Introduction To In Nonprofit Organizations

Introduction to Bookkeepingin Nonprofit OrganizationsCompassPoint Nonprofit ServicesShannon EllisProject Director, CompassPointshannone@compasspoint.org

Welcome 9:30am – 4:30pm. 1 hour lunch around noon.A break in the morning and afternoon. Sign in Silence mobile phones Return from breaks on time Questions

Introductions Name, organization, and role One thing that you want to learn

Learning ObjectivesBy the end of this workshop, you will be able to: Understand the basic terminology ofbookkeeping. Identify the primary components of abookkeeping system. Begin to apply standard accounting conceptsin a nonprofit organization. Understand how key financial statements areproduced.

Agenda Overview of Bookkeeping ProcessChart of AccountsCash vs. Accrual AccountingOverview of Key Financial Statements– Statement of Activities– Statement of Financial Position Double‐Entry Bookkeeping– The Accounting Equation– Debits and Credits Posting Journal Entries– Capitalization and Depreciation– Prepaid Expenses Closing the BooksPreparing Financial Statements

Note Software neutral; covering basic concepts thatunderlie all accounting software Introductory level; accountant‐level supportencouraged for new bookkeepers Books are yours to keep for future reference

What is Bookkeeping?DocumentSourcedocuments Invoices Bank statements Payroll registersRecordGeneralLedger Postingtransactions Journal entriesSummarizeFinancialReports Balance sheet Profit & Loss Funders

What is Bookkeeping?Financial ManagementAnalysis &StrategyAccountingGAAPKnowledgeCommunicate& ize

Why is Bookkeeping Important?Bookkeeping providesa critical foundationfor effective financialmanagementInternalmanagementdecision makingTo g andaccountabilityto stakeholders

Chart of Accounts Determines how the organization’sfinancial information is organized(internal & external) Will be the basis for coding alltransactions and designingbudgeting templates Fiscal year turnover is good timefor review Unified Chart of Accounts canbe a starting point for discussion

Chart of Accounts: Account TypesStatement ofActivitiesStatement ofFinancial PositionIncomeAssetsExpenseLiabilitiesChange inNet AssetsNetAssets

Chart of Accounts: Functional ActivityNonprofit organizations are required to trackour expenses in at least three functionalareas, based on the activities in these areas:ProgramCosts resulting in distributing goods and services toclients and fulfilling the mission of the organization.AdminCosts such as governance, finance and accounting, legal,and executive management.FundraisingCosts associated with soliciting contributions.

Chart of Accounts: ConsiderationsBest designed via a collaborative process(roles beyond finance staff should be involved) What reports do you need to prepare? What financial decisions or assessments doyou need to make on a regular basis? What level of detail do you require? What is your organizational capacity forclassifying and tracking financial information?

Chart of Accounts: Steps to Designing1.2.3.4.Define your programs/cost centersIdentify specific line itemsConsider detail needed by funding sourcesSegregate unrestricted, temporarilyrestricted, and permanently restricted funds5. Number your accountsAssets 1000Liabilities 2000Net Assets 3000Revenue 4000, 5000, etc.Expense 6000, 7000, etc.

Time for Terms: General Ledger (GL)The General Ledger (GL) is a single volume thatcontains the year‐to‐date record of all of theaccounts of the system, organized according tothe Chart of Accounts.

Cash vs. Accrual Accounting CASH BASIS:– Income is recorded when cash is received– Expenses are recorded when they are paid ACCRUAL BASIS:– Income is recorded when cash is earned– Expenses are recorded when they are owed

Cash vs. Accrual AccountingCashAccrual1. Invoiced the city for 100 educationsessions held in December, charging 500 for each session.2. Received a donation from anindividual supporter for 5,000 inJanuary 2012.3. Received 3,000 in pledges duringJanuary 2012 that will be paid inMarch.4. Received a payment of 25,000 on a 50,000 foundation grant that wasawarded in October 2011.JANUARY 2012Income:Total income

Cash vs. Accrual AccountingJANUARY 2012CashAccrualExpenses:1. Paid December salaries for a total of 35,000 on January 5, 2012.2.3.4.Incurred 35,000 in salary expense inJanuary to be paid on February 5,2012.Received office supply bill for 500 onfor orders placed in January.Paid 2,000 to a local hotel to coverthe remaining balance due on afundraising event held in December.Total expenses

Cash vs. Accrual AccountingADVANTAGESDISADVANTAGESCASH BASISEasy to understandFewer transactionsNot GAAP compliantIncomplete pictureACCRUAL BASISGAAP compliantMore meaningful recordHarder to understandMore transactionsMODIFIED BASISUse easier basis forinternal interim reportingAudit looks different frominternal statements; maylead to surprisesGAAP Generally Accepted Accounting PrinciplesWhich is right for your organization? Number of transactions Expertise of staff Size of budget

Statement of ActivitiesINCOME ‐EXPENSE SURPLUS/DEFICIT

Financial StatementsStatement ofActivitiesStatement ofFinancial PositionIncomeAssetsExpenseLiabilitiesChange inNet AssetsNetAssets

Recording IncomeIncome Received(Cash, pledge, award letter, nconditionalUnrestricted

Statement of Financial PositionASSETSBank AccountsWhat you OWNAccounts ReceivableProperty & EquipmentInvestmentsMinusLIABILITIESAccounts/Loans PayableWhat you OWEAccrued Salaries/VacationEqualsNET ASSETSWhat you are WORTHUnrestrictedRestricted (Temporarily or Permanently)

Statement of Financial PositionASSETSCashReceivablesProperty &EquipmentInvestments LIABILITIES NET ASSETSPayablesAccrued SalaryUnrestrictedRestricted

Statement of Financial PositionWe borrowed 200from a friend andnow have 500 inour bank account.Our financialpicture wouldbe as follows:ASSETSLIABILITIES &NET ASSETS 200 500 300

Statement of Financial PositionWe had 10K in ourbank account andbought a car for 7K.We paid a 2K downpayment and got a 5K loan.Our financial picturewould be as follows:ASSETSLIABILITIES &NET ASSETS 8K 5K 7K 10K

The Accounting EquationASSETSCashReceivablesProperty &EquipmentInvestments LIABILITIES NET ASSETSPayablesAccrued SalaryUnrestrictedRestricted

The Accounting EquationAssets Liabilities Net AssetsIncome ‐ Expense In double‐entry bookkeeping, everytransaction is recorded in two accounts Accounting equation always remains balanced Provides built‐in checks and balances andhelps to safeguard the organization’s assets

The Accounting EquationAssets Liabilities Net AssetsIncome ‐ Expense 3,000 Checking 3,000 Foundation Grant 100 Checking 100 Telephone 50 Checking 50 Contributions 2,950 200 Credit Card 200 Supplies 500 A/P 500 Computers 700 2,250

Debits and Credits: What are they? A way to record the increases and decreases inaccounts associated with each transaction By debiting one account and creditinganother, we ensure that the accountingequation remains in balance They are NOT synonymous with the wordsincrease and decrease; it depends on the TYPEof account to which they are applied

Debits and Credits: What do they do?Account TypeAssetDebit (DR)Credit (CR) Increase DecreaseNormalBalanceDebitLiability Decrease IncreaseCreditNet Asset Decrease IncreaseCreditIncome Decrease IncreaseCreditExpense Increase DecreaseDebit

The Accounting EquationAssets Liabilities Net AssetsIncome ‐ ExpenseDR 3,000 CheckingCR 3,000 FoundationGrantCR 100 CheckingDR 100 TelephoneDR 50 CheckingCR 50 Contributions 2,950 CR 200 Credit CardDR 200 SuppliesCR 500 A/PDR 500 Computers 200 2,750

Time for Terms: Journal Entry (JE)A Journal Entry (JE) is an entry that directlychanges the account balances on the generalledger. They are often used to post non‐cashtransactions such as depreciation and costallocations.

Time for Terms: CapitalizationCapitalization means an item has a “useful”life of more than a year and is recorded asan asset when purchased rather than expense.

Time for Terms: DepreciationDepreciation is the process by which anorganization: records the cost of a capitalized item over theperiod that the organization receives benefitfrom the item reduces the value of the asset due to wearand tear, age, or obsolescence

Depreciation Schedule

Posting DepreciationAn organization purchases a piece of equipmentfor 2,400 and plans to depreciate it over 3years, per the organizations capitalization policy.How do you record this transaction at the timeof purchase?Account NameDRCR

Posting DepreciationAn organization purchases a piece of equipmentfor 2,400 and plans to depreciate it over 3years, per the organizations capitalization policy.What transaction will you record for the next 3years (assuming you only post annually)?Account NameDRCR

Closing the Books Make sure all transactions are recorded andreview coding as needed Reconcile bank accounts – confirm bankbalance matches general ledger Record any non‐cash transactions(depreciation, prepaids, allocations etc.) Analyze and confirm balance sheet accounts Print/export financial reports

The Trial BalanceAssets Liabilities Net AssetsIncome ‐ ExpenseDR 3,000 CheckingCR 3,000 FoundationGrantCR 100 CheckingDR 100 TelephoneDR 50 CheckingCR 50 ContributionsCR 1,000 CheckingDR 2,400 Capital PurchCR 800 Acc DeprecCR 200 Credit CardDR 200 SuppliesCR 500 A/PDR 500 ComputersCR 1,400 Line of CreditDR 800 Depreciation

Financial StatementsStatement ofActivitiesStatement ofFinancial PositionIncomeAssetsExpenseLiabilitiesChange inNet AssetsNetAssets

Financial StatementsAccount NameDRCR

Food.org Statement of ActivitiesFor the period ended December 31, 2012IncomeTotal incomeExpensesTotal expensesChange in net assetsNet assets – beginningNet assets – ending

Food.org Statement of Financial PositionAs of December 31, 2012AssetsTotal assets Liabilities and net assetsTotal liabilitiesNet assetsTotal liabilities and net assets

Action PlanThree things I will do differently, practice, focuson additional learning, try, or share with mycoworkers:1. X2. X3. X

Wrap up & Evaluation Resources will be emailed after workshop Email me with questions –shannone@compasspoint.org Evaluation Thank you!

Learning ObjectivesBy the end of this workshop, you will be able to: Understand the basic terminology ofbookkeeping. Identify the primary components of abookkeeping system. Begin to apply standard accounting conceptsin a nonprofit organization. Understand how key financial statements areproduced.

Chart of Accounts: Steps to Designing 1. Define your programs/cost centers 2. Identify specific line items 3. Consider detail needed by funding sources 4. Segregate unrestricted, temporarily restricted, and permanently restricted funds 5. Number your a