Monday, 20 April 2009


This blog breaks the sequence of my on-going series of articles which is intended to provide summarised information about the material contained in my book ‘Accounting for a Better Life’, published by Troubador in 2007 – see for further information.

With the second anniversary of the book coming up in August 2009, I thought it might be of interest to put down some of my own ideas about the way-ahead for managing home and personal finances.

By managing and controlling home finances, I am concentrating on the idea of the background activity of knowing all about the state of the finances of a household situation.

From the early days when I started delving into managing my own personal finances, I always believed that this aspect of management was crucial to everything else that followed. The control aspect followed on from the basics of knowing what was going on in the present and how it might have changed from the past – so that there was a starting point for deciding if anything needed to be changed for the future. From this, it was a question of what needed to be changed, by how much and how to do it – and that is where the idea of maintaining the best possible balance came from in relation to a new focus to replace business profits.

I also recognise that there is another very important aspect of financial management which is all about financial products needed by a household – mortgages, loans, insurance, investments and so on - which is what most personal finance websites throughout the world seem to concentrate on.

I would say that management and control of home finances should be the pre-cursor to the selection and purchase of financial products so that affordability and that balance I mentioned can be best brought together.

It will also be vital that proper, appropriate and continuing advice be sought about the type and the choice of particular financial products throughout life; but that is not the concern of this slant on financial management and control.

Historically, most attempts at managing home finances have essentially been fairly ad-hoc – say over the last ten years - until quite recently. Prior to the arrival of personal computing, virtually no one would consider keeping manual accounts for a home or personal domestic situation. At best, hand-written notes would be all that people might attempts in conjunction with bank statements relating to their account at the local bank, indeed if they had one.

With the arrival of home computing, two products made a major (?) difference to the situation – spreadsheets and off-the-shelf personal accounting packages.

Spreadsheets probably made the most impact as they were and are, relatively easy for the homesteader to understand and use. The main sorts of uses would have been bank account reconciliation and simple budgeting as well as for example, analysis of utilities (gas, electricity, water, telephone, etc.) consumption and expenditure.

The accounting packages opened up more possibilities for those with some knowledge of accounting or for those with the necessary sense of responsibility to find out sufficient about accounting to ‘have a go’; and I suppose I fell into both of theses categories!

These accounting packages (and there were and are a number of them still available) were what I think if as bare-bones packages. They arrived ‘empty’ and you could start creating individual accounts as you needed. They were essentially, single entry systems as opposed to business double entry systems and some tried to provide a move towards home accounting with some pre-set categories available for associating transactions with different forms of income or expenses - salary, food, car, holiday etc.

Appreciating that business accounting must have much to offer for personal finances since it had evolved as ‘best of breed’ as the only and legally required way to manage business finances, I decided to follow this route and eventually came up with my new domestic accounting model with a new focus on what I called Domestic Well-Being (DWB). As a model it consisted of a structure for the transactions and associated reports that characterise domestic life – and more information about this can be found in my other blogs and at my website at .

In the years prior to publishing my book, I had quite by chance, chosen the Microsoft Money product on which to develop and first implement the new accounting model. As a bare bones package, this required that I get down to the intricacies of accounting in order to make it all work.

It was because I found this quite complex that I decided that another approach was needed to address the aspects of accounting that I found difficult and that was going to make it possible for me and others in the future to have any chance of making personal accounting viable. This turned out to be the new naming convention for accounts that I created and associated with an extended version of the accounting equation. By putting more emphasis for transactions on the ‘From’ and ‘To’ an account in order to keep the accounting equation balanced, I was able to get away further away from debit and credit.

Apart from their association with a bank account, I always found debit and credit extraordinarily difficult to visualise, especially for some of the more disparate accounts that might exist in a typical chart of accounts. I appreciate that accountants (like my son) have little difficulty with such concepts because they live and breathe debit and credit for over four years of their professional training; but that is not the same for amateur accountants who might be tempted to try to gain control of their own personal finances.

The problem for these amateur accountants today is that they cannot avoid having to know something about accounting. For a start, they have to purchase an empty personal accounting package and then have to set it all up, creating the necessary accounts, categories, reports and so on. At least with the techniques associated with the new accounting model, understanding of the bookkeeping – entering of transactions – is now relatively easy to understand. [Those who chose to get hold of my book avoid all of this as the attached CD provides everything they need for the particular product that I used so that they can be up and running from day 1 – the details of the starting position can even be added later].

There is an issue with the possible architectures for accounting packages which I discuss more fully on my website. Essentially, the association between the transactions and the components of the Domestic Well-Being structure is achieved by categorisation e.g. in Microsoft Money and by making a single entry system double-up as a double entry system, or by the more business oriented, nominal accounts approach, whereby a separate account is created for each category of income or expense. Two alternative approaches are therefore available but the single new model can be implemented on either of them. This shouldn't be an issue for the users but because the users have to become involved in implementation issues, some packages from this generation of accounting packages are distinctly, user unfriendly.

Again, as described in more detail on my website, I discovered ‘Personal Accountz’ since publishing the book which is an example of a personal accounting package based on the use of double entry and nominal accounts. It is fantastically easy to create and move accounts around in the structure and with ‘grouping’, means that the DWB accounting model can be easily implemented, such that the Domestic Balance Sheet and the Domestic Well-Being Statement (DWBS) that replaces the business Trading and Profit & Loss accounts, is always as up-to-date as the last transaction entered.

However both these solutions, with good graphics and the required reports are still accounting systems and users cannot avoid having to get to know a bare minimum about accounting. The advantage though is the tremendous visibility that is provided about the state of the financial affairs of a household or domestic situation; not only the current situation but with all the past records as a basis for on-going analysis in order to make decisions about how best to improve the situation. For this, budgets assume importance and some systems provide integrated budget capabilities with the ability to set warnings based on chosen levels of spending in selected categories with alarm bells as the limits are approached.

Another feature of the new model is a set of new ratios or factors to replace the over 30 rations used in business accounting. These will be of little use to begin with, apart from internal comparison on a period-by period basis, as it will require the accumulation of a base of statistics so that householders can begin to compare their figures with those of others in a similar situation, rather similar to business norms for different business areas.

What about the future? Well in the last few years, business accounting has and continues to experience a dramatic change towards online accounting. What does this mean? Well instead of buying an accounting package and having to set it all up and periodically update it as a new release is made available, the service is provided as Software as a Service (SaaS).

The software is centrally managed, setup, backed up and recovered, and updated by the vendor as users subscribe to the available services. They can log-on from anywhere and access the various modules needed to conduct their business. Accounting is only one such service and a whole host of other business functions are typically provided such as stock, payroll, invoicing, Customer Relations Management (CRM), Enterprise Risk Management (ERM) and so on.

Security is an important issue since business data is held centrally and requires absolute and guaranteed protection from unauthorised access as well as guaranteed online availability. Private individuals are likely to be even more wary of putting their personal financial data into the ether, or cloud as it is now known!

At the time of writing there are some 30 vendors worldwide providing these SaaS business accounting services. Some of them as new start-ups’ have concentrated on removing or at least hiding some of the mystique of accounting so that non-accountant sole traders, consultants and small business owners can concentrate on managing the business rather than worry about the accounting itself. Others have tended to move existing standalone systems to the online environment and have not perhaps utilised the potential power of modern software to take advantage of online interactivity.

Online SaaS has to be the next move for home and personal accounting!

I am aware of only one online personal finance system today, called Mint. It is a US site and is currently only available in the USA. Its emphasis appears to be the making available of individuals’ financial data so that third party vendors can offer financial products to users – not for me!

The debt crisis in the UK with trillions owed by households and the credit crunch whereby life generally has become extremely difficult for many people, has important implications if its resolution or easing is ever to be possible.

It all comes down to personal responsibility. Those who already have a sense of responsibility have no doubt tried to do something about avoiding or at least keeping debt to manageable amounts. This must involve doing whatever is possible to know about the state of personal finances. If easier ways of gaining control of personal finances became available, then it is most likely that responsible people would start to try to use them in increasing numbers.

How many responsible people are there in the world? I don’t know but surely it is far more than one might imagine – hundreds of thousands, millions – but most likely, a very large number.

There is a niche out there, waiting to be exploited!

For the vendors of online accounting, it would appear to be a relatively simple exercise to produce online versions of their business systems tailored for home and personal use. It would mostly be an exercise of cutting back existing features such as those for sales and purchasing (the heart of business accounting) with a new emphasis on income and expenses. Focus has to move from nominal account numbers to account names and some name changes for the reports. Graphics together with drill-down would assume more importance since the nature of a structure, such as the DWB structure, cries out for this form of summarisation.

For ease of use and with no auditing responsibility, data entry has to childishly simple with emphasis on re-use of previously entered information. Online access to bank statements means that statements from many UK banks can now be downloaded in well recognised formats. I still choose a semi-automated approach in order that I can remain in control of the data in my system and be aware of all the changes that have occurred; it is still necessary for me to associate some of the transactions to categories in the DWB structure but for many of them, the software can make the association so I simply click on ‘accept’ for each one. Bookkeeping is a relatively quick and easy process and might take up to a couple of hours a month – trivial compared to the visibility achieved on the state of home finances.

A first evolution of online accounting for domestic use would probably still look quite like an accounting system but could and should be very workable for the end-user subscriber. Publicity and advertising will be an important area here in order to attract people to this powerful new capability as an online service. Bookkeeping could be done on the way, to and from work.

A next generation service should evolve to a home financial management system. Accounts per se would be well hidden and the user would only have to relate to concepts such as assignment of expenses to categories and decisions on quantities of appreciation or depreciation on certain assets, perhaps once a year.

The focus would be on the results in terms of the reports, comparisons and graphical interpretations from the underlying data. The results of the decision making process would imply support for budgeting which is in need of improvements and could perhaps be linked to some independent systems now already available.

In time, it would be appropriate to see domestic accounting recognised by the accounting authorities as a branch of accounting in its own right, alongside business accounting.

The management of personal finance is so important today in the light of the debt crisis that there ought to be some degree of national, social responsibility alongside personal responsibility, to help people minimise their exposure to debt as well as assist with its management and reduction where it has already occurred.

The users of online personal accounting would not only be the end-user homesteader, but accountants looking after the private finances of their clients. Links to Income tax filing would also be a useful adjunct.

People, both voluntary and from business concerns, responsible for analysis and advice on financial hardship, particularly debt recovery would represent a further group of potential users.

There would be new opportunities in education, both at the school and college levels, as well as for adult education.

In conclusion, I believe that the time has arrived for personal accounting to be brought out in the open in comparison to its somewhat chequered and hidden past where it has been the province of the enthusiastic and dedicated amateur – witness the forums associated with the various personal accounting software packages.

Families throughout the world should be the beneficiaries with hopefully, better and more contented lives based on the income available to them.