(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.