Income and expenditure statement

From Financial Literacy Wiki

The personal income and expenditure statement actually measures a person's financial health over time usually a month or a year. It summarises the income earned and expenditure incurred over the period of time. Take note that the personal income and expenditure statement is recorded on a cash basis, meaning only cash transactions are recorded. The three components of the personal income and expenditure statement are income, expenditure and cash surplus/deficit.

Cash Surplus/Deficit

If your income is more than your expenses, then at then end of the time period, you will end with a cash surplus. This surplus would represent your savings. You can then use this savings to reduce your liabilities or purchase more assets to increase your net worth. On the other hand, if your income is less than your expenditure, you will then have a cash deficit, signifying that you have overspend. If you are facing a cash deficit, you might need to draw down your savings or increase your borrowings or sell your investment and assets.

It is not unusual for you to occasionally encounter cash deficit for some years. They usually occur in years where you make major purchases. However, if you encounter cash deficit for several years in a row, then it means that you are not managing your finances well. You should start looking at reducing your expenditure or increase your income sources.