Master the art of Debt management

In making any purchase, you want that the item purchased must have a long term utility. However, while selecting the debt management technique a shift in the approach is quite noticeable. We find that short term debt management techniques like debt consolidation loans are much greater in use. Nevertheless, this is not double standard on the part of people. The choice is mostly influenced by the immediate pressure of debts.

Debt settlement techniques, which have a longer standing effect, are the rule of the day. People know them by the name of debt management in the UK. Debt management aims to strike at the roots of debt, instead of simply countering the after effects of debts. When debts are not allowed to increase, the use of debt consolidation loans and other short-term debt management techniques become redundant.

Why is debt management preferred to have a longer effect? The realisation is the result of people accepting that debt consolidation loans can give succour for only a time being, but not for ever. Even when borrowers are able to pay all the debts at a particular point of time, is there a guarantee that debts will not arise again? What shall one do at that time? Taking a new debt consolidation will not be a viable solution. The loan providers will be the first to deny loans to borrowers who have grown a habit of borrowing. And what about your home against which the loan is taken? Will it have sufficient equity left to be used for any other purposes? No! These are the reasons that have pushed borrowers towards seeking long term debt management.

Certain borrowers are perplexed at the inclusion of debt consolidation loans in debt management, when the debt management agencies themselves say that debt consolidation loans are of not much good. To this the debt management agencies reply in the following manner; “We do not recommend the total ban on the use of debt consolidation loans. What we recommend is a ban on the misuse of debt consolidation loans.”

Debt consolidation loans are rampantly used in the UK. It is because of the ease with which people are able to draw debt consolidation loans that people have started spending rashly; thus being further weighed down by debts.

Debt management agencies have come down on this habit of the people of the UK. Since debt consolidation loans abet people in taking more debts, debt management agencies also criticise debt consolidation loans.

Debt management makes a planned use of debt consolidation loans. Compare the situation with an ailment that a person is facing. Debt consolidation loans will be like a surgery to be performed. However, doctors will first try to cure the ailment through oral medication. The oral medication is to be given through debt counselling. Only when oral medication is not able to cure the ailment, doctors will suggest surgery, i.e. debt consolidation loans.

Debt counselling is referred to the advice to borrowers about the manner in which they can cure a debt problem. The advice is not general in nature. Debt counsellor, who is an expert, will sit with the debtor during a few sessions to discuss the details of the debt problem. When debt problem is at its preliminary stage, it will require efforts from the borrowers own side. Debt counsellor offers certain suggestions through which borrowers can bring upon a marked change in their finances. Debt management agencies have given a new look to certain age old principles of coping with debts. It is these principles that are made use of to inculcate debt sense in borrowers.

It is during these sessions that the debt counsellor will access the use of debt consolidation loans. The factors that will be considered while making the decision are as follows:

• What is the amount of debts that the debtor owes to one or different creditors?• Does the borrower have sufficient available income to repay debts on his own without using debt consolidation loans?• The nature of the debts- whether debts are accruing higher interest rate, and if they have already reached their repayment date.

The various tips that you learned during the debt management process must not be forgotten during repayment of debt consolidation loans. While debts owed to creditors have been settled, you continue to owe to the loan provider. Never must the borrower relax until the final instalment of debt consolidation has been made.

Cash Accounting or Accrual Accounting

The tax authority require bookkeeping records to calculate the tax due. The choice for small business is basically cash accounting or accrual accounting each of which has advantages and disadvantages.

The date of the sales invoice and the date of purchase invoice are known as the tax point. The tax point does not determine the spread of that transaction over the tax period which can be different when accounts are prepared on an accruals basis as opposed to a cash basis.

For the purposes of cash accounting the effective inclusion of the transaction in the financial records is the date the cash or bank receipt or payment was made. The tax point date on the document is not the deciding factor to include the item in the accounts. The date the amount was paid out or received into cash funds or bank account is the date to be used fopr inclusion in the accounts.

There are disadvantages to maintaining accounts on a cash basis in that records must be kept of all payments received and paid out and those records supported by the actual primary accounting documents to which they relate. That entails matching the financial documents to the payments and receipts records, a feature many small businesses might find onerous as record keeping ios often regarded by samll business as an administrative burden.

Virtually all professional accountants adopt an accruals basis for clients accounting purposes as it is based upon recording all financial information whether relevant to the tax period or not and then adjusting the management accounting profit indicated to produce the net taxable profit or loss.

By operating an accruals basis all financial documents are recorded according to the tax point date. If every transaction was paid or received within the year then the cash accounting and accruals basis would produce the same tax accounts.

The main adjustment a small business or the accountant might make to accounts prepared on the accruals basis is to first prepare the set of accounts according to the tax point of the primary accounting records and then examine those transactions and adjust them according to their relevance to the financial period for which the accounts are being prepared.

A typical example of the difference would be the rent invoice for the business premises. Let us assume a quarterly rent invoice was received dated 1 December for the 3 months from December 1 to February 28 which was paid by the small business owner by cheque on December 31 and a year end date also of December 31

On a cash basis the rent would not technically be included in the accounts as it would be shown as a rent payment from the business bank account on January 2 or later if cashed by the recipient at a later date. Therefore that quarters rent would be included in the following year accounts not the current year as issuing a cheque is not a payment but actually a promise to pay.

Assuming the rent was paid in cash prior to the 31 December then the whole 3 months rent would be included in the current financial year. That treatment may have distorted the accounts as more or less than 12 months rent might have been included in the tax calculations.

On an accruals basis the rent invoice would have been entered in the accounting records with an effective date of December 1. The accountant or small business owner preparing the accounts would deduct 2 months from the qaurterly amount leaving one months rent in the current year accounts with the other 2 months being included the following year.

That is more accurate as the other side of the accounting would be for that same accountant or bookkeeper to further include the 2 months rent not already claimed to be included in the tax calculation for the next financial year. Mvoing the prepayment not specific to the accounting period is how business treats a prepayment under accrual accounting.

When operating cash accounting only transactions actually paid for or received are valid. On an accruals basis provisions can be made for costs incurred by the business whicvh have not yet been invoiced.

Cash accounting might appear easier but has the disadvantage of maintaining receipts and payments records in addition to the primary documents which should also be matched to the financial transactions to support the accounts.

Accrual accounting is based upon recording all financial transactions and then adjusting the end result to determine the most accurate net taxable profit. The accruals basis is favoured by accountants as it reaches an accurate tax liability as opposed to more or less tax being payable on the cash basis according to the credit control policies and practises of the business its suppliers and clients.

Rep. Elijah Cummings (D-MD) and Chairman Henry Waxman of the Committee on Oversight and Government Reform question witness on the accounting arrangement that led to .8 billion in missing funds.
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