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If I wanted to try the accrual method for my personal banking, how would I enter my salary?

For example, I get paid on the last Thursday of the month, and I pretty much know what it'll be. Should I:

  1. Add in the next year's worth of monthly salary payments to my current account.
  2. Add next month's salary each month.

Also, what if the value changes? For example I get a promotion or bonus, or if my job were partly or solely based on commission? Surely it's not acceptable to modify those existing "transactions"?

I'm wondering if I should have a separate "account" (imaginary rather than setting up an actual account, of course) for my salary? I could put the twelve months' worth of salary payments in there, and then as real money comes into the bank each month I "transfer" it to my current account?

I used salary for this example, but the same goes for any budget item - income and expenses.

Many thanks in advance.

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You wouldn't enter salary until you had earned it even with accrual accounting. I suppose you could book the unearned income to a sales account. –  JohnFx Dec 28 '12 at 3:01
    
Just because something is feasible does not necessarily mean that it is practical or worth doing, What gains do you foresee by using accrual accounting? What do you see as the benefits of having a separate imaginary account into which your salary accrues daily and then gets transferred over every two weeks or every month into your actual bank account? –  Dilip Sarwate Dec 28 '12 at 4:44
    
The benefit is that will learn how it works and how to implement it in the hobby software project I am writing. :) –  Neil Barnwell Dec 28 '12 at 8:17

1 Answer 1

You would add your daily earnings every day. For example, you work full time job (8 hours a day) at $20/hour. At the end of the 1st day of the month, you'd add $160 to your salary account. You've earned it, even though its still almost a month till you actually get paid. So its accrued.

What if you don't get paid? You've accrued it already, its on your books, but not in your wallet. You might have paid taxes on it, etc. But you don't really have it. This is what is called "bad debt", and eventually, after you can show that the payee is not going to pay, you write it off - remove it from your books (and adjust your taxes etc that you paid on that income already).

Generally, it is a very bad idea to use accrual method of accounting for an individual or a small business. For large volume business using accrual mode solves other accounting and revenue recognition problems.

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Excellent, thanks. So the idea isn't to put things in for the future, but instead to record a little and often as I accrue those earnings and then when the monthly payment hits, I transfer that amount over to my current account. Makes perfect sense. I guess there could be rounding errors affecting the pennies but generally by the end of the year the accrual account will have "seen" my full annual salary and closed at zero. –  Neil Barnwell Dec 28 '12 at 8:29
2  
You need to understand the meaning of accrual: it means that you've secured your right to be paid. A plumber secures his right to be paid when an invoice is issued. A plumber, thus, recognizes revenue at that time (if using accrual basis). An employee secures the right to be paid any time he works. The employer must pay, employee doesn't have to bill for it. So you can go and add accrued salary every hour, if you want, and it would be fine. Why would you do that though? –  littleadv Dec 28 '12 at 9:08

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