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'Accounting for a Better Life'
is the title of a new book by John Passmore, who is now retired and
lives in Dorset, UK.
It is more than "yet another" book on accounting, it may be a life
changer.
Nichola Ross Martin FCA BA(Hons), Editor
AccountingWEB (www.accountingweb.co.uk
)
When John Passmore approached his own domestic accounting, he started
with an off-the-shelf package as the framework for a double-entry based
system. The only guidelines available were based on business, where the
focus was on profit, shareholders’ value, purchases, sales, expenses,
etc - hardly relevant to the domestic scenario.
Reports like the trading and profit and loss account were also, equally
understandably, not much use in evaluating domestic success over some
period.
Business ratios such as gross and net profit margins, return on capital
employed (ROCE) and over twenty other ratios, although vital for
management and control in business have absolutely no bearing on
domestic finances. So John decided to find other ways to solve the
problems he had encountered.
First, he simplified everything with naming conventions and domestic
accounting equations to make accounting easier to understand for home
users. Next, he devised a new and relevant focus which he called,
domestic well-being (DWB). He defined DWB in terms of a structure of the
components of increases and decreases of domestic, financial activity
characterising daily life.
DWB consisted, at the top level, of the three categories, "the basics",
"the discretionary", and the catch-all of "others", covering all aspects
of domestic finances.
Basics is subcategorised into "essentials" (food and drink, utilities,
etc), "responsibilities" (taxes, mortgage, insurance, etc.) and "family"
(personal commitments, etc.).
Similarly, the "discretionary" category includes asset purchases and
sales (e.g. house and car), other sub-categories such as "nice-to-have"
(holidays, hobbies, entertainment, etc.), "investment for the future"
(home improvements, pension contributions, etc.) and "luxuries". The
"others" category consists of uncontrolled changes, such as inheritance,
appreciation, depreciation, losses, etc.
The power of this structure is that it provides an easy way to
categorise all transactions as they occur, from day to day.
The trading and profit & loss accounts are replaced with a "domestic
changes account". A new report, called the domestic well-being statement
(DWBS) shows the breakdown by categories and sub-categories for all
changes, over any period.
The fantastic benefit of this is the visibility provided, as a basis for
analysis and planning, and control for the future. The balance across
the categories is clear and the split amongst the decreases across the
sub-categories, is also exposed.
John has defined a new set of domestic factors, to replace the business
ratios. For example, the "basic cost of living factor" (BCLF) expresses
the ratio of the amount of the basic domestic decrease, compared to
total household increases, whilst the well-being contribution factor
(WBCF) is the proportion of discretionary domestic decreases, compared
to total household increases.
In the prevailing UK situation of a very severe debt crisis, the new
approach, almost in passing, provides the visibility on the state of a
family's financial affairs required to provide warnings of potential
difficulties. With this, the appropriate, 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 realised 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 DTI, knocking on their
doors.
In his book, John Passmore provides the necessary background and
information for anyone to get started with setting up and running their
own, domestic accounting system. He uses Microsoft Money and a
spreadsheet package but any accounting package that offers support for
categorisation of transactions could be used. With basic computer
literacy and access to a computer for bank statements, John believes
that benefits are potentially available for a family or domestic
situation with a shared annual income, of around £20,000 and upwards./br>
A sense of personal responsibility towards the members of any domestic,
family situation and their financial activities, is paramount. The
benefits are that with the accumulation of a few months' worth of
figures, a realisation of the actual spread and balance of the family
outgoings will become apparent. The whole purpose of the exercise is to
achieve an overall and improved sense of domestic well-being. He says
that accounting in itself, will not achieve this. Discipline will be
required to change spending patterns to obtain the desired changes.
John believes the new methods have the potential to be adopted,
eventually world-wide, as a formal, sub-discipline of business
accounting. With such recognition, the motivation for appropriate
investment from industry and the state becomes real. From this,
improvements in software support, the further calibration of the new
domestic factors and the creation of an associated training
infrastructure can all be further developed and refined.
He proposes that in time, such methods should become a normal 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 domestic
life.
About the author
'Accounting for a Better Life' by John Passmore is to be published by
Matador, of Troubador Publishing Ltd
( www.troubador.co.uk ). Further information can be found on the
author's web site at
www.dwba.co.uk
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copyright
© 2006
John Passmore |
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