Know the present state of our finances



When I was young, I used to think that money was the most important thing in life. Now that I am old I know it is. — Oscar Wilde

Irish poet, playwright and author Oscar Wilde eulogized the importance of money in every life more than hundred years ago and every senior citizen with fixed income will concur with him. Every person should know about his sources and use of funds, his income & expenses and whether he saved or overspent during a year. Maintaining a simple record to the same will help you in preparing your financial plans as well as achieve your financial goals, GR Thengdi stresses

Finding present state of our financials

Before planning for future, we must know the present state of our finances. We should therefore prepare an Income and Expenditure statement for the just concluded financial year and also a year before that. If we prepare Income and Expenditure account for the financial year 2011-12, we will know our actual income and expenditure and assets and liabilities. When we prepare Income and Expenditure account for 2010-11, we can compare our income and expenditure of two years. By comparing figures of two financial years, we will find following answers: Whether our income in 2011-12 is more or less than the previous year 2010-11 and the reasons for the same. Whether our deposits have increased/decreased during the year and reasons for the same. Are we getting proper returns on his investments and is it possible for us to increase income from his investments. The analysis will help us to relook at our investment plan for future years.

Comparison of expenditure in the years 2011-12 and 2010-11 will show variations of expenditure under different heads and reasons for variations will help him to plan for the next year. The analysis will help us to decide whether there is any scope for cutting costs in future. We will now be able to plan our expenditure profile for the next year in a systematic manner.

Preparing accounts from incomplete records

We will now see how a senior citizen will start making financial statements. It is presumed that the senior citizen has not kept proper records of his income and expenditure and he has to prepare financial statements from incomplete data and whatever records are available with him.

He can compile the data from his Bank Statements, TDS Certificates, Income Tax Returns, Credit Card statements, cheque deposit slips and whatever invoices he has for payments made. He will also have to rely on his memory and spending pattern to create financial records. It would be easier to compile income figures with reasonable accuracy. However, as most household expenditure is made in cash, he will have to compile the data on the basis of spending pattern.

He will have to prepare “Receipts and Payments” statement or Funds Flow statements from his Bank passbook or Bank statements.

Compiling details from Bank Statements

He should first prepare Bank a/c statement in the following format. If he has more than one bank account, he should prepare separate sheet for each bank account. If he has received money in cash and has spent from it, he should prepare a separate receipts and payments statement for cash transactions

XYZ Bank a/c: Details for FY11-12

Date

Cheque no/ deposit details

Deposit

Rs.

Withdrawal

Rs.

Balance= (*OB+Deposit-withdrawal)

01-04-11

List all entries in bank statement

(1st Apr to 31st Mar).

31-03-12

Total Deposits

Total Withdrawals

= *OB + Deposits -Withdrawals

*Opening balance

This statement is like Day Book as each transaction is recorded with details. The opening balance as on 01-04-2011 is taken from bank statement. The closing balance as worked out in the last row in balance column should be the same as per bank statement. This would ensure that he has correctly tabulated figures from the bank statement. He should write details of transactions very carefully and use information from records in chequebook for payments. If he can connect invoices with cheque payments, more details will be available.

Writing details of invoice and purpose of issuing cheques is a good habit. Cash is drawn from Bank or ATM for routine household expenses and sometimes for specific purposes. While preparing details of Bank accounts, cash drawn shall be as Cash Expenses and details of cash expenses shall have to be worked out later in a separate work sheet.

Accounting of receipts net of TDS

Banks pay interest after deducting income tax and the bank statement will show the net amount. We will have to find out tax deducted by bank from TDS Certificate. The gross income will be amount of interest paid by the bank plus TDS. The amount of TDS is expenditure as Income Tax paid.

Reconciling TDS with Income Tax records

We receive certain payments after “deduction of income tax at source” (TDS). We need to find out Gross Amount of income. For this we need to know the TDS amount. The tax deducting bank and company deposits the tax amount with Income Tax Department and issues us TDS Certificate. Income Tax Department credits the tax deducted by various payers to our tax account and we have to adjust the amount so deducted from our tax liability arising from our Income Tax Return and pay the balance tax. Permanent Account Number (PAN) is our tax account number. Entries in our Tax Account are made by Income Tax Department on the basis of quarterly returns submitted by tax deducting banks and companies. We should get details of TDS from time to time to keep our records updated. Income Tax department allows us credit of only those TDS amounts which are shown in our tax account with them. We can ourselves find out details our tax account from Form 26AS on web site of IT Department to ensure that the tax deducting bank or company has properly filed their returns and tax as deducted has been correctly accounted.

Tracking deposits

The following Table will help in keeping track of our Deposits and work out Gross Income and TDS from the net amount paid to us as interest.

Deposit Master Sheet, TDS & Gross amount of Interest

Bank name & FD no

FD Amt Rs

Interest % p.a.

Interest due on#

M/Q/ Hy/Yrly

Date of maturity of FD

Net Interest Deposited in a/c Rs

Add

TDS   Rs

Gross

Amt of Interest Rs

Bank

FD no

Company FD no

Total

#As per the terms of each deposit, interest is due on monthly, quarterly, half yearly, and under cumulative option, principal amount is payable with interest at the end of term. We should always have updated record of deposits. Tax from interest is deducted at 10% of gross amount. We can ourselves calculate Gross amount and TDS provisionally, and later get it confirmed from bank or company. For example, if Bank has deposited Rs. 11700 as interest, this amount is 90% of gross amount of interest. Therefore, gross amount is (11700/90X100) Rs. 13,000 and TDS is Rs. 1300 which is 10% of Rs.13000.

We should also include deposits with post office in schemes like National Savings Certificates and other Government schemes in the above format. The total of column FD amount is our Asset and will appear in our Balance Sheet.

Keep proper record of other investments also

If we have investments in shares, mutual funds, debentures and other securities, we should keep a proper record of such investments and update the same as soon as a transaction relating to them occurs.  

Income from let out property

Some payments like Rent on leased accommodation and Professional fees are paid after deducting TDS. Here also rate of TDS is 10% so we can calculate gross and TDS amounts as shown above. If deposits are placed with individual persons and rent and professional fees are received from individual persons, such persons cannot deduct TDS. In this case, onus of paying tax rests with us.  

The author has worked in the field of financial management over 50 years.



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