The rich and famous got to where they are because of good expense management, and proper expense tracking is where it all starts. Almost everyone will agree that it is necessary to track one’s expenses in order to have good expense management. However, expense tracking isn’t as simple as it sounds, and there is a right way or wrong way to do it.
At its simplest, expense tracking entails writing down in a notebook the details and amount of each expense then adding up the amounts after a period of time. Many people now make use of automated online expense tracking tools which essentially asks one to do the same thing. What these methods do not consider is “how” to record expenses so that the record can be useful in expense management.
When all purchases or financial transactions were conducted in cash, listing down an expense worked perfectly. When the credit economy was invented, things changed and expense recording became more complicated. In a credit transaction, a person incurs an expense but does not give away cash as payment until some future time, usually with an extra amount on top of the purchase price.
In accounting, one can follow either a “cash” method or an “accrual” method in recording income and expenses. In the cash method of recording expenses, the expense is listed down only when cash is actually paid out (and income is recorded with actual cash is received). In the accrual method, an expense is recorded as soon as it is made even if the actual cash is given away at a future date (as in the case of a purchase made with a credit card). Each method has its advantages and disadvantages, depending upon the person and the situation.
Businesses, for instance, have a lot of employees and a lot of technology, therefore they will need not just standard expense management but also technology expense management. Businesses are required by law to use the accrual method in recording their income and expenses. Individuals, however, may choose one or the other.
What is important is not to mix them up. If a person decides to follow a cash method in an expense management system, then all expenses should be recorded on a cash method basis. If an accrual method is chosen, then all expenses should be based on an accrual method. This way, when summarizing expenses at the end of the month, for instance, nothing “falls through the cracks in the floor”.
Good expense management, therefore, requires not just expense tracking but the right and consistent method of tracking expenses.