On your journey to financial liberation, proper accounts must be kept; this brings about the idea of personal accounting. This has to do with budgeting, keeping of proper records and filing of annual federal income tax. For a person looking for financial liberation, a budget can serve as a very useful tool. Before we go further, let us first describe what a budget is. A budget sets out the cost and revenue that are expected to be incurred or earned in the future. It is backed up by figures, so it can be described as a quantitative expression of a plan of action prepared in advance of the period to which it relates.
Budget is not only meant for organizations, it can also be utilized by individuals who seek to plan their future expenses and revenue, so as not to overspend or under save. The main aim of a budget for individuals includes:
- Planning for the future: The budget helps the individual in determining his sources of revenue, and his spending limit. It aligns the needs of the user with the user’s ability to meet them. In a budget, when revenue is forecasted, and expenses are higher than revenue, the consumer ranks his needs according to an order of priority so as to meet the more important needs first.
- Controlling costs: The user controls cost by comparing the plan of the budget with the actual results and investigating significant differences between them.
- Promote savings: A budget promotes savings because the outlay of total revenue is given and also the outlay of total costs. The user works hard to meet this budget, and when they do, they reward themselves by saving the difference between total revenues and total costs if positive.
Proper records should be kept to keep track of your spending and receipts. A budget cannot be complete without the keeping of records to analyze what money has been spent on, and the amount of money spent thereof. Keeping of proper records is also useful in reconciling accounts. Normally the bank sends statements at the end of every month. If proper records are being kept, you can compare what are on your records with what the bank sends as your statement of account. Nowadays, you do not even have to wait till the end of the month for your bank statement. With the advent of online banking, statements of account are readily accessible through internet banking.
The process of reconciliation is fairly easy; you note any charges in your bank account that you haven’t recorded in your books. Some of these can include ATM fees, overdraft fees, bank charges, special transaction fees or low balance fees (if you’re required to keep a minimum balance in your account).
Also, you take into cognizance credit transactions which may enter into your account without your notice. Transactions such as automatic deposits, refunds, interest on deposits, and other electronic deposits are among.
Reporting of income is required by the IRS of the United states. Most people employ the services of a CPA (Certified Public Accountant) to help them with filing their returns; others do it by themselves. If you are doing it yourself, you need to understand some concepts in order not to file exaggerated returns and end up being over taxed. Such concepts include:
Income – any money you’ve earned from working or owning assets, unless there are specific exemptions from income tax.
Personal exemptions – There are some particular allowances from tax that gives the tax payer relief, in order not to be overburdened with tax. Personal exemptions are certain amounts of income that is excused from tax. Personal exemptions reduce the tax payer’s amount of taxable income.
Standard deduction – These are part of the allowances given. They may include personal expenditures or business expenses which can be deducted from your income to reduce the taxable amount of income. These expenses include items such as interest paid on your home mortgage, charitable contributions and property taxes.
Taxable income – This is the balance of income that’s subject to taxes after personal exemptions and deductions are factored in. Taxable income is the amount of income used to calculate an individual or company’s income tax due. A certain percentage is multiplied by it to arrive at the tax payable by the individual or company.