How do you record and measure your family’s wealth in a comprehensive way?
Thomas: It is time to put together everything we’ve learned so far about accounting. Time to solve the Hudsons’ problem and show them how to record and measure their wealth in a comprehensive way.
Sarah: Yes! I’m excited.
Thomas: You’ve all seen now that accounting is not rocket science. Anyone with basic mathematical skills and a grasp of a few definitions and concepts can do it. So, let’s get started.
The Hudsons’ accounting is based on the following concepts:
- The family will record and measure its wealth based on wealth units. Each family member is a wealth unit; the family business is a separate wealth unit, and there is also a general (common) wealth unit for transactions that cannot be individualized (or which they don’t want to be individualized).
- The Hudsons have decided to account for all their cash as belonging to their general wealth unit.
- They have decided to allocate most of their assets and expenses to the other wealth units (other than the general unit), individually.
- And, most important, they have decided to adopt my methodology to record and measure their wealth.
Sarah has been so kind as to provide us with a record of the family’s monthly transactions, as well as the opening balances of the most significant family assets and debt. Here is the way we account for all these transactions, based on our methodology:
Please read carefully through all the transactions and the way we have accounted for them. Note that each positive amount increases the family’s wealth, and each negative amount decreases it.
And now, from this transaction entry table, we are going to prepare the Hudsons’ financial statements:
Ann: That may seem like a boring job to some, but to me, it looks quite useful.
Thomas: I agree. The general conclusions we can draw are that the total family wealth is $161,000, and you were able to generate $15,800 of new wealth in just one month. The sources of monthly wealth are John’s salary, the family business and the market re-valuation of the family’s apartment.
Sarah: Not bad. I am not included in this report only because I didn’t go to the mall this month. Wait and see the next month’s reports.
Sri Humana: I have also asked the family to make a report – a report about things they cannot measure with money. I asked them to rate their most valuable unmeasurable assets. I asked them to rate these assets as they stand right now, compared to what they would like them to be. This is all subjective, but it is still important, my friends.
Sarah: We can see the bigger picture now.
Sri Humana: All that we see is limited by our imperfect tools. Looking within ourselves, we can find all the answers we are searching for.
Some questions for you:
- What other conclusions could you draw from the Hudsons’ financial statements?
- Do you think the statements are useful?