegate our financial record keeping and analysing tasks to experts. We can hire them as personal accountants and bookkeepers, or outsourcing partners to take up our bookkeeping and accounting burden.
Besides, bookkeeping services have popularised more than before since the onset of the COVID-19 pandemic. As the world shifted its working methods to digitized versions, the management of bookkeeping records over cyberspace has become easier and cost-effective.
Pros and Cons of outsourcing bookkeeping:
Pros:
- Time-Saving: Outsourcing is often worth the money as it saves time and energy, while we can attend to other commitments without the strain of overlooking our monetary numbers.
- Peace of mind: Assurance of expertise to take care of our accounts and bookkeeping helps us remove the burned of incomplete or erroneous financial entries.
- Lower risks of fraud: A trusted outsourcing partner who observes ethical reporting and integrity at work eases off more pressure and helps build trust.
Cons:
- Doubts of reliance: bookkeeping and accounting styles will vary once we have outsourced the tasks. It leaves a lingering question on my mind about our expectations being met.
- Unexpected costs: It is always prone to hike in an increase of service costs, especially in the post-COVID-19 period.
- Different time zones: Outsourcing our financial record management overseas and coordinating with it online may often get disruptive due to the differing time zones. It adds to the mental pressure as time-zone differences aren’t negotiable and pre-planned collaboration is inevitable. Besides, in-person meetings are not possible.
Famous outsourcing bookkeeping companies
Since accounting and bookkeeping go way back to ancient times in their origin and continue to rapidly evolve in the digital era, they will form the backbone of all business for money management. As a result, presently there are several bookkeepers who have conducted thousands of transactions and record keeping with their clientele. For example, My Accounts Consultant operating in the USA and Canada claim to processed around 75000 transactions.
There are reportedly over 9.8 million bookkeepers in the USA alone.
Some other notable companies:
- IBN Tech
- Meru Accounting
- ICB USA- A top Bookkeeping Institute in the World located in the USA, which is affiliated with experts from the industry.
- Bookkeeping USA, and more.
Some notable software that helps automate bookkeeping
While outsourcing may be a good option for growing businesses, there are many software products with which DIYers of bookkeeping and accounting can purchase. As much as it is a burden, as mentioned earlier, bookkeeping can develop as a good interpersonal skill and many would opt to automate it by themselves as they grow in their careers.
QuickBooks Online, QuickBooks Desktop, Xero, Intacct, MRISoftware, AppFolio Property Manager, Propertyware A Realpage Company, Buildium, Yardi Voyager, YARDI breeze, Sage 50, 100, 300, Rent Manager, avdixchange, Microsoft Dynamics GP, and NAV, NETSUITE, SAP, PC Law year expert.