A little about accounting


Income and expenditure statement tells you the surplus or deficit of income over expenditures

The process of accounting involves the preparation of few key financial statements. A financial statement is a formal record of the financial activities of a business, person or other entity. They typically include three basic financial statements:

Balance sheet: Reports a company’s assets, liabilities and ownership equity at a given point in time (usually the end of every financial year).

Profit & loss statement (P&L): Reports a company’s income, expenses, profits and losses over a period of time.

Cash flow statement: Reports a company’s cash flow activities, particularly its operating, investing and financing activities. The cash flow statement tells you how much money is coming in and how much is going out.

This is important because the P&L will only tell you profit or loss made but will not disclose how much money has come in or gone out. For example: If goods costing Rs. 100 are sold for 20% profit but on credit, the P&L will reveal the profit figure as Rs. 20 but the cash flow will show money received as zero. (We will not get into the details of cash flows in this module).

Now that we have some idea of accounting, let’s turn to the income and expenditure statement that you can easily use for your own money management.

Income and expenditure is popularly laid down in the form of a statement with two columns representing the two heads. This statement tells you the surplus or deficit of income over expenditures.

Surplus or deficit

Expenditure (Debits)

Income (Credits)

Incurred during a specific period

Earned during a specific period

Fixed expenses like utility bills, rents, interest, EMIs, etc

Salaries, wages, consultancy income, commission, bonuses, interest, dividends, rent, gifts, inheritances, profit from sale of assets, etc

Variable expenses like food, clothing, medical expenses; telephone and utility payments and leisure expenses

Windfall gains like lotteries and other chance winnings

Surplus of income (when income exceeds expenditure)

Deficit of income (when expenses exceed income)

This statement helps you see where your money is coming from and where it is being spent. Let’s see what a budget could look like. This is Laxmi’s monthly budget, a school girl of std-IX.

Spend money wisely

Total income (Rs)

Gifts, allowances, prize money & stipend

1,200

Total expenses

Planned

Actual

Shopping

200

250

Birthday treat

500

550

Eating out

100

200

Knowledge book

300

200

Note that in this budget, Laxmi could not buy the Knowledge book as she exceeded the budgeted amount for all the remaining items. While the Knowledge book would have been a good investment, she spent all her money on fun and entertainment. What do we learn from Laxmi’s example?

We learn that we should be realistic about setting budget limits, and once they are set, we should follow them religiously. We should spend our money wisely.

Read more:

Introduction to budgeting 

The pareto principle in financial planning too

Planning & saving go hand in hand



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