Part Five - Financial Statements

Income and expenditure accounts and balance sheets

Personal accounts

It is a salutary exercise to work out your personal budget over a period of, say, a year. A budget is merely a list of all items of income to be received and cash to be paid - in other words, it is an estimate of what your receipts and payments account would look like at the end of a year. Planning a budget can be a very useful device for judging what you can and cannot afford to buy.

A young man or woman just starting work at 18 or 19 might rough out figures on the following lines. Although the figure for basic wages is reasonably accurate, since the starting wage is known to be £44 a week, the figure for overtime is an estimate based on what others in the same firm have said they are getting. Payments for National Insurance contributions, income tax PAYE deductions and company pension plan contributions are reasonably calculated at current (2000/81) rates. The remaining items of expenditure are estimates.

Preliminary budget for one year

Money paid out £ Money received

NI contributions 144 Gross basic wages 2,288

Income tax 480 Estimated overtime 696

Company pension Interest on £200 in

contributions 108 building society 21

Board and lodging.

(living with

parents) 540

Fares to work 240

Carried over

1,512

3,005

Brought forward 1,51:

Midday meals 18(

Clothes 30(

Holidays 12(

Saving £20 monthly in building

society 24(

Spending money

(say) 25(

2,60:

Budgeted excess of income over

spending 40:

3,005

3,005 3,005

Let us assume that, after starting work, this person finds that some items of expenditure have been overestimated and others underestimated, but that on balance he still seems to be budgeting for a surplus of some £400. Assume that he decides to allocate some of this to an additional contractual savings plan of £10 a month in the index-linked National Savings, some to the purchase for cash of a transistor radio, and some to the purchase on HP of a motorbike.

At the end of 12 months he decides to prepare a proper account recording his actual performance regarding income and spending. He nets his wages (gross less deductions) and the take-home pay is easily worked out from his pay slips. Much of his expenditure is recorded in his bank statement and cheque counterfoils. He notices that his credit bank balance is £40 lower than it was at the beginning of the year. This is what his actual receipts and payments statement looks like.

• Insurance Exercise
• Capital Transfer Tax