See, bank statements are one thing I never check. I read Barefoot Investors and my partner and I started following it religiously last year but then got a bit lazy and looking through just March’s statement was a real eye opener. If I was a company in normal circumstances, for the month of march I would be thoroughly disappointed as my statements show a big loss (just on income vs expense). Thankfully, I am just an ordinary person who has plenty of savings and very thankful that my partner and I are still employed during this period.

The exercise overall was a fun task to flick through accounts and see how my learning categorises the payments I see. It did take me a few tries to categorise payments correctly as I tried to be as realistic and thoughtful as possible. If I wanted to make excuses for myself, I could’ve said work is consuming all of my time and chosen the easy way out by doing blanket categorisations however I wanted to challenge myself and depict a realistic chart of accounts with a semi in-depth breakdown.

For the purpose of this step, I used my ‘Daily Expense’ account where I have my bills direct debited from and pays deposited into. I like many others in todays day and age have multiple accounts (as you could see from my internal transfer debits) but only chose to select my main account to do my reflection on. To save myself time, I only did my chart of accounts based on 1 of 4 accounts and over a 1-month period. March may have been a bad month to pick as it is not an accurate reflection of my usual monthly spending however just like businesses we have been given to study this term, my bank account is feeling the effects of COVID-19.

Doing this exercise really made me think about mine and my partners spending. It also made me think about how things are technically classified, for example my bike loan to me is just a bill, however it is a liability to me as if I stop paying it I can have my bike repossessed and my credit score would be affected.

I did have difficulty with some categorisations such as my pets. I had the thought of categorising them as a liability for the sole reason that if they get out and cause havoc, I am legally responsible for them therefore they are a liability. After listening to Maria talk about what a liability would be considered (rego, insurance, etc), I decided that my pets would be classified as an expense. I periodically spend money on food, vets, treats etc however there is no obligation I expect from them and no gain I get other than a loving friend.

The chart of accounts that I created for the month of march shows a fairly accurate representation of the general transactions that my partner and I make on a monthly basis. There are a few irregularities (like any company) such as refunds and expenses related to a holiday, we weren’t able to take due to COVID-19. Similar to the chart of accounts given in the example, it depicts income and expenses for a couple, but the depth of the accounts is very minimal. For me to get a better understanding of my accounts, I decided to try and accurately categorise the transactions for a deeper picture of the overall expenses we incur. It was crazy to see that for the month of march, our expenses outweighed our income by a good 33% however that is considered normal in the world of business as some months attract good profit and other months attract losses.  

The level of detail in which we do our chart of accounts has been left to us however to get a deeper understanding of how a business is running, they need to be categorised deeper to allow someone looking at the accounts to see where spending can be increased or decreased. In the example given, the general living expenses blankets nearly everything therefore it is hard to see where exactly the money is being spent. If you were to expand on the living expenses account, you would then be in a position to rethink your spending and see where you can make some savings. When I went through and categorised my account statement, I tried to split all transactions up to a realistic level of grouping without individualising every single expense.

Just after the bushfires happened and everyone was applying for the Disaster Recovery Allowance, businesses and sole traders needed to provide a profit and loss statement as well as a tax return which included the depreciation schedule. I saw many varying types of profit and loss statements with varying degrees of categorisations which made it harder for me to assess the claim of lost income. There were some statements where expenses were generalised (like the example given in the assignment) which then made the claim process take even longer as I would then have to call the customer and get a breakdown to see what is assessed and what is not assessed as an expense. On the other hand, I would see statements where every expense was categorised into a relevant account making it easy to track what was a genuine business expense and what was a personal expense from the business account.

Doing this activity has just cemented my understanding of the benefits attributed to an in-depth income statement and why double-entry bookkeeping is important. For anyone to be able to make improvements to a businesses profitability (even personal profitability), you must first be able to identify where the income and expenses are coming from. One thing I have found, is every time I do an activity like this, I find something that I can take away and use in my personal life. After looking at the income statement for march, my partner and I sat down and had a chat regarding our spending and what we can do to improve our financial position. Personally, I think that if I was to do a basic income statement monthly or quarterly, I would be able to gain some insight as to what my major expenses are and help identify areas where my partner and I can save some money.

I believe that a few ledger accounts outlined in the chart of accounts would better represent the actual financial position of someone if they were recorded as an accrual basis of accounting rather than a cash basis. Take for example the $470 paid for electricity. On a cash basis, the money left my account on a specific day in March however that does not mean that my partner and I used $470 worth of electricity on that specific day. The $470 represents the electricity used from December till March and if it was reflected in a liability accrued ledger, you would then be able to evenly apportion the amount over the period it represents rather than when it was paid. The reason this would be beneficial is due to the accuracy of transaction accountability in the sense that March is showing a massive expense however it was accrued over a 3-month period.   Insurance is another expense that would be better suited to an accrual basis rather than a cash basis as the lump sum payment is for a future benefit. In the bank statement, there are 2 charges for insurance which is paid on a monthly basis. The charge shown on the bank statement is called a prepaid expense where the funds are paid now for a future benefit. With the scheme of insurance, I opt to pay monthly so the money that’s paid now gives me 1 months comprehensive cover on my motorbike. Personally I believe this is an accurate representation on my monthly income statement as each month I outlay a cost to receive the benefit for the whole month however if I was to pay yearly, the charge for March would be the total of a years coverage and would majorly affect the representation of my financial position. Having an asset prepaid expense ledger would prove to be beneficial for an accurate representation of the account statement as although the insurance premium may be $1100 for a year, only $92 ($1100/12 months) would be attributed to the month of march.