If you were completely ignorant of an accounting system, and the bookkeeping necessary to put financial information into proper places, what would you assume you needed? Chances are, you would look for the checkbook and feel sure that it contained all the necessary information you would need to produce a financial picture of your monetary worth. But, as you are about to see, a checkbook only scratches the surface.
If you start with a firm foundation and build up, your finished product should be sturdy and strong. The same is true with the accounting system. If the pieces you start with are firm and accurate, your finished product is strong and sturdy; the finished product being your financial health. Every transaction that occurs within your day to day existence, for which there is a dollar value available, is part of the accounting equation.
For instance, suppose you purchase lunch at McDonald’s and gas at the Quick-n-Go. Do you need that piece of information for accurate accounting? Many non-accounting individuals would say no, it didn’t affect my checkbook so I don’t need to document or keep a receipt. But it did affect your net worth, or the financial snapshot of your net worth. You now have $32.16 less than you did this morning. A debit and credit has occurred, and your net worth has changed.
Account for ALL Transactions
In order to keep accurate records, and be able to account for all transactions that have affected your net worth, you need receipts, records, invoices, statements, bill of sales, and market value estimates, for everything that comes into or leaves your possession, for which a dollar value can be assigned. The last part of that sentence would be one of the most important parts; “for which a dollar value can be assigned”, this means anything of financial value, not sentimental, emotional, or physical.
Bank statements and checking accounts are only small pieces of the information puzzle. However, almost every person you survey will tell you the same thing. They believe the only transactions affecting their financial net worth are those that come into and go out of the checkbook.
The other most often overlooked piece of the puzzle would be the depreciation factor. The minute that you purchase an item, with the exception of your home, it begins to depreciate. In other words, the value begins to drop. The depreciation of your car occurs at a much faster rate, than the depreciation of your lawnmower. The depreciation of any equipment is at any given time, going to affect your net worth value. How do you account for this? You don’t receive a receipt for accumulated depreciation each month. Most often, individuals don’t factor in the depreciation values until they file their federal taxes each year. Small businesses and most certainly large companies, generally make accumulated depreciation entries each month in order to balance their books.
Now that you have a heightened awareness about the pieces of information that comprise your financial picture, hopefully all those shoeboxes with receipts and invoices can be organized. Oh never mind, heightened awareness is not comparable to a complete personality change!