Question

Assignment Details | This assignment has 3 parts: Every business or organization must utilize accounting to record, summarize and report business transactions. While the focus in this course is the use of accounting within a business, the same concepts can be used on a personal level. 1. How can you use accounting to manage your personal finances? 2. What are the benefits of keeping track of personal transactions - income and expenses - in an organized manner? 3. What are some of the possible risks if you don't keep track of personal transactions?

Answer 1

1. A great amount of information we use in making personal finance and investing decisions is accounting information. We need a basic understanding of accounting terminology and valuation methods in order to make good use of the financial information. The first and foremost thing that one needs to understand is what their income and expenditure are. It is important to know what comes in and what goes out. The next step is to identify the debts and efficiently clearing them off. With some background in accounting, one can use an accounting tool to manage personal finances.

2. A lot of people do not know the total amount of expenses they generate in a month. This creates a problem but there is a solution for it. One needs to keep track of all expenses in a given month. Collecting receipts where they shop, checking bank statements on a regular basis will certainly help. We also need to remember to keep track of expenses paid by cash as well as credit cards. This will allow you to see the whole picture and know how to manage your expenses going forward. Most people know their full monthly income but have less knowledge of their full monthly expenses. The point is to figure out your total expenses and subtract that from your total income for the month in question. Once you understand your expenses and income and have a firm understanding of the money coming in and out of your life, it will make your finances more organized.

3. Here are some of the risks:

a. When you don’t have an idea of what transactions you are entering into, it’s far too easy to spend more than what is reasonable – or even more than you bring home each week. And once the debt takes hold and you start paying interest, it becomes even harder to find your way out.

b. If you don't keep a track of the personal transactions,  it might be difficult to remember which bills are due and when. If a surprise bill just so happens to hit when your account runs low, well, there will be a lot of struggle to manage them.

c. It is hard to understand how much you need to save if there is no track.

d. It will affect the retirement plans. When you do not know what you are spending and what your are earning then this will affect your savings as mentioned above but the worst thing is that you will have no funds after the retirement.