# The Income and Expense Statement

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```					The Income and Expense
Statement

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Remember the balance sheet is a snapshot (like with a camera) at
a point in time. Captured on the balance sheet are the assets and
liabilities of a person or family (in the context of personal
finance.)
The income and expense statement (I&E) is a document that is
prepared using amounts accumulated over a time period like a
month or a year. A video recorder would be needed to view the
happenings over time.
The I&E statement is conducted on a cash basis, but this really
means coin and currency payments as well as checks we get and
write out.
On the I&E statement we will pay attention to income, expenses
and the difference between the two.

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Income
Common sources of income           On the I&E statement
Wages                              we should put the gross
Salary                             income amount. This is
Self employment income             the amount before taxes
Bonuses                            and the like is taken out.
Commissions                        We will account for the
Interest and dividends on assets   taxes and the like on the
Proceeds from sale of assets       expense side.
Pension or annuity income
Social security
Rent
Grants
Tax refunds
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Expenses
Major categories of expenses include
Living expenses, asset purchases, tax payments and debt
payments.
Note that some of these expenses are fixed and some are variable.
Only account for expenses where a cash outlay has actually
occurred. So if you borrow to make a purchase, do not include it
on the I&E statement.

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On the balance sheet we had an equation for net worth. There
is a similar calculation for the I&E statement.
If income minus expenses > 0 we say there is a cash surplus,
and
If income minus expenses = 0 we say income = expenses, and
If income minus expenses < 0 we say there is a cash deficit.
An Interesting Connection
A cash surplus on the I&E statement means that the balance
sheet will show an increase in the asset cash (or checking
account balance.) Then the individual may want to change their
assets mix.
Similarly a cash deficit will show up as either an asset decline
or a liability increase or a combination of the two on the
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balance sheet.
The Savings Ratio – svr for short
Svr = cash surplus/income after taxes.
Note if you have a cash deficit you are in deep dodo (not
necessarily) and this ratio doesn’t really matter.
Let’s do some investigating, ok?
Cash surplus = income minus expenses (> 0).) Remember we
said make income gross and we take taxes as an expense. So the
cash surplus can be written
Income after taxes minus other expenses. So
Svr = 1 – [other expenses/income after tax]. So, if your other
expenses are eating up, say 80%, of your income after tax, then

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The Debt Service Ratio - dsr
dsr = total loan payments/gross income.
Note the calculation is made with a time period in mind, like a
month or year.
This ratio is just keeping track of what % of your income is
going to pay off loans each month. The authors say a value of
.35 or less is the good range.
Would you give a loan to a person who has a dsr of .5? If you
give them a loan the ratio would rise. Remember people have
living expenses as well. So the higher the ratio here the less
folks have for living expenses. The person might have trouble
paying off the loan.

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 views: 3650 posted: 4/7/2009 language: English pages: 7