Author Topic: Income/Expense Statement Help  (Read 2531 times)

Myrmida

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Income/Expense Statement Help
« on: June 12, 2013, 09:43:27 AM »
Background: I'm kind of embarassed to say that I don't really understand how much money I make.  I know that sounds stupid, but on top of my base salary, I get stock options, cash bonuses, share bonuses, an employee share purchase program, all of which vest over various periods of time.  I also get a bit of passive income.  Since early 2010, I have sporadically calculated our net worth and put it in a spreadsheet.  I feel like we spend a lot (I am hoping to learn the ways of the mustachian siblinghood).  However, we also managed to increase our net worth by $95,000 since August 2012, which sort of astounds me, as my gross base salary is only $133,000, and my spouse has been a stay-at-home dad since early 2012.  Therefore, I'm preparing very simple income/expense statements for the years since 2010 based our tax returns and some bank/mortgage statements, so that I can see how much we made from ALL income streams and where we put all the money.

Actual Question: I have never counted any of my additional compensation until it has vested, but should I should include options that have vested, but which I have not exercised?  I do count them in my net worth statement, but when I exercise them I will be taxed on them, so maybe they shouldn't be counted (or at least only counted with a deduction for taxes that will be due upon exercise).

Myrmida

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Re: Income/Expense Statement Help
« Reply #1 on: June 12, 2013, 10:31:06 AM »
Related question: As I earn money, taxes are deducted.  I usually make enough of a retirement contribution that I get a tax refund, but I don't receive that until the year following the tax year.  So, do I include that refund in the income/expense statement of the following year, or the tax year?

anastrophe

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Re: Income/Expense Statement Help
« Reply #2 on: June 12, 2013, 10:45:16 AM »
Related question: As I earn money, taxes are deducted.  I usually make enough of a retirement contribution that I get a tax refund, but I don't receive that until the year following the tax year.  So, do I include that refund in the income/expense statement of the following year, or the tax year?

As long as you are consistent between years, I don't think this matters. But others may disagree.

DaftShadow

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Re: Income/Expense Statement Help
« Reply #3 on: June 12, 2013, 12:22:49 PM »
These are excellent questions!   

Regarding when to count your additional compensation as "income", that's an interesting one.  You don't actually own the stock yet, you merely own an option to purchase stock.  This option may expire...  So while the value of the option is the value of the stocks you can purchase at a given moment, you don't truly own anything yet...  (the IRS agrees too, which is why they usually don't tax you until you exercise the options). 

I am inclined to say you should count them the instant that they vest, since you are putting them in your net worth column then too.  If something arrives on your balance sheet as an asset, it must also arrive as income somehow too.  This is what double-entry accounting is  all about... to make sure that situations such as this - creating an asset without accounting for how it got there - do not occur.

Note that this is not yet "taxable income", so it won't match your annual IRS numbers, but that's just what makes this such a good question.  :)


Regarding Tax Refunds, it's important to talk about Income and Cash Flow.  Income is counted when you earn something, and Cash Flow is when you actually receive the cash for it. 

In particular, this is important because a tax refund is not income!  You already counted your income for last year (the total gross wages from your job, say).  The Tax Refund was not additional income, it was merely a return of a quantity of cash, owned by you, that they held onto for you.  (how generous of the IRS!  :) ).  In this vein, technically speaking, your "net worth" does not increase upon receiving a tax refund. 

That being said, most of us don't keep our books quite accurate enough to account for this, and so we "cheat" a little bit by focusing on cash flow (when the physical dollars enter our bank accounts) and calling it income.  Thus, each time you get a refund, there is an increase in your tracked account balances, so it looks like income.

If this is the case for you, that you operate more of a cash flow tracking system, then I will recommend counting Tax Refunds as part of the cash flow of the year they arrive in your bank accounts, because it's easier.  You're probably already doing that for other things (e.g. food purchased December 31st was last year's expense, but it didn't charge until January 4th...), and it makes sense to keep following the same pattern. 

It's less 'accurate', but it's far easier.  As long as you remember that your are making that call, then it's OK. 

Hopefully this helped answer your questions.  And congrats on such a great year!

~ DaftShadow

frompa

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Re: Income/Expense Statement Help
« Reply #4 on: June 12, 2013, 03:36:43 PM »
+ to DaftS -- If you are using previous years' tax returns as the source of your data, your income figures are gross, not net, so you needn't count the refund as income the year you receive it back.  You already counted it in when you noted your gross income for the year before the IRS returned your $$.