Topic 3
Bookkeeping format and local bookkeeping practice
Recording of income-expense transactions in the account book can be made in several formats. At least income-expense information must be recorded. For enhanced efficiency, recording must be made regularly and actively. Recording deals only with writing down income and expense transactions by using, for example, a plain book which is easy to find. The book page shall be divided into 2 sides, left and right.
- The left side represents transactions related to income or monetary receipts of the family
- The right side represents transactions related to expenses or monetary payments of the family.
“Left is Income and Right is Expense. It’s so easy to remember!”
Examples of formats of the household income-expense account book and others as well as descriptions specified therein:
Income side
Field 1: Date For recording date,
month and year of
receipt of money
Field 2: Income Transaction For recording all income transactions occurring
Field 3: Income Amount For recording the amount of money received as per each
transaction (as per the second field)
Expense side
Field 4: Expense Transaction For recording all expense transactions
Field 5: Expense Amount For recording the amount of money paid as per each
transaction (as per the fifth field)
Field 6: Savings For recording the intended savings amount. The savings amount shall be deducted as expense from the income amount from the beginning. This is to cultivate a savings habit and to manage spending. If, at the end of the month, there is still a remaining amount of money, it can be added to the savings amount.
Example 1: Details of recording of income and expense transactions of a family named “Chai Po Pieng” in February 2011 are as follows:
2 Feb 2011 Receive salary as of January amounting to 10,000 baht
3 Feb 2011 Deposit money at bank amounting to 1,000 baht
4 Feb 2011 Repay house loan installment amounting to 3,000 baht
5 Feb 2011 Pay phone bill as of January 2011 amounting to 175 baht
6 Feb 2011 Pay water bill amounting to 200 baht and electricity bill amounting to 450 baht
10 Feb 2011 Receive proceeds from sale of old newspapers amounting to 50 baht
15 Feb 2011 Pay for child’s lunch worth 1,000 baht
20 Feb 2011 Pay for household supplies and bathroom accessories totaling 1,750 baht
22 Feb 2011 Pay for beauty treatment worth 200 baht
28 Feb 2011 Pay for fuel worth 700 baht, clothes worth 750 baht and wedding gift of 400 baht for a friend’s child
After recording all transactions of a particular month, all income and expense amounts will be tallied. Thus, we will know the total spending of the household. Whenever the total expense amount exceeds the total income amount, rectifying actions must be undertaken, for example reduction in unnecessary expenses. This would ultimately enable accumulation of savings. If such a practice is carried out continuously, the family would become successful.
For example, if a few days after receipt of salary, there is little money left in the account. The reasons for the missing funds cannot be identified. Finally, the only thing one can do is to use the calculator to calculate if the remaining amount of funds would be sufficient until the end of the month. This situation could be avoided if we prepare the income-expense account on a regular basis.
However, bookkeeping does not deal only with the recording of income and expenses. As regards families whose income is not earned from a salary-based profession such as a food seller, hair stylist, dress maker, auto repair garage, fish farming, hydroponics vegetables growing, horticultural farming, crop farming, rice farming, etc., preparing an income-expense account book would not be enough. Therefore, in order to facilitate the calculation of costs/expenses and income related to each profession and the consideration as to whether to enter into each profession, it is necessary to prepare a “record of costs and profits of practicing a profession”.
Costs of practicing a profession include costs related to materials and equipment, land, plant variety, engagement of labour, soil preparation and improvement, food, loan interest, etc. Certain items involve long-term costs or investments and continuous operations such as fish pond, building, rice silo, dining table, kitchenware, auto repair equipment, cloth making equipment, etc. Also, there are other expenses that must be calculated and recorded as costs of practicing a profession such as depreciation, amortization, and one’s own labour expenses.
Direct income from practicing a particular profession includes, for example, income from the sale of vegetables, fish, rice, chicken manure, rice straw, corn husk, making of clothes, sale of food, etc.
“In the case of receipt of a government support and its value or monetary amount can be determined such as a support in the form of digging a fishing pond, fish feed, fish species, chicken feed, etc., the amount shall be recorded in the “Costs” field or the “Long-term investment” field, as the case may be.
Field 1 Profession
This field is for recording the type of profession based on the activity the costs of which are to be recorded, such as raising chicken, fixing cars, sale of food cooked to order, rice farming, crop farming, etc. Each book represents each profession.
Field 2 Date
This field is for recording the date, month and year of receiving an income or paying for costs and expenses in practicing a profession.
Field 3 Transaction
This field is for recording various types of transactions as follows:
A. Income from practicing a profession including details of sources of income
B. Expenses considered costs of practicing a profession including details of what is paid for
C. Long-term investment allocated as costs
Field 4 Income
This field is for recording the amount of money received as income from practicing a profession as per each transaction (No. 3).
Field 5 Cost
This field is for recording the amount of money paid as costs of practicing a profession as per each transaction (No. 3).
Field 6 Long-term investment
This field is for recording the amount of money paid as investment in practicing a profession. It involves purchasing or constructing items with a long length of service and high price such as costs of a water pump, auto fixing equipment-tool, dining table, digging a fishing pond, constructing hen/cow pens, etc.
(Example) Details of receipt – payment of Mr. Srethi from 1 May 2010 to 30 November 2010 are as follows:
Date 1 May 2010 Receive loan from Tung Kula Cooperatives Limited.
20,000 baht
1 May 2010 Buy shares 1,000 baht
2 May 2010 Buy a tractor 8,000 baht
5 May 2010 Buy rice variety 1,000 baht
10 May 2010 Pay for wages 3,500 baht
20 May 2010 Buy herbicide 500 baht
21 May 2010 Buy herbicide sprayer 1,200 baht
22 May 2010 Pay for doctor fee 90 baht
25 May 2010 Pay for child’s tuition fee 1,150 baht
31 Jul 2010 Receive proceeds from teacher worship rite 900 baht
31 Aug 2010 Receive proceeds from shrine removal 600 baht
1 Sep 2010 Buy lottery 700 baht
31 Oct 2010 Buy soap, toothpaste and powder 200 baht
1 Oct 2010 Receive proceeds from sale of paddy rice 40,000 baht
2 Nov 2010 Repay loan to Tung Kula Cooperatives Limited 20,000 baht
2 Nov 2010 Pay loan interest 1,420 baht
7 Nov 2010 Receive proceeds from sale of rice straw 1,500 baht
10 Nov 2010 Pay for alcohol 2,000 baht
30 Nov 2010 Pay water-electricity bills 140 baht
Pay for one’s own labour cost as of May – Oct 2010 11,040 baht
Example of recording of transactions in the account book related to costs and profits of rice farming is as follows:
Depreciation of assets shall be realized as expense in preparing an account book related to costs of practicing a profession. The formula for calculating depreciation per year is as follows:
The same formula for depreciation calculation applies to the case of buying a herbicide sprayer with a useful life of 5 years. Therefore, the depreciation per year of the sprayer is 1,200 ÷ 5 = 240 baht. Thus, the depreciation shall be realized as expense each year.
Recording of depreciation as costs of practicing a profession in the cost and profit account book may be done on a monthly basis, a periodical basis or a seasonal basis as appropriate. In calculating costs and profits related to each profession, for example flower cultivation, the depreciation of the sprayer shall be realized on a monthly basis when flowers can be cut and sold and calculation of profit and loss from sale of flowers is done on a monthly basis.
Cost to be amortized
This refers to a high amount cost required for the establishment of an operation of a profession and is beneficial for several seasons. Examples of such cost is the cost of fishing pond digging, cost of land improvement for fruit farming, etc.
The cost to be amortized, when paid, shall be recorded in the cost and profit account book in the “Long-term investment” field. At the time of calculating and allocating the cost to different time periods or seasons, the amortization expense per each period or season shall be recorded as costs of practicing a profession.
Own labour cost calculation
As agricultural professions or other professions may require labour of family members, it is recommended to calculate labour cost of oneself or people in the family and to record it as costs of practicing a profession. In this regard, the wage rate shall be based on the local rate and the labour cost shall be realized on a daily or monthly basis in the cost and profit account book. If a particular profession involves several activities, hence several cost and profit account books, one’s own labour cost shall be allocated to each activity on a pro-rata basis.
Allocation of expenses as costs
In certain professions, there might be several activities amongst which expenses can be shared. To ensure that the calculation of costs reflects the actuality to the greatest extent, it is recommended to allocate such shared expenses as costs of each profession on a pro-rata basis in the cost and profit account book. Such expenses include loan interest, fee for delivery of produces for sale, labour cost for grass removal, etc.
Profit or loss is derived from comparing income with costs. The definition of profit and loss may vary from context to context as follows:
The steps of calculating profit and loss are as follows:
Step 1
Determine a fiscal period or year in which profit and loss from practicing a profession will be calculated.
Step 2
At the end of the period of practicing a profession, calculate expenses which are not paid in cash and are realized as costs of practicing the profession in that period, for example depreciation expense or receipt of support from several projects which should be determined in monetary terms. Should there be use of labour of family members, calculate labour cost of each profession on a pro-rata basis. Information from the cost and profit account book shall be used in the calculation. These costs shall then be recorded in the cost and profit account book.
Step 3
Tally income items and cost items in the cost and profit account book. Compare the total sums to derive a profit and loss result.
Step 4
Subtract the total sum of costs from the total sum of income. The result is a profit or loss from practicing a profession. Income exceeding costs will result in a profit while costs exceeding income will result in a loss.
Step 5
Divide the profit by the number of months of practicing a profession (each activity), the result is an increase in income of the household each month.
According to the profit and loss result, those practicing a profession will be able to know the amount of profit or loss and whether there is sufficient amount of funds for use within the household. The result will also show whether there is sufficient money for further investment in the next period.
The calculation of profit and loss will be based on transactions recorded in the cost and profit book account of each profession. Example of the calculation of the profit from rice farming of Mr. Srethi is as follows:
Errors found in bookkeeping
Errors in bookkeeping may be caused by misunderstanding related to accounting items. For example, people may misunderstand that liability items are income items and thus do not set aside a reserve for debt repayment. When we borrow funds from other sources to support financial needs, although such items are viewed as receipt of cash, they are not considered income items since there are obligations to repay the principal and interest. If such liability items are mistakenly recognized as income, this would cause a financial mismanagement. Therefore, when items involve receiving funds with conditions that repayment must be made within a specified time frame, whether with or without interest, such items shall be presented as liabilities to be repaid. For example, when receiving funds under a securitization project, this transaction would be considered as income or liability or even equity which is equal to income. However, principally, such item is considered a creation of liability because the received funds are not free of charge. Actually, the recipient is obliged to repay such funds within as specified time frame. Therefore, the said transaction involves the creation of liability through the use of intangible assets as a security against a loan.
Human errors such as mistakenly adding or subtracting numbers or failure to completely record accounting transactions may be solved by reconciliation of the outstanding balance as per the account against the actual balance of cash and deposit at bank. If the outstanding balance as per the account equals the actual balance of cash and deposit at bank of the household, it may be concluded that the account is correctly prepared. However, if there is any discrepancy, there may be some errors in recording transactions in the account or cash may be lost.