Examples of financial accounting rules not applicable to personal finance?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Topic Author
acegolfer
Posts: 3029
Joined: Tue Aug 25, 2009 9:40 am

Examples of financial accounting rules not applicable to personal finance?

Post by acegolfer »

"Financial accounting is the process of recording, summarizing and reporting the myriad of transactions resulting from business operations over a period of time. These transactions are summarized in the preparation of financial statements, including the balance sheet, income statement and cash flow statement, that record the company's operating performance over a specified period." (investopedia)

To those who have taken Financial Accounting courses, what rules/principles/guidelines are not applicable to personal finance?
Greenman72
Posts: 544
Joined: Fri Nov 01, 2013 2:17 pm

Re: Examples of financial accounting rules not applicable to personal finance?

Post by Greenman72 »

I am a CPA, which means I have taken all of the financial accounting classes.
I am also a certified financial planner, which means I have taken all of the personal financial planning classes.
It would be quicker and easier to tell you what financial accounting rules ARE applicable to personal finance--none. The two are not related in any meaningful way.

Financial Accounting is the science of recording financial transactions and presenting a financial report that accurately portrays the economic position, profitability, and cash flows of a business enterprise. Personal financial planning is the art of setting goals with regards to a person's financial life, and taking steps to ensure those goals are met in a timely fashion. These two disciplines could not be more different if they tried.

The only place where these two meet (IMHO) is if a person has a business that needs recordkeeping (journal entries, ledger entries, etc.) and a tax return. But again, it could be said that recordkeeping and tax are two different things.
Topic Author
acegolfer
Posts: 3029
Joined: Tue Aug 25, 2009 9:40 am

Re: Examples of financial accounting rules not applicable to personal finance?

Post by acegolfer »

Tamarind wrote: Wed Apr 24, 2019 7:47 am Goodwill accounts. :sharebeer
A case within the context of personal finance will be appreciated.
HomeStretch
Posts: 11335
Joined: Thu Dec 27, 2018 2:06 pm

Re: Examples of financial accounting rules not applicable to personal finance?

Post by HomeStretch »

To name just a couple that are not usually applicable to personal finance:
- Accrual basis accounting
- GAAP footnote disclosures

Some concepts are similar. I prepare personal financial statements (balance sheet, income statement, cash flow statement). But I use cash basis accounting rather than accrual basis.
Last edited by HomeStretch on Wed Apr 24, 2019 8:22 am, edited 1 time in total.
User avatar
Sandtrap
Posts: 19582
Joined: Sat Nov 26, 2016 5:32 pm
Location: Hawaii No Ka Oi - white sandy beaches, N. Arizona 1 mile high.

Re: Examples of financial accounting rules not applicable to personal finance?

Post by Sandtrap »

Greenman72 wrote: Wed Apr 24, 2019 8:07 am I am a CPA, which means I have taken all of the financial accounting classes.
I am also a certified financial planner, which means I have taken all of the personal financial planning classes.
It would be quicker and easier to tell you what financial accounting rules ARE applicable to personal finance--none. The two are not related in any meaningful way.

Financial Accounting is the science of recording financial transactions and presenting a financial report that accurately portrays the economic position, profitability, and cash flows of a business enterprise. Personal financial planning is the art of setting goals with regards to a person's financial life, and taking steps to ensure those goals are met in a timely fashion. These two disciplines could not be more different if they tried.

The only place where these two meet (IMHO) is if a person has a business that needs recordkeeping (journal entries, ledger entries, etc.) and a tax return. But again, it could be said that recordkeeping and tax are two different things.
Outstanding!!!!
Well said.
Thanks.
j
Wiki Bogleheads Wiki: Everything You Need to Know
Topic Author
acegolfer
Posts: 3029
Joined: Tue Aug 25, 2009 9:40 am

Re: Examples of financial accounting rules not applicable to personal finance?

Post by acegolfer »

HomeStretch wrote: Wed Apr 24, 2019 8:19 am To name just a couple that are not usually applicable to personal finance:
- Accrual basis accounting
- GAAP footnote disclosures

Some concepts are similar. I prepare personal financial statements (balance sheet, income statement, cash flow statement). But I use cash basis accounting rather than accrual basis.
More explanation will be appreciated. Why use cash basis over accrual basis?

Suppose I purchase a computer on 4/20/2019 w/ credit card and will payoff credit card bill on 5/15/2019. Should I recognize the expense on April (using accrual) or May (using cash basis)?
Topic Author
acegolfer
Posts: 3029
Joined: Tue Aug 25, 2009 9:40 am

Re: Examples of financial accounting rules not applicable to personal finance?

Post by acegolfer »

Greenman72 wrote: Wed Apr 24, 2019 8:07 am It would be quicker and easier to tell you what financial accounting rules ARE applicable to personal finance--none. The two are not related in any meaningful way.
A = L + OE doesn't apply to personal finance? I have been calculating my net worth by A - L. Can you suggest a better way to calculate net worth?
nolesrule
Posts: 2631
Joined: Thu Feb 26, 2015 9:59 am

Re: Examples of financial accounting rules not applicable to personal finance?

Post by nolesrule »

acegolfer wrote: Wed Apr 24, 2019 8:39 am
HomeStretch wrote: Wed Apr 24, 2019 8:19 am To name just a couple that are not usually applicable to personal finance:
- Accrual basis accounting
- GAAP footnote disclosures

Some concepts are similar. I prepare personal financial statements (balance sheet, income statement, cash flow statement). But I use cash basis accounting rather than accrual basis.
More explanation will be appreciated. Why use cash basis over accrual basis?

Suppose I purchase a computer on 4/20/2019 w/ credit card and will payoff credit card bill on 5/15/2019. Should I recognize the expense on April (using accrual) or May (using cash basis)?
I personally treat my credit cards as cash accounts with negative balances. The expense happens when it happens. The payment is just relocating cash.
User avatar
KlingKlang
Posts: 1090
Joined: Wed Oct 16, 2013 3:26 pm

Re: Examples of financial accounting rules not applicable to personal finance?

Post by KlingKlang »

I've been using double-entry bookkeeping for my personal finances for 40 years. One problem that I have is using book value instead of market value for assets. If I have a mutual fund purchased for $100k that now has a market value of $500k it seems that I am understating my net worth to list it at $100k. On the other hand the $400k in capital gains will not be realized until I sell that asset.
Topic Author
acegolfer
Posts: 3029
Joined: Tue Aug 25, 2009 9:40 am

Re: Examples of financial accounting rules not applicable to personal finance?

Post by acegolfer »

KlingKlang wrote: Wed Apr 24, 2019 9:23 am I've been using double-entry bookkeeping for my personal finances for 40 years. One problem that I have is using book value instead of market value for assets. If I have a mutual fund purchased for $100k that now has a market value of $500k it seems that I am understating my net worth to list it at $100k. On the other hand the $400k in capital gains will not be realized until I sell that asset.
GNUcash (which uses double entry method) solves this issue by creating an account for the asset in question. This account tracks # of shares held, from which it calculates the market value (rather than the book value).
HomeStretch
Posts: 11335
Joined: Thu Dec 27, 2018 2:06 pm

Re: Examples of financial accounting rules not applicable to personal finance?

Post by HomeStretch »

acegolfer wrote: Wed Apr 24, 2019 8:39 am
HomeStretch wrote: Wed Apr 24, 2019 8:19 am To name just a couple that are not usually applicable to personal finance:
- Accrual basis accounting
- GAAP footnote disclosures

Some concepts are similar. I prepare personal financial statements (balance sheet, income statement, cash flow statement). But I use cash basis accounting rather than accrual basis.
More explanation will be appreciated. Why use cash basis over accrual basis?

Suppose I purchase a computer on 4/20/2019 w/ credit card and will payoff credit card bill on 5/15/2019. Should I recognize the expense on April (using accrual) or May (using cash basis)?
That’s up to you. Accruals of income and expenses should make your financials more precise. But accrual basis accounting is generally more complex and time-consuming than cash basis accounting.

I don’t have the need for it for my personal financials. Your situation may be different. For example, if you owned a business with personal guarantees where your personal financials were needed by lenders, I could see using accrual-based financials if they are significantly different than cash-basis presentation.
Topic Author
acegolfer
Posts: 3029
Joined: Tue Aug 25, 2009 9:40 am

Re: Examples of financial accounting rules not applicable to personal finance?

Post by acegolfer »

HomeStretch wrote: Wed Apr 24, 2019 9:33 am But accrual basis accounting is generally more complex and time-consuming than cash basis accounting.
I beg to differ. My CC transaction data (which are downloadable) record the date when the purchase is made. To do cash basis instead, I will have to manually change the dates to when I paid off the CC balance.

I rather use the whatever dates that are in the transaction data. Manually converting to cash basis is time-consuming.
megabad
Posts: 3638
Joined: Fri Jun 01, 2018 4:00 pm

Re: Examples of financial accounting rules not applicable to personal finance?

Post by megabad »

Greenman72 wrote: Wed Apr 24, 2019 8:07 am It would be quicker and easier to tell you what financial accounting rules ARE applicable to personal finance--none. The two are not related in any meaningful way.
Agree. I was going to say something like "any rule that is not based in reality". Much of "financial accounting" has to do with showing things in certain ways that are abstract and not connected to real world application. Even simple things like defining a liability are complicated and abstract when it comes to financial accounting practices and they can vary depending on the necessary rules. Personal finance is about the concrete for me.
User avatar
Tamarind
Posts: 2809
Joined: Mon Nov 02, 2015 1:38 pm

Re: Examples of financial accounting rules not applicable to personal finance?

Post by Tamarind »

acegolfer wrote: Wed Apr 24, 2019 8:08 am
Tamarind wrote: Wed Apr 24, 2019 7:47 am Goodwill accounts. :sharebeer
A case within the context of personal finance will be appreciated.
When you overpay for a house, you don't get to keep the excess payment on your "books" as an asset.
bloom2708
Posts: 9855
Joined: Wed Apr 02, 2014 2:08 pm

Re: Examples of financial accounting rules not applicable to personal finance?

Post by bloom2708 »

When I buy something on my credit card and pay it "next month", I do not have to accrue for it in the current month.

Accrual accounting 101. No Sarbanes-Oxley.
HomeStretch
Posts: 11335
Joined: Thu Dec 27, 2018 2:06 pm

Re: Examples of financial accounting rules not applicable to personal finance?

Post by HomeStretch »

acegolfer wrote: Wed Apr 24, 2019 9:47 am
HomeStretch wrote: Wed Apr 24, 2019 9:33 am But accrual basis accounting is generally more complex and time-consuming than cash basis accounting.
I beg to differ. My CC transaction data (which are downloadable) record the date when the purchase is made. To do cash basis instead, I will have to manually change the dates to when I paid off the CC balance.

I rather use the whatever dates that are in the transaction data. Manually converting to cash basis is time-consuming.
Sounds like you made your decision! Good luck.
User avatar
dm200
Posts: 23214
Joined: Mon Feb 26, 2007 1:21 pm
Location: Washington DC area

Re: Examples of financial accounting rules not applicable to personal finance?

Post by dm200 »

Depreciation of fixed assets may differ a lot between the accounting rules for organizations and the more common sense ones for personal finance. You might plan to keep your car for ten years - but that same car would probably be depreciated over 3-5 years under accounting rules.

Some aspects of personal finance may make more sense as cash basis - and not go through accrual accounting. If you are paid, say, every two weeks - would you do accrual accounting personally for the end of year accrual vs cash basis?

In most markets, a home will not depreciate over time for personal finance -- but if a "business" (say rental), the house (but not the land) would be depreciated over a 20-30 year period.

For personal finance, I would probably want to value stocks and bonds at current market value - where under accounting rules, there are different valuation rules for things like "held to maturity" or "available for sale" or "trading".
User avatar
dm200
Posts: 23214
Joined: Mon Feb 26, 2007 1:21 pm
Location: Washington DC area

Re: Examples of financial accounting rules not applicable to personal finance?

Post by dm200 »

acegolfer wrote: Wed Apr 24, 2019 8:39 am
HomeStretch wrote: Wed Apr 24, 2019 8:19 am To name just a couple that are not usually applicable to personal finance:
- Accrual basis accounting
- GAAP footnote disclosures
Some concepts are similar. I prepare personal financial statements (balance sheet, income statement, cash flow statement). But I use cash basis accounting rather than accrual basis.
More explanation will be appreciated. Why use cash basis over accrual basis?

Suppose I purchase a computer on 4/20/2019 w/ credit card and will payoff credit card bill on 5/15/2019. Should I recognize the expense on April (using accrual) or May (using cash basis)?
Since a computer is a tangible asset, under accrual accounting you would not expense the total in either April or May, but rather "depreciate" the cost over a several year period (perhaps 36 months).
Frank Grimes
Posts: 207
Joined: Tue Mar 07, 2017 9:54 am

Re: Examples of financial accounting rules not applicable to personal finance?

Post by Frank Grimes »

Yeah accrual basis will get way more complex than just determining when to record your CC payment as an expense.

The previously mentioned example of the way you treat investments under financial accounting does not have a lot of utility for personal finance.

I'd question why you need to prepare your personal records using financial accounting rules to that level of detail.
User avatar
dm200
Posts: 23214
Joined: Mon Feb 26, 2007 1:21 pm
Location: Washington DC area

Re: Examples of financial accounting rules not applicable to personal finance?

Post by dm200 »

Frank Grimes wrote: Wed Apr 24, 2019 12:09 pm Yeah accrual basis will get way more complex than just determining when to record your CC payment as an expense.
The previously mentioned example of the way you treat investments under financial accounting does not have a lot of utility for personal finance.
I'd question why you need to prepare your personal records using financial accounting rules to that level of detail.
Yes. I agree.
Topic Author
acegolfer
Posts: 3029
Joined: Tue Aug 25, 2009 9:40 am

Re: Examples of financial accounting rules not applicable to personal finance?

Post by acegolfer »

dm200 wrote: Wed Apr 24, 2019 11:55 am Since a computer is a tangible asset, under accrual accounting you would not expense the total in either April or May, but rather "depreciate" the cost over a several year period (perhaps 36 months).
This is how I personally expense my big purchase items such as home, cars. Suppose I purchase a $20k car in 2017 with cash. If I use cash basis to calculate expense, it will skew my 2017 spending. Instead, I depreciate $20k over the life of the car (such as 5 yrs), which will smooth out the auto expense over 5-yr period. This makes it easier for me to analyze income/expense year to year. Perhaps, ppl may disagree. But for me, using accrual accounting + depreciation makes more sense for spending analysis. (Of course, cashflow is a different story.)
coachd50
Posts: 1777
Joined: Sun Oct 22, 2017 10:12 am

Re: Examples of financial accounting rules not applicable to personal finance?

Post by coachd50 »

acegolfer wrote: Wed Apr 24, 2019 12:25 pm
dm200 wrote: Wed Apr 24, 2019 11:55 am Since a computer is a tangible asset, under accrual accounting you would not expense the total in either April or May, but rather "depreciate" the cost over a several year period (perhaps 36 months).
This is how I personally expense my big purchase items such as home, cars. Suppose I purchase a $20k car in 2017 with cash. If I use cash basis to calculate expense, it will skew my 2017 spending. Instead, I depreciate $20k over the life of the car (such as 5 yrs), which will smooth out the auto expense over 5-yr period. This makes it easier for me to analyze income/expense year to year. Perhaps, ppl may disagree. But for me, using accrual accounting + depreciation makes more sense for spending analysis. (Of course, cashflow is a different story.)
You do realize it all depends on who is the user of information. That ultimately answers your question.
adam1712
Posts: 566
Joined: Fri Jun 01, 2007 5:21 pm

Re: Examples of financial accounting rules not applicable to personal finance?

Post by adam1712 »

I'd say almost all accounting principles are applicable if you want to do it, but many are unnecessary or irrelevant in most cases. Accounting allows businesses to compare between different parts of the business, report to shareholders, and properly do their taxes. It's complexity is necessary to make sure comparisons for the reader of the report are fair with nothing hidden.

When you are preparing your personal financial reports, you presumably are the accountant and the reader. You only need to consider your own needs.
coachd50
Posts: 1777
Joined: Sun Oct 22, 2017 10:12 am

Re: Examples of financial accounting rules not applicable to personal finance?

Post by coachd50 »

adam1712 wrote: Wed Apr 24, 2019 12:31 pm I'd say almost all accounting principles are applicable if you want to do it, but many are unnecessary or irrelevant in most cases. Accounting allows businesses to compare between different parts of the business, report to shareholders, and properly do their taxes. It's complexity is necessary to make sure comparisons for the reader of the report are fair with nothing hidden.

When you are preparing your personal financial reports, you presumably are the accountant and the reader. You only need to consider your own needs.
Well put. In fact, you allude a bit to managerial or cost accounting here. Internal accounting concepts for decision making as opposed to reporting.
Topic Author
acegolfer
Posts: 3029
Joined: Tue Aug 25, 2009 9:40 am

Re: Examples of financial accounting rules not applicable to personal finance?

Post by acegolfer »

Frank Grimes wrote: Wed Apr 24, 2019 12:09 pm I'd question why you need to prepare your personal records using financial accounting rules to that level of detail.
Good question. Ppl may differ why they keep records. Personally, I do it so that I can compare my income/spending & saving rates year to year (or month to month). Having a one time big purchase item such as $20k car in 2017 will skew my cash outflow for 2017. Using cash basis, comparing 2017 saving rate vs 2018 saving rate will be meaningless because of $20k car purchase in 2017.

Is calculating depreciation expense hard? Perhaps, yes for most ppl. But I can't think of an easier way to get around these big purchase items such as cars/homes. Any suggestions so that I can properly calculate saving rate for annual comparison?
coachd50
Posts: 1777
Joined: Sun Oct 22, 2017 10:12 am

Re: Examples of financial accounting rules not applicable to personal finance?

Post by coachd50 »

acegolfer wrote: Wed Apr 24, 2019 12:37 pm
Frank Grimes wrote: Wed Apr 24, 2019 12:09 pm I'd question why you need to prepare your personal records using financial accounting rules to that level of detail.
Good question. Ppl may differ why they keep records. Personally, I do it so that I can compare my income/spending & saving rates year to year (or month to month). Having a one time big purchase item such as $20k car in 2017 will skew my cash outflow for 2017. Using cash basis, comparing 2017 saving rate vs 2018 saving rate will be meaningless because of $20k car purchase in 2017.

Is calculating depreciation expense hard? Perhaps, yes for most ppl. But I can't think of an easier way to get around these big purchase items such as cars/homes. Any suggestions so that I can properly calculate saving rate for annual comparison?
Don't include them in the calculation?
Frank Grimes
Posts: 207
Joined: Tue Mar 07, 2017 9:54 am

Re: Examples of financial accounting rules not applicable to personal finance?

Post by Frank Grimes »

acegolfer wrote: Wed Apr 24, 2019 12:37 pm
Frank Grimes wrote: Wed Apr 24, 2019 12:09 pm I'd question why you need to prepare your personal records using financial accounting rules to that level of detail.
Good question. Ppl may differ why they keep records. Personally, I do it so that I can compare my income/spending & saving rates year to year (or month to month). Having a one time big purchase item such as $20k car in 2017 will skew my cash outflow for 2017. Using cash basis, comparing 2017 saving rate vs 2018 saving rate will be meaningless because of $20k car purchase in 2017.

Is calculating depreciation expense hard? Perhaps, yes for most ppl. But I can't think of an easier way to get around these big purchase items such as cars/homes. Any suggestions so that I can properly calculate saving rate for annual comparison?
Ok that sort of makes sense but that is way different than what you originally asked. There are multitudes of other financial accounting requirements in GAAP accounting that are wholly unneeded for your personal finances. If it makes your personal analysis more useful by depreciating your big purchases over some time then go for it, that would be pretty easy and makes sense. But you have some deeper rabbit holes to explore if you want to apply some other financial accounting principles to your personal life and I wouldn't do that.
lazydavid
Posts: 5124
Joined: Wed Apr 06, 2016 1:37 pm

Re: Examples of financial accounting rules not applicable to personal finance?

Post by lazydavid »

acegolfer wrote: Wed Apr 24, 2019 8:39 am More explanation will be appreciated. Why use cash basis over accrual basis?

Suppose I purchase a computer on 4/20/2019 w/ credit card and will payoff credit card bill on 5/15/2019. Should I recognize the expense on April (using accrual) or May (using cash basis)?
A company using accrual basis will typically also capitalize major or infrastructure purchases. So in this example, it would take 1/36th or 1/48th of the charge in April, and an equal amount for every month thereafter until the item is fully depreciated.
Last edited by lazydavid on Wed Apr 24, 2019 1:12 pm, edited 1 time in total.
Texanbybirth
Posts: 1612
Joined: Tue Apr 14, 2015 12:07 pm

Re: Examples of financial accounting rules not applicable to personal finance?

Post by Texanbybirth »

Frank Grimes wrote: Wed Apr 24, 2019 1:06 pm
acegolfer wrote: Wed Apr 24, 2019 12:37 pm
Frank Grimes wrote: Wed Apr 24, 2019 12:09 pm I'd question why you need to prepare your personal records using financial accounting rules to that level of detail.
Good question. Ppl may differ why they keep records. Personally, I do it so that I can compare my income/spending & saving rates year to year (or month to month). Having a one time big purchase item such as $20k car in 2017 will skew my cash outflow for 2017. Using cash basis, comparing 2017 saving rate vs 2018 saving rate will be meaningless because of $20k car purchase in 2017.

Is calculating depreciation expense hard? Perhaps, yes for most ppl. But I can't think of an easier way to get around these big purchase items such as cars/homes. Any suggestions so that I can properly calculate saving rate for annual comparison?
Ok that sort of makes sense but that is way different than what you originally asked. There are multitudes of other financial accounting requirements in GAAP accounting that are wholly unneeded for your personal finances. If it makes your personal analysis more useful by depreciating your big purchases over some time then go for it, that would be pretty easy and makes sense. But you have some deeper rabbit holes to explore if you want to apply some other financial accounting principles to your personal life and I wouldn't do that.
+1

OP has answered the original question. None of it is "applicable" or all of it is "applicable", depends on how you want to run your personal finances.

For me as a CPA, I spend enough time running someone else's books to run my family's the same way. It's just not something I care enough about when I'm off work! :beer
“The strong cannot be brave. Only the weak can be brave; and yet again, in practice, only those who can be brave can be trusted, in time of doubt, to be strong.“ - GK Chesterton
Greenman72
Posts: 544
Joined: Fri Nov 01, 2013 2:17 pm

Re: Examples of financial accounting rules not applicable to personal finance?

Post by Greenman72 »

acegolfer wrote: Wed Apr 24, 2019 8:39 am
Suppose I purchase a computer on 4/20/2019 w/ credit card and will payoff credit card bill on 5/15/2019. Should I recognize the expense on April (using accrual) or May (using cash basis)?
You will debit "Computer Expense" and credit "Credit Cards Payable" on 4/20/19.
Then you will debit "Credit Cards Payable" and credit "Cash" on 5/15/19.
Greenman72
Posts: 544
Joined: Fri Nov 01, 2013 2:17 pm

Re: Examples of financial accounting rules not applicable to personal finance?

Post by Greenman72 »

Texanbybirth wrote: Wed Apr 24, 2019 1:10 pm For me as a CPA, I spend enough time running someone else's books to run my family's the same way. It's just not something I care enough about when I'm off work! :beer
+1
User avatar
dm200
Posts: 23214
Joined: Mon Feb 26, 2007 1:21 pm
Location: Washington DC area

Re: Examples of financial accounting rules not applicable to personal finance?

Post by dm200 »

Greenman72 wrote: Wed Apr 24, 2019 2:30 pm
Texanbybirth wrote: Wed Apr 24, 2019 1:10 pm For me as a CPA, I spend enough time running someone else's books to run my family's the same way. It's just not something I care enough about when I'm off work! :beer
+1
Or, how about "imposing" accounting rules on your spouse! If you try that, set up an accrual account for divorce expenses. ;)
Frank Grimes
Posts: 207
Joined: Tue Mar 07, 2017 9:54 am

Re: Examples of financial accounting rules not applicable to personal finance?

Post by Frank Grimes »

Honey that was a particularly bad fight, better credit that contingent liability!
User avatar
dm200
Posts: 23214
Joined: Mon Feb 26, 2007 1:21 pm
Location: Washington DC area

Re: Examples of financial accounting rules not applicable to personal finance?

Post by dm200 »

Frank Grimes wrote: Wed Apr 24, 2019 3:08 pm Honey that was a particularly bad fight, better credit that contingent liability!
:sharebeer
MichCPA
Posts: 884
Joined: Fri Jul 06, 2018 9:06 pm

Re: Examples of financial accounting rules not applicable to personal finance?

Post by MichCPA »

Swiss pension accounting
MichCPA
Posts: 884
Joined: Fri Jul 06, 2018 9:06 pm

Re: Examples of financial accounting rules not applicable to personal finance?

Post by MichCPA »

lazydavid wrote: Wed Apr 24, 2019 1:08 pm
acegolfer wrote: Wed Apr 24, 2019 8:39 am More explanation will be appreciated. Why use cash basis over accrual basis?

Suppose I purchase a computer on 4/20/2019 w/ credit card and will payoff credit card bill on 5/15/2019. Should I recognize the expense on April (using accrual) or May (using cash basis)?
A company using accrual basis will typically also capitalize major or infrastructure purchases. So in this example, it would take 1/36th or 1/48th of the charge in April, and an equal amount for every month thereafter until the item is fully depreciated.
I would argue that understanding accrued expenses and being able to value a stream of payments vs a lump sum are probably the two biggest things that separate those who are intermediate/ advanced at personal finance from those who repeatedly shoot themselves in the foot.
Topic Author
acegolfer
Posts: 3029
Joined: Tue Aug 25, 2009 9:40 am

Re: Examples of financial accounting rules not applicable to personal finance?

Post by acegolfer »

MichCPA wrote: Thu Apr 25, 2019 3:45 pm I would argue that understanding accrued expenses and being able to value a stream of payments vs a lump sum are probably the two biggest things that separate those who are intermediate/ advanced at personal finance from those who repeatedly shoot themselves in the foot.
+1

How do you record accrued expenses (which are different from cash outflow) in quicken/spreadsheet? Do you create a separate account or split the transaction with multiple dates or some other trick?

Any example will be appreciated.
MichCPA
Posts: 884
Joined: Fri Jul 06, 2018 9:06 pm

Re: Examples of financial accounting rules not applicable to personal finance?

Post by MichCPA »

acegolfer wrote: Thu Apr 25, 2019 9:10 pm
MichCPA wrote: Thu Apr 25, 2019 3:45 pm I would argue that understanding accrued expenses and being able to value a stream of payments vs a lump sum are probably the two biggest things that separate those who are intermediate/ advanced at personal finance from those who repeatedly shoot themselves in the foot.
+1

How do you record accrued expenses (which are different from cash outflow) in quicken/spreadsheet? Do you create a separate account or split the transaction with multiple dates or some other trick?

Any example will be appreciated.
What I actually do is every quarter I prepare financial statements in excel using my Mint activity. That is when I add things like car depreciation and adjustments to insurance. ( I prepay every 6 months for a discount).

My advice would be to go through the exercise of identifying those types of items once and then you can determine if it is worth the effort to do that regularly. For example if you are paying insurance monthly, putting property tax into escrow with your mortgage, don't pay tax estimates, and make car payments, you probably won't have many of those items.

Maybe someone here who has used GNU Cash can provide some input.
Topic Author
acegolfer
Posts: 3029
Joined: Tue Aug 25, 2009 9:40 am

Re: Examples of financial accounting rules not applicable to personal finance?

Post by acegolfer »

MichCPA wrote: Fri Apr 26, 2019 8:26 am What I actually do is every quarter I prepare financial statements in excel using my Mint activity. That is when I add things like car depreciation and adjustments to insurance. ( I prepay every 6 months for a discount).
Suppose on 2/15/2019, I paid $600 auto insurance premium up front for 6 months using CC. Mint will show $600 transaction on 2/15/2019. Specifically, how do you adjust in Excel? Do you replace $600 transaction with six $100 transactions on 2/15, 3/15, ..., 7/15?
MichCPA
Posts: 884
Joined: Fri Jul 06, 2018 9:06 pm

Re: Examples of financial accounting rules not applicable to personal finance?

Post by MichCPA »

acegolfer wrote: Fri Apr 26, 2019 8:41 am
MichCPA wrote: Fri Apr 26, 2019 8:26 am What I actually do is every quarter I prepare financial statements in excel using my Mint activity. That is when I add things like car depreciation and adjustments to insurance. ( I prepay every 6 months for a discount).
Suppose on 2/15/2019, I paid $600 auto insurance premium up front for 6 months using CC. Mint will show $600 transaction on 2/15/2019. Specifically, how do you adjust in Excel? Do you replace $600 transaction with six $100 transactions on 2/15, 3/15, ..., 7/15?
Basically yes, since I do it quarterly I would recognize 300 per quarter.
Topic Author
acegolfer
Posts: 3029
Joined: Tue Aug 25, 2009 9:40 am

Re: Examples of financial accounting rules not applicable to personal finance?

Post by acegolfer »

MichCPA wrote: Fri Apr 26, 2019 8:26 am What I actually do is every quarter I prepare financial statements in excel using my Mint activity. That is when I add things like car depreciation and adjustments to insurance. ( I prepay every 6 months for a discount).
TY for previous explanation. Another question, if you don't mind.

Adjusting prepaid expense (with pre-determined length such as 6 months) is straight forward. What about car depreciation expense? Any tips on how to determine the time length for depreciation (presumably on a straight line)? Do you use an estimated depreciation expense first and then re-adjust previous depreciation expenses at termination (with salvage value accounted for)?

(Of course, there's no standard rule. I just want to find out the best practices.)
Last edited by acegolfer on Fri Apr 26, 2019 9:07 am, edited 2 times in total.
User avatar
dm200
Posts: 23214
Joined: Mon Feb 26, 2007 1:21 pm
Location: Washington DC area

Re: Examples of financial accounting rules not applicable to personal finance?

Post by dm200 »

To fully comply with all accounting rules, a business would need to have a regular outside CPA audit.

Try to explain that to a spouse!
MichCPA
Posts: 884
Joined: Fri Jul 06, 2018 9:06 pm

Re: Examples of financial accounting rules not applicable to personal finance?

Post by MichCPA »

acegolfer wrote: Fri Apr 26, 2019 9:03 am
MichCPA wrote: Fri Apr 26, 2019 8:26 am What I actually do is every quarter I prepare financial statements in excel using my Mint activity. That is when I add things like car depreciation and adjustments to insurance. ( I prepay every 6 months for a discount).
TY for previous explanation. Another question, if you don't mind.

Adjusting prepaid expense (with pre-determined length such as 6 months) is straight forward. What about car depreciation expense? Any tips on how to determine the time length for depreciation (presumably on a straight line)? Do you use an estimated depreciation expense first and then re-adjust previous depreciation expenses at termination (with salvage value accounted for)?

(Of course, there's no standard rule. I just want to find out the best practices.)
Since I try to pay for my cars in cash, I use straight line with no salvage value (I basically use up most of the car anyway) and the accumulated depreciation is basically a mental reserve for how much I should have saved for a car.

While you could try to accelerate depreciation if you had a shorter life of the car or adjust your monthly amount if you decided to hold it longer, that is more detailed than what I am trying to do. For an ending gain or loss, since I roll the vehicle into another vehicle pretty much immediately, the gain just rolls into the value of the new car. I suppose you could do an analysis on depreciation after you got rid of a car by just taking the decrease in value / holding period.

While it is important to understand some of these concepts, I would err on the side of simplicity.
Topic Author
acegolfer
Posts: 3029
Joined: Tue Aug 25, 2009 9:40 am

Re: Examples of financial accounting rules not applicable to personal finance?

Post by acegolfer »

MichCPA wrote: Fri Apr 26, 2019 9:57 am I suppose you could do an analysis on depreciation after you got rid of a car by just taking the decrease in value / holding period.
IMO, this is the best practice for my expense report. TY.
michaeljc70
Posts: 10837
Joined: Thu Oct 15, 2015 3:53 pm

Re: Examples of financial accounting rules not applicable to personal finance?

Post by michaeljc70 »

One example would be if you owned business property you would depreciate the building (not the land). Obviously, most peoples homes go up in value over the long haul (even if it is only inflation) so that wouldn't make sense for personal finances.

Another example would be capital improvements. With GAAP, they generally need to be capitalized and depreciated. If I put a new furnace in or new windows on my house and expect it to last 20 years, I am not going to go through the effort for my personal finances to do that. On the other hand, I do need to decide if that is an expense or something that will increase the value of my home (asset). It could be a combination.

Others have pointed out expensing/depreciating large purchases like cars with cash. I don't follow GAAP accounting. I do what makes sense to me in that it spreads the cost out over many years and is also easy to account for. I depreciate my cars over 7 years equally (straight line depreciation). Obviously the car will have some value after 7 years, but not anything significant and I guess using 10 years might be better.
User avatar
mrmass
Posts: 1507
Joined: Thu Jul 26, 2018 6:35 pm
Location: MA

Re: Examples of financial accounting rules not applicable to personal finance?

Post by mrmass »

Sometimes I feel like I could depreciate my body
User avatar
dm200
Posts: 23214
Joined: Mon Feb 26, 2007 1:21 pm
Location: Washington DC area

Re: Examples of financial accounting rules not applicable to personal finance?

Post by dm200 »

mrmass wrote: Fri Apr 26, 2019 11:12 am Sometimes I feel like I could depreciate my body
Yes.

I can imagine trying to explain to my wife the various choices of depreciation - straight line, double declining balance, sum of the digits, etc. :oops:
User avatar
Dialectical Investor
Posts: 527
Joined: Mon Dec 03, 2018 10:41 pm

Re: Examples of financial accounting rules not applicable to personal finance?

Post by Dialectical Investor »

dm200 wrote: Fri Apr 26, 2019 11:52 am
mrmass wrote: Fri Apr 26, 2019 11:12 am Sometimes I feel like I could depreciate my body
Yes.

I can imagine trying to explain to my wife the various choices of depreciation - straight line, double declining balance, sum of the digits, etc. :oops:
Depreciating a body might be the first useful application of this method.
User avatar
dm200
Posts: 23214
Joined: Mon Feb 26, 2007 1:21 pm
Location: Washington DC area

Re: Examples of financial accounting rules not applicable to personal finance?

Post by dm200 »

Dialectical Investor wrote: Fri Apr 26, 2019 12:06 pm
dm200 wrote: Fri Apr 26, 2019 11:52 am
mrmass wrote: Fri Apr 26, 2019 11:12 am Sometimes I feel like I could depreciate my body
Yes.

I can imagine trying to explain to my wife the various choices of depreciation - straight line, double declining balance, sum of the digits, etc. :oops:
Depreciating a body might be the first useful application of this method.
Yes --

and use "Rule of 78s" for various kinds of life insurance prepaid premiums. :oops:
Post Reply