For personal finance, should I use the cash or accrual method?

Question

I can't believe I am even asking this....but am looking to do things right this year.

What's the best way to track my finances - cash or accrual?

For example, when I use my credit card in JAN, but pay it off in FEB, in what month should I realize my expenses? In JAN or FEB?

I have the same question for the receipt of my paycheck? I work in JAN, but receive the money 1/2 in JAN, 1/2 in FEB? I know my employer will issue my W2 based off the accrual method.

Lastly, how does this tie in with tracking my budget?

Thanks!

Answer 1

When I budget, I consider charges on my credit card exactly the same as spending cash. There is a 2-fold benefit to this: 1) I never spend money I don't have, because charges go directly against my current month's budget and 2) reconciling it to my budget is easy because it counts in the month I charge it. There is no difference between something charged on my CC vs my bank card, except I get points for using my CC.

My checks are figured into my budget as I receive them. Interestingly, my employer pays on a non-delayed schedule. I receive a check on the 15th for work through the 15th. However, if I were on a 2-week delay like you are (or my wife is), I *still* count the income in the month that I receive it. The benefit there is one again, ease of accounting (my budget coincides directly with my bank statement), and also the 'hidden' 2-week safety cushion.

When it comes to budgeting, I highly recommend keeping thing as simple as possible because that gives you the most simple and useful information, and is the easiest to keep up with.

Answer 2

For my personal finances, I use the accrual method. I use Quicken and have a separate account for all my credit cards and each week I enter all the charges I made for the previous week. The payment of the credit card bill therefore does not impact the bottom line since the expenses were already accrued. For my paycheck, I get paid monthly, but it is for the previous month's work. However, since my W-2 is done by what payment I actually receive (on a cash basis) I just record my paycheck as "revenue" in the month I receive it, even though this is not technically correct. If I was paid bi-weekly however, I think I would do some type of accrual so as not to distort the earnings pattern from month to month.

Also, I amortize my prepaid insurance policies (like car insurance) by initially setting them up as an other asset account. I also recognize depreciation expense for my vehicle each month and I split the interest and principal on loan repayments.

For smaller items, I just expense those when they are incurred. Also for utility bills, I just expense those when paid for simplicity, even though they are for the previous month's service.

Let me know how it works out for you. In the end, you will need to decide the method that provides the most useful information to you.