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Accounting for a better life. By John Passmore

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1st Dec 2006
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'Accounting for a Better Life' is the title of a new book by John Passmore, who is now retired and lives in Dorset. It is more than "yet another" book on accounting, it may be a life changer.

When John Passmore approached his own domestic accounting, he started with an off-the-shelf package as the framework for a double-entry based system. The only guidelines available were based on business, where the focus was on profit, shareholders’ value, purchases, sales, expenses, etc - hardly relevant to the domestic scenario.

Reports like the trading and profit and loss account were also, equally understandably, not much use in evaluating domestic success over some period.

Business ratios such as gross and net profit margins, return on capital employed (ROCE) and over twenty other ratios, although vital for management and control in business have absolutely no bearing on domestic finances. So John decided to find other ways to solve the problems he had encountered.

First, he simplified everything with naming conventions and domestic accounting equations to make accounting easier to understand for home users. Next, he devised a new and relevant focus which he called, domestic well-being (DWB). He defined DWB in terms of a structure of the components of increases and decreases of domestic, financial activity characterising daily life.

DWB consisted, at the top level, of the three categories, “the basics”, “the discretionary”, and the catch-all of “others”, covering all aspects of domestic finances

Basics is subcategorised into “essentials” (food and drink, utilities, etc), “responsibilities” (taxes, mortgage, insurance, etc.) and “family” (personal commitments, etc.).

Similarly, the “discretionary” category includes asset purchases and sales (e.g. house and car), other sub-categories such as “nice-to-have” (holidays, hobbies, entertainment, etc.), “investment for the future” (home improvements, pension contributions, etc.) and “luxuries”. The “others” category consists of uncontrolled changes, such as inheritance, appreciation, depreciation, losses, etc.

The power of this structure is that it provides an easy way to categorise all transactions as they occur, from day to day.

The trading and profit & loss accounts are replaced with a “domestic changes account”. A new report, called the domestic well-being statement (DWBS) shows the breakdown by categories and sub-categories for all changes, over any period.

The fantastic benefit of this is the visibility provided, as a basis for analysis and planning, and control for the future. The balance across the categories is clear and the split amongst the decreases across the sub-categories, is also exposed.

John has defined a new set of domestic factors, to replace the business ratios. For example, the “basic cost of living factor” (BCLF) expresses the ratio of the amount of the basic domestic decrease, compared to total household increases, whilst the well-being contribution factor (WBCF) is the proportion of discretionary domestic decreases, compared to total household increases.

In the prevailing UK situation of a very severe debt crisis, the new approach, almost in passing, provides the visibility on the state of a family's financial affairs required to provide warnings of potential difficulties. With this, the appropriate, defensive actions can be taken to prevent falling into the debt trap. For those already experiencing some debt, the new methods provide the necessary visibility on their finances to facilitate the required planning and control, required to best manage debt recovery.

If people realised the extent and value of the average, domestic, cash turnover, in the course of a lifetime, it seems amazing that serious, financial management is not already, demanded. If an equivalent, small business, with similar turnover was not effectively managed, the owners would probably have shareholders, accountants and DTI, knocking on their doors.

In his book, John Passmore provides the necessary background and information for anyone to get started with setting up and running their own, domestic accounting system. He uses Microsoft Money and a spreadsheet package but any accounting package that offers support for categorisation of transactions could be used. With basic computer literacy and access to a computer for bank statements, John believes that benefits are potentially available for a family or domestic situation with a shared annual income, of around £20,000 and upwards.

A sense of personal responsibility towards the members of any domestic, family situation and their financial activities, is paramount. The benefits are that with the accumulation of a few months' worth of figures, a realisation of the actual spread and balance of the family outgoings will become apparent. The whole purpose of the exercise is to achieve an overall and improved sense of domestic well-being. He says that accounting in itself, will not achieve this. Discipline will be required to change spending patterns to obtain the desired changes.

John believes the new methods have the potential to be adopted, eventually world-wide, as a formal, sub-discipline of business accounting. With such recognition, the motivation for appropriate investment from industry and the state becomes real. From this, improvements in software support, the further calibration of the new domestic factors and the creation of an associated training infrastructure can all be further developed and refined.

He proposes that in time, such methods should become a normal part of the school curriculum. Through this, youngsters will be able to achieve the best possible foundation to accept and take on the financial responsibilities that are associated with success, in modern domestic life.

About the author
'Accounting for a Better Life' by John Passmore is to be published by Troubador Publishing Ltd. Further information can be found on the author's web site at www.dwba.co.uk

We are always keen to hear from any other members who have published any books on accounting or indeed any other subjects recently. Please email the editor with details.

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