Using Accounting Practically

A lot of accounting is used in running a business (well all of it really) but I thought it would be good to point out how Accounting can be used in our personal finances as well.  I am writing about a couple of things in particular, mainly budgeting, forecasting and break even analysis.

We need a budget so we can manage our finances so we know if we have enough money coming in each month to cover our expenses (and save a little extra) and forecasting so we can plan for any shortfalls which I’ll go into more detail next week.  This week I did want to talk about the practical use of break even analysis in our finances.

A break even formula looks like this: Profit = (Variable Income less Variable Costs) less Fixed Costs.  So where do you use this in your finances?  One obvious use is in budgeting.  If I have a job and I know there are certain expenses I am going to incur regardless of whether I go to work or not – primarily rent, electricity, phone etc.  Then there are the expenses that are job related (lunches, fuel, car/travel expenses) and there is the daily income that you receive from your job.

If I earn $300 a day and lunch/fuel costs $30 a day I can work out that every day I go to work I will make $270.  I have weekly fixed costs of $1080 so at the end of the week I will have $270 left over or $270 profit ($270 x 5 – $1080).   By doing this it is an effective way to work out how many days/hours I need to work each week (useful if you work casually) or how many sales I need to make each week (which is again useful if I run a business).

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