Double-Entry Accrual Accounting for Personal Finance

So I started to put together my family’s finances recently. I thought about using some fintech solution. Ultimately, in my data nerdliness, I landed on using double-entry accrual accounting principles to look at my finances through. At first, I thought to myself, “I should use some fintech account aggregator”; but then I thought, “Wait, they are giving that service away for free. I must be the product”. Then I started to look into it some more, and holy cow. The shameless shady data usage.Okay, it isn’t too shady. They just use your personal finances to figure out whether or not they should push credit cards, loans, and other stuff. Which let’s be honest, is standard fare these days.

The other problem was that this didn’t give me nearly as much insight into my finances as I wanted. The big problem was that most of these aggregators suck at detailing your financial position. Most of the time, they are little more than a global check register. They won’t alert me that my car has depreciated to the optimal selling point, and that I should start looking for a new one. They won’t be able to tell me which investments I’ve made over the last year have contributed the most to my cashflow. In short, they kind of sucked.

So I started trying to build one. I did this project a few years ago, actually, it was more like a decade ago. I did it in microsoft access. Yeah, that microsoft access. I built my very own personal finance app in microsoft access, from the ground up. I used it for about 3 months before I discovered a bug, and that bug kept growing and causing issues for me. It had this problem where it was causing some of my numbers to be off every month. This was of course before I knew anything about programming. So my balance sheet, slowly drifted from reality into something that didn’t make any sense.

So I wanted to totally redeem myself, and build an app. Sort of like I did with Skinnier Me to get myself into physical shape. Well, I began looking into what other competitors were offering, and someone had built what I was looking for and giving it away for free. Plus it had features that I didn’t even know that I wanted. So I decided to use the thing from someone else. I’m talking about gnuCash.

So what does gnuCash do for you?

It is a double-entry accounting system that was built as open-source software. That means you can crack the hood open and tinker around with its inner workings, but more importantly it means you can download it for free.

If you are looking for a simple budgeting app this isn’t the right choice for you. The reason to go through the hassle is to get detailed, accurate data about your financial health.

It let’s you do things like split your transactions up between different categories. A good simple budgeting app will let you do that. It also lets you do things like track depreciation of things that you have bought, like that new printer, or the new tablet that you bought. That way you can see how your net worth changes. It let’s you get as detailed as you can about your finances, so that you can analyze them in excruciating detail. That is what I wanted, because I am super nerdly.

That brings up the next point. You then have a choice to make, do you want to follow a cash-based method, or do you want to do an accrual-based method. Both of them have their pros and cons. I opted to set up my accounts as accrual accounts. Which means that I now have some interesting things on my personal balance sheet like accounts receivable and accounts payable. Honestly, it is a little overkill for someone like me to do this.

Here is the idea, when a bill comes in the mail (or more likely, email these days) you immediately post the expense and you fund the expense with your account payable. I also post my income in a similar way. For regular pay, I should post the income and send it to my accounts receivable, and then a separate transaction goes to my bank account from accounts receivable. Honestly, this level of detail is too much for even me. However, there is one aspect of my income that I do this exact thing for. That is for my PTO hours that I have accrued at work. It turns out those are a valuable asset that I want to track on my balance sheet, so I do.

Accrual accounting also helps if a friend buys you lunch and you commit to buying next time, drop that into your accounts payable, or vice-versa, if you pick up the tab, and your friend says they’ll buy next time, you can drop that into your accounts receivable. (Actually, don’t do that. The first one is fine, that makes you a good friend paying back a buddy. The second one makes you a transactional jerk, but the point is that you can track these things.).

This is accrual accounting for you. It is more complicated, and honestly, recording the transactions correctly is a bit of a pain for the average Joe like myself. So that begs the question:

Why should I use accrual accounting personally?

Honestly, I’ve been wrestling with this myself since I started doing it. If you start to do it, you will have to answer your personal why. It is a bit more work than simply recording the exact outflow. I don’t even think it is more accurate. In some ways, like from a cashflow perspective, it is less accurate.

Here is what I landed on. There are things that I buy that have value. Things like tablets, printers, cars, and other things. They continue to have value even after I pay for them, even if they don’t have value to anyone else but me. I want to know how much of that money is left over, since likely these things will lose value. So I want to track them, and I can only do that via the accrual method for those. There are also other things that I prepay for, like car/home insurance, life insurance, sometimes HOA dues and other things like that. Someone owes me these services. I don’t want to lose track of those. When a bill comes in the mail, I don’t want to drop the ball and not pay it, so I track it on my accounts payable.

It gives me a better sense of where I am, and how I am moving financially. It also gives me pristine data so that I can forecast, and do other things with. I can analyze my cashflows, and I can know what it actually costs to keep my family going per month.

Oh! That is a huge benefit right there. The accrual method is like taking the average of your monthly expenses. It let’s you smooth out those random big ticket items and get a sense for how much it actually costs to run your household. I think that is why I am doing it mainly. For me, accrual accounting for personal finance is a data cleaning hack. It just ensures that my numbers that I use to estimate my life expenses are correct.

I think that the thing that surprised me the most was since I started to depreciate my personal property assets, how much my stuff was actually costing our household every month.