My journey in personal finances started with Excel Based Expense Tracking System I Instituted in October 2007. Back then I had no knowledge of double-entry accounting hence dabbled in products like Quicken, Microsoft Money, YNAB etc…(Microsoft money review) My entry into MBA in 2009 opened gates of double entry accounting. Since I hadn’t grasped the concept intuitively back then I couldn’t implement it in personal finances. By January 2013 I caught on to very powerful package called GNU Cash. The accounting equation in me had been drilled deep and I could start my double entry accounting journey. I wrote an article on double-entry accounting and its powers in personal finance tracking.

This post is about personal and business accounting. The similarities and differences. The rules of debit and credit are the same for personal and business accounting. The difference is in gaze. Personal Accounting focuses on CRATON (Corpus Ready At the Time Of Need). Business accounting focuses on proper fund utilization & for wealth maximization.

Personal and Business Accounting

The personal accounting looks after an individual’s financial snapshot. As it focuses on Individual’s finances, there will be an increased gaze on Incomes, Expenses, Assets, and Liabilities. The Equities which form a big part of businesses goes by the name of Net Worth in personal accounting. Apart from that, the Networth plays a mere placeholder role in personal finances. Because of its placeholder role it even goes without any transactions made to it. This changed gaze of personal accounting goes by name CRATON (Corpus Ready At the Time Of Need). A person saves to fulfill a need in future.

Accounting Period

The CRATON focus also changes the Accounting Period Conventions and Time considered as Accounting Period. A person normally sees his finances in Month over the month accounting period. Whereas businesses view it in Financial Year terms. Also, the accounting constructs of closing and opening of accounts are totally useless in personal accounting.

P&L Report

In personal accounting, the notion of profit is also varied. If the person spends after saving (like me), the profit and loss figures can be viewed for the year or for the quarter. Whereas, If a person has one bank account. saves after provisioning for all the expenses, the profit and loss figures have to be calculated monthly for him. (PS: financial situations of 1 bank account and save after spend are also indicators of very precarious financial condition)

Accounting

The Current Assets ledger records the transactions. The Cash Wallet, Bank Accounts, E-Wallets are different kinds of Current Assets in personal finances. The fixed assets comprise of Vehicle and House (despite them actually being an expense). The Goal-Based Investments are a category in themselves. Instead of being lumped into current assets, they get own category. In the case of Investments, the required corpus is matched to the goal’s current accumulations. This matching helps to ascertain progress. The emergency corpus (despite having its own goal) is placed in Current Assets.

In business accounting, its customary to write “Debit some account to something”. The ‘to’ part is called the credit side. It’s indented a bit. The Journal records these transactions. Whereas, In the case of personal accounting, Current Assets and Liabilities ledger record the transactions. As a result of that, Credit side starts with ‘from’ or ‘by’. Similarly, The debit side starts with ‘to’. Likewise, the credit side in personal accounting acts as the source of funds. Similarly, The debit side becomes the destination for the funds.

Similarities of Personal and Business Accounting

The variations in personal and business accounting is because of the gaze. But the principles of accounting is the same for both. Similarly, the assets side strength determines the safety. More unencumbered assets signify safe operations for businesses as well as a person. Similarly, in a company higher cash hoard signify lack of investment avenues. Same is the case with individual too. The companies are formed with a goal in mind. This shows up as the vision statement. Similarly, investments of an individual too have goals like retirement etc…The debt and inflation kill both business and person. maddening Inflation erodes the purchasing power of the consumer. This, in turn, affects the demand for the company’s products.

Conclusion

Hope, this article helped you in understanding the nuances of Personal and Business Accounting. Along with things to focus, if you are doing either one of those.

Your Focus determines your reality.

Qui-gon jinn