by Prior to electronic worksheets, accountants had several pads of paper with a varying number of columns (and rows) pre-printed on them. The pads of paper were labelled as columnar pads. The pre-printed paper in these pads allowed accountants and bookkeepers to easily prepare manual spreadsheets.
The Investment Account is maintained in a columnar form with three amount columns on each side viz., Nominal, Interest/Income and Principal/Capital. The face value or nominal value of securities purchased or sold is recorded, however, in the ‘Nominal’ column. The accrued Interest/Dividend on purchase or sale of securities including the Interest/Dividend so received is recorded, however, in the ‘Interest/Income’ column. The third column, ‘Capital/Principal’, reveals the true cost or true sales consideration.
Investors are one of the many players in the financial markets, who deploy savings when there is a surplus and demand it back when there is need. The terms at which the money will be used or lent is determined by the market place and the investors’ choices have to be framed in this context. The focus, therefore, is not so much on the promises that can be made to the investor, but how well the investors evaluate their own cash-flow needs and that of the seekers of their money.
The summary of an investor’s financial life can be drawn in three columns on a worksheet. The first column holds the cash inflow of the investor. The second shows the drawdown or the outflow that may be needed. The third shows the value of assets the investor has accumulated.
Consider a young investor who has just begun to earn an income. The cash inflow is the salary income, and the outflow is the expense and the assets are those saved, provided expense is lower than the income. If the investor sees himself as earning a steadily rising income and is able to meet most of his needs with this income, he can build long-term growth assets that he need not access at a short notice. In the market place, he may be able to get a better return if he makes such an investment choice.
A retired investor, on the other hand, may find that he has a large asset base representing his accumulated wealth and retirement corpus (column 3), but does not have a steady income from salary (column 1). The assets have to continue to grow in value to meet his growing need for cash as the years go by, given the depleting caused by inflation. Therefore, he is seeking an adequate future cash flow, except that he does not frame the problem thus. Instead, he makes faulty assumptions that a fixed rate of interest represents an adequate cash flow to meet future needs.
Since, he is unwilling to draw from the corpus as he is no longer contributing to it, the investment choices available to him seem unsatisfactory. Instead, if the retirement problem is seen as a diligent management of assets, not all of which are required for immediate cash flow needs, investors can make better choices.
A newly married couple trying to build their financial lives can see how accretions to their income are not translating into an accretion to their assets. They may see that the demands on their cash inflow are too high. If they visualise any cash requirement that exceeds their income, they have no buffer in the form of assets to meet that need. If they resort to borrowing, the EMI takes away even more of the income, leaving too little for anything else. If they work towards better levels of income for themselves and move up in their professions, they will be able to build long-term assets. Until then, they need assets that they can access when needed, and rebuild when possible.
These examples are without doubt an over-simplification. Each investor’s situation could be specifically different, but financial lives can be simplified if the focus is on taking charge of these three elements of accretion (inflow), drawdown (outflow) and accumulation (assets). A financial goal is nothing but a large future cash-flow need, which cannot be met from the regular income, but has to be drawn down from the accumulated assets. A borrowing is nothing but a drawdown from a future income, which may or may not have a matching asset.
The reason I propose this framework is to return the focus to control and management of finances. We may not be able to accurately forecast the future, but we can have a plan for assets we want to build based on aspirations that need drawdowns. Then our choices in investing are completely driven by our needs. We are no longer the ‘entitled’ investors who have to be handed down an ideal product. We are investors in charge of our own lives, making choices based on what we can earn, save and invest. We then focus on our assets and their use for us and, therefore, choose carefully. We monitor them regularly and adjust what we hold based on our need. We can manage the risks to the assets by diversifying well.
How does this approach solve the problem of investment choices? We begin to see everyone else who is seeking our money as cash-flow managers and builders of assets too. We ask what their incomes are, and what their drawdowns are, and if they too would have a surplus. We begin to ask if what they offer matches what we need. We stop looking for tips, tricks, short-cuts, magical methods, assurances, iron men and miracles. We begin to see the market place and find our space there.
Format of a Three Column Cash Book
The common format used in a three-column cash book is shown below.
One thought on “Columnar format for investment Account”