Personal Income & Expenses PDF

Personal Income We have seen that income is money that is earned. Personal income refers to an individual’s earnings. Earnings can come from: Salary / wages and / or Investments – interest on bank accounts and / or rental from property Disposable income i...

Personal Income We have seen that income is money that is earned. Personal income refers to an individual’s earnings. Earnings can come from: Salary / wages and / or Investments – interest on bank accounts and / or rental from property Disposable income is the amount of income available for spending and saving after tax has been paid. For example, if a person’s salary is R8000 and R400 tax is payable to SARS, the disposable income is R7600. Types of personal Income Salary / Wages Employees in a business earn either a salary or wages. A salary is usually a set amount of money paid monthly to skilled workers. Wages, on the other hand, are generally paid to workers at an hourly rate of pay or part-time, semi-skilled employees daily, for example, labourers and casual workers. People earn different salaries or wages depending on the type of job that they do. Investments Personal income can be earned from investments. This type of income is known as passive income as it does not require a person’s time or effort (or very little) to earn it. When you put money into a special type of bank account, for example, a savings account, you can earn interest. The interest is calculated as a percentage of the money invested, for example, 10% p.a. (per annum), meaning that you will earn 10% interest per year on the money kept in the account. Different banks offer different interest rates. The interest rate that you can earn varies depending on: The amount of money invested. The term of the investment, i.e. the length of time you leave the money in the bank.  The type of account invested in, for example, a 30-day notice account, which means you would need to inform the bank 30 days before you plan to withdraw any money. Apart from buying property to live and work in, some people buy property as an investment. They then rent the property to tenants. The person who is renting out the property is known as the landlord. There are obviously costs of owning property, for example, rates. The rent charged must be more than the expenses incurred to earn money from property rental. For example Mr Singh (the landlord) rents a house to the Govender family (the tenants). He pays R2000 to the local municipality every month for rates and water. He charges the Govender Family R12,000 a month rental, so his rental income is R10,000 a month. Personal Expenses Personal expenses or living expenses are the items you need to pay for to live. Expenses differ from person to person and depend on their lifestyle, but in general, people have the following personal expenses: o Rent or bond repayments on a house o Food o Schooling / education for children o Water o Electricity o Rates and taxes o Phone bills, data costs o Television – DSTV o Transport costs, for example, petrol or taxi fares o Clothing o Household appliances – TV, washing machine, etc. o Medical fees o Insurances – building, household contents and car o Entertainment A person can fall into debt if their personal expenses are more than their personal income. For example Mr and Mrs Marsden have a personal income of R16 000 per month. Their monthly expenses are R18 500, so every month they have a shortfall of R2500 and this will lead to them falling into debt. Many people use credit cards and loans to try to cover their expenses, but too much credit can lead to financial problems. It is therefore essential to manage personal income and expenses. Drawing up a budget can help with this. Personal Statement of Net Worth Just as a business has a balance sheet, which shows the assets and liabilities of the business, so an individual or family can also draw up a personal balance sheet, also known as a personal statement of net worth. This statement shows what a person owns and what they owe. It is a list of a person’s assets (what they own) and their liabilities (their debts and what they owe to other people). A personal statement of net worth shows the difference between what a person owns and what they owe and is, therefore, a calculation of how wealthy a person is. Banks often require a personal statement of net worth when approving loans. Personal statement of Net Worth Current Assets Current Liabilities Fixed Assets Long term liabilities  Business income and expenses Income We know that a business needs to earn income so that it can survive and make a profit. Business income is the money earned or generated by the business. Business income is earned in the following ways: Sales – this is money earned through the sale of goods and / or services. Investment – This is income earned through investments and is passive income. The business can invest money in a savings account and through purchasing shares, for example. Rental Income – Rental of property – for example, sub-letting some of the businesses office space. Commission Income – Some businesses like estate agents, for example, earn commission for selling properties. This commission is calculated as a percentage of the value of the property sold. Expenses A business has many of the same costs that an individual has. Business expenses are the costs incurred in running a business. Profit (or loss) is the difference between income and expenses. A business can have the following costs: Cost of Sales These are also known as direct costs and are the costs that can be attached to making a specific item. For example, in a business that manufactures shirts, the cost of the materials to make the shirt might be R25 and the shirt is sold for R75. The labour cost to make the shirt is R25. The gross profit is R25, which is the selling price minus the cost of sales. Gross profit is, therefore, the profit before the deduction of expenses. The cost of sales is the basic cost of creating a product and includes: The cost of stock and materials purchased for resale and to make the product. The cost of labour to make the product. Machine or equipment-hire to make the product. Other direct production costs. Expenses Business expenses or overheads are ongoing costs associated with running the business. They are the day-to-day running costs. When these expenses are deducted from the gross profit, they give the net profit before tax. Business expenses include the following: Employee costs (salaries and wages) Rental costs Repairs and maintenance Motor vehicle expenses Telephone costs Insurance Water and electricity Transport Travel Interest and finance charges General administration  Advertising and marketing Stationery and printing Legal costs Professional fees, such as accounting Any other expenses Some expenses, for example, telephone, are paid monthly by the business, and some do not occur every month, for example, legal fees or advertising. However, all costs must be budgeted for as they affect the profit of the business. The aim of any business is to make a profit. The business income must be more than the expenses to make a profit. The income and expenses of a business are recorded on an Income Statement. This statement shows the income, expenses and net profit or loss (before tax). Example of an Income statement Income and expenses for Jo’s Pie shop Sales Sales ( How much money is made at the R2 000 less Cost end of the month) of sales. Items that are Cost of Sales R2000- R100 R900= directly Pastry R1100 related Cooks name R500 to the Ingredients R300 company Gross Profit R1 100 Gross Other income profit plus Rent of storage unit to another company R75 other Operating Income R1175 income Expenses Rent R100 Electricity R50 Maintenance R100 Wages (teller) R85 Total Expenses R335 Net Profit Before Tax (operating R840 income – Expenses) Less Tax 10% of Net Profit R84 Net Profit R756