People consider accounting as the business’ languages and it is justified. At the individual level, accounting is the representation of the language of financial independence. But financial independence has its own explanation and accounting has a central role to play to achieve this particular goal. Needless to mention, that the businessmen in Hobart turn up to accounting services benefiting their financial independence.
The Definition of Financial Independence
Often being financially independent is the very idea the people tend to believe, that is the status, the people normally refer to, but for everyone, it is difficult to achieve. Thus, to break this thought down, the concept should be clearly defined. Financial independence can be achieved when a person can successfully achieve the following of the two scenarios:
• First, the Income Scenario
You need not work as the passive income sources are covering all your living expenses, and till the end of your life, it will continue.
• Second, the Spend-The-Savings Scenario
Your net worth exceeding your annual living expenses and being multiplied by the estimated years remaining of your life is defined as the spend-the-savings scenario. For instance, someone having $6,000,000 with 35 years to live, then he/she is financially independent if the person can live on $171429 approximately, per year.
Despite these following categories, an individual is likely to fall into an apparent commonality – to achieve financial independence, there is a need to work for supporting yours. Now the very next question that follows is how is it possible for a person to create a clear path and achieve such a status?
How is Accounting Defined?
To define this term accounting, the dictionary, it is the process or action to keep the financial accounts. The common view revolves around accounting implied to the business contexts, but the fundamentals are equally important and effective in relation to personal finance.
Alternatively, a layman belonging to the family level, the explanation of accounting is successfully answering the three basic questions:
i. Can your financial net worth be accurately assessed?
ii. Can you keep an accurate track of money coming in and moving out from your bank?
iii. Can the information derive from these two above questions used for setting and monitoring your progress for your financial goal in the future?
Accounting need not be a difficult topic for the non-accountant. At the fundamental level, accounting is all about understanding the net worth and cash flows and implying this understanding to set up and achieve the financial goals.
How Do the Accounting Principles Lead to Financial Independence?
Now since the two concepts are related to financial independence as well as accounting’s basic definition, then these two have to be tied together. As it has been already mentioned, financial independence is achieved upon either having a lot of passive income for covering your expenses for your remaining life, or your net worth permitting you to spend your expenses gradually for your remaining life, but still having your living expenses covered.
Both these are dependent upon one critical assumption, that is the ability to measuring the living expenses as well as the cash accurately and projecting to the future while covering these expenses. These instances can be easily achieved by applying the basics of accounting, and the accountants can help in this regard with their accounting services when hired from the best accountancy firm in Hobart.
a. A balance sheet is a clear explanation of your wealth accumulated or existing at a given time period. Through the balance sheets, you can financially stand and set out the foundation to plan for the future.
b. A profit and loss statement is beneficial in monitoring your income and expenses over the given time period. You get a clear sense about your living expense and the money you have that is coming in for covering these expenses.
c. A financial forecast includes everything we know regarding the present financial situation for estimating future results. Through the financial forecast, you can receive an informed estimate regarding your financial situation going ahead to the future, on the basis of your present situation as well as key assumptions.
Now, these terms are common for being used with the business financials, and they even provide a framework to the individuals for measuring progress towards achieving financial independence. You need to understand your personal balance sheet that is net worth as well as profit and loss, that income and expenses over a time period to chart a clear path to achieve financial independence.
Thus, from the discussion, it is clear that there is no need to view accounting as a foreign language. The basics of accounting should be strictly followed as a medium for facilitating to make a successful journey towards financial independence.