Managing the Money
Table of Contents
Basic Accounting Principles For Non-Profits ……………………………………001
Review Of Accounting Software
How To Use A Simple Spreadsheet (e.g., Excel)
Double-Entry Bookkeeping
Understanding The Difference Between The Budget And The Balance Sheet, Income And Expense Statement, And Statement Of Cash Flow
Budget
Balance Sheet
Balance Sheet Assets
Balance Sheet Liabilities
Balance Sheet Net Assets
Unrestricted
Temporarily Restricted
Permanently Restricted
Income Statement
Income Statement Revenue
Income Statement Expense
Cash Flow Statement
Cash Flows
Operating Activities
Investing Activities
Financing Activities
How To Prepare A Balance Sheet, Income And Expense Statement, And Statement Of Cash Flow
Balance Sheet Preparation
Income Statement Preparation
Cash Flow Preparation
Web Resources and References
Forms
Basic Accounting Principles For Non-Profits
Whether your church is large or small, effective financial management is an ongoing process featuring a cycle of good management habits. Sound procedures and internal controls help ensure accurate accounting and high-quality reporting. Evaluation of the information in the reports then informs planning and facilitates good management decisions. Regular evaluation of the process leads to consistent improvement in financial management.
The diagram above and the following basic overview give some general perspective on the basic processes involved in non-profit financial management. The following activities described below occur regularly as part of the yearly accounting cycle or more frequently as circumstances dictate. The accounting cycle includes bookkeeping, generating financial statements and analyzing information from the statements.
Bookkeeping is basically recording various financial transactions. Bookkeeping activities can often be done by someone responsible for basic clerical work in the church. However, the Treasurer usually oversees and approves the bookkeeping system.
The Board develops and authorizes a set of standard operating procedures (SOPs) which outline how the church shall manage its finances, including how the following activities are carried out withinthe church. The Treasurer usually coordinates development of the SOPs, including a regular review and update. The Board and Senior Pastor should make every effort to ensure compliance with the SOPs.See Sample Financial Operating Procedures below.
Review Of Accounting Software
Accounting starts with basic record keeping (or bookkeeping). When a church is just getting started, its bookkeeping system will probably be based on what is called cash-basis accounting, rather than an accrual-basis accountingsystem. Many young churches use the cash-basis system and a checkbook to track transactions. In the “memo” portion of the checkbook or register, the amount is noted as Revenue or Expense and includes the source or destination of the funds. As a church grows, it should begin to useledgers(journal) to track transactions. For example, cash receiptsshould be posted to a Cash Receipts Journal and checks written should be posted to a Cash Disbursements Journal.
As a church continues to grow and begins using the accrual method, those responsible for bookkeeping will likely need more types of journals, for example, a Cash Receipts Journal, a Cash Disbursements Journal, a Fixed Assets Journal, a Fund Raising Journal, Journal a Payroll Journal, an Accounts Receivable Ledger, an Accounts Payable Ledger, a Sales Journal, a Purchases Journal and a General Ledger. In an accrual-basis system, entries are posted when money is earned and when money is owed. Small churches usually do not have the resources to use an accrual-based system. However, financial statements are prepared on an accrual basis. As a compromise, many churches use cash-based principles to record entries in journals, but get help to convert to an accrual-based approachin order to generate financial statements.
Accounts and Chart of Accounts: Each entry should be posted according to the category—or account―of the transaction. Each account will be associated with an account number. These numbers are referenced when developing financial statements (more on those later). AChart of Accounts indicates which account number to use when posting a particularentry. Charts of Account can be designed specifically for each church, including developing unique account numbers. The account numbers developed should depend on the particular kinds of revenues and expenses a church expects to have most frequently.
A Chart of Accounts usually has five categories coveringthe following areas: assets, liabilities, net assets or equity(including specific fund balances), revenues, and expenses. However, non-profits must report account activity according to the classifications of Functional (or Programs) and Natural (or Supporting). Functional transactions are those directly related to providing services to clients, members, etc. Natural transactions are those common to all programs, for example, general management costs, etc.
Budgets (Financial Forecasting): A church will have an operating budget (or annual budget), which provides the Treasurer projected revenue and expenses, usually for the coming year. Budget amounts are usually divided into major categories such as salaries, benefits, computer equipment, office supplies, etc. Cash budgets, which depict the cash a church expects to receive and pay over the near term, for example, a month, may also be provided. A Treasurer also might be provided capital budgets, which depict expenses to obtain, develop, operate, or maintain facilities or major pieces of equipment such as buildings, automobiles, computers, furniture, etc.
Usually, a Treasurer will prepare a monthly comparison of actual revenue and expenses to the approved budget. This allows a comparison between planned revenue and expenses to actual revenue and expenses, providing the Treasurer with a good idea as to whether the church is operating financially according to plan or not, as well as indicating areas which may need attention such astrimming expenses or bolstering revenue.
Petty Cash: A church usually has many small, recurring expenses that need immediate attention, for example, computer power cords, stamps, etc. This will most likely necessitate a petty cash fund. This is a small amount of available cash which can be generated by writing a check to the church, from a churchaccount and noting on the check that the cash received from the bank goes to the “petty cash” fund. Money can be withdrawn from the fund upon submission and approval of a voucher that describes who received the money, the amount received, thepurpose for which the cash was used, and on what date the money being reimbursed was spent. Usually the Treasurer or bookkeeper requests the store receipt or bill of purchase for the item or service obtained be attached to the submitted voucher in order to verify the purchase.
Trial Balances: The Treasurer, or the bookkeeper with the Treasurer’s assistance, will often do a monthlytrial balance. This activity usually starts by totaling the entries from the journal(s) into a general ledger. When using double-entry accounting, totals on both sides of the ledger are added up to make sure that total debits equal total credits.
The Treasurer should ensure that the individual postings and totals in the ledger are correct by comparing each to its accompanying documentation. For example, the recording of cash disbursements should be compared to the monthly checking statement received from the bank that indicates what checks have been drawn from the church’s account during the month and post Petty Cash receipts. The recording of cash disbursements should also be compared to accompanying invoices and other forms of billing submitted to the church for the purpose of verifying there was a need for each check written.
Internal Controls: The church should have in place various forms of internal controlsto ensure it is properly following its financial plan. Internal controls also minimize the likelihood of accounting mistakes and help avoid employee theft, etc. There are a wide range of internal controls. Some examples of internal controls include careful hiring practices (performing background checks or requiring an employee be bonded), establishing checks and balances or double oversight for a particular function, and creating carefully controlled lists of people who are responsible for various functions and clearly outlining what authorization each has in regards to accessing information and/or different secured areas of the facilities (who collects the offering, who counts the offering, who has access to the on-site safe, who makes bank deposits).
As mentioned above, totals from various financial reports, will be reviewed against each other to determine if a church’s financial activities are progressing according to the approved plan or not. As also noted, internal controls to minimize employee theft should be established, among which, the church’s mail should be opened by one person only who logs in each check that is received. This person must be someone other than the person who deposits the checks to the bank.
Disbursements of large cash amounts, for example, over $500, should probably require a secondary signature, for example, from the Treasurer.Should the check be made payable to any of the two authorized signees, a third signee should have been previously established who can sign in place of the payee, thus assuring a large check is always signed by two authorized persons other than the payee.
Another form of financial control is an audit. An audit is a comprehensive analysis, by a professional from outside the church, of your financial management procedures and activities. The auditor produces a report which contains a variety of supplemental information that indicates how well your church is managing its resources. Some nonprofits are required to have external audits. It isusually good practice to have a periodic audit, whether you are required to or not. Note: External audits are need to procure outside funding (i.e. mortgage).
How To Use A Simple Spreadsheet (e.g.MS Excel)
A basic record keeping system will be based on a manual entry system, most likely using a simple Microsoft Excel spreadsheet. Excel is a spreadsheet program that analyzes, organizes, solves, and charts information. Excel’s most powerful features are the ability to create formulas, lists, and charts. An Excel spreadsheet consists of a grid made from columns and rows (see Fig 1).
Fig. 1
Cell / The small rectangle container that can hold numbers, text, formulas, etc.Active Cell / Cell that is selected and has a border around it. Also called selected or highlighted cell. In the above example, A1.
Cell Reference / The cell address that is used in a formula to specify which cell(s) are used
Cell Address / Identifies a cell’s location. The default style in Excel uses letters to denote columns and numbers to denote rows. A1 refers to Column A and Row 1
Range / Two cell references that are separated by a colon. Example (B5:D13) will find all cells between B5 and D13―including B5, B6,…B13, C5, C6, …C13, and D5, D6, …D13.
Worksheet / The document area in Excel. A page of cells that are arranged in rows and columns. Worksheets can contain text, charts, formulas, and files. Default is three worksheets; the maximum number of worksheets is limited to the computer’s memory.
Workbook / A collection of worksheets. File extension is .xls.
It is an environment that can make number manipulation easy and somewhat painless (see Fig. 2).
Fig. 2
Record keeping and accounting systems may eventually evolve to a computer-based system, which greatly automates entry of transactions, updating of ledgers, generation of financial statements and financial analysis (more later on these, and generation of reports needed for filing taxes, etc.)
For more information, please refer to
Double-Entry Bookkeeping
Postings can be done using a single-entryor double-entrymethod. Double-entry works from a basic accounting equation “Assets = Liabilities + Equity”. The double-entry method makes sure that the financial books are always in balance. Every transaction has two journal entries, a debit and a credit. Each transaction affects both sides of the equation.*
Each posting might refer to accompanying documents that should be kept in an easily accessible and understood file somewhere. For example, postings about cash receipts might refer to invoices sent to a client which prompted the client to write checks to thechurch (checks which were posted as cash receipts). Or, in another case, postings about cash disbursements might refer to invoices that were sent to the church which required checks be written to a vendor (checks which were posted as cash disbursements). The deposit receipts received from the bank should always be kept in in a file.
In order to know how the church is doing, the Treasurer will be responsible for doing ongoing financial planning and analysis. In this planning and analysis, a cash flow statement, a statement of activities(sometimes called income statement or income and expense statement) and a statement of financial position(also referred to as a balance sheet) will be generated from the bookkeeping information tracked in the ledgers and journals.
A cash flow statement depicts changes in the church’s cash during the year. A statement of activities depicts the changes in the church’s assets over the past year, which includes both cash and other assets such as the building and capitalized equipment.This statement is particularly useful to indicate if the church is operating with extra money or at a deficit, as it gives a fairly good indication of the church’s rate of revenue intake and spending outflow. This can help signal areas of concern. A statement of financial position depicts the overall value of the church at a given time (usually at the end of the year). It is generated by recording the church’s total assets, subtracting its total liabilities and reporting the resulting net assets (capital). Net assets are reported in terms of unrestricted, temporarily restrictedand permanently restrictedassets.
By themselves, numbers usually don’t mean much. But when compared to certain other numbers, they can inform a Treasurer and Board about how their church is doing. As mentioned, the planned expenses depicted on the church’s budget can be compared to the actual expenses paid out by the church in order to see if spending is on track. This is a one-to-one comparison of a projected number to an actual number.
Another form of comparison is by using ratios. A ratio is a comparison made by mathematically dividing one number by the other. For example, nonprofits are expected to keep administrative costs down in order to make more money available for programs and services. Dividing program expenses by the total expenses forthe church indicates the amount of administrative overhead used to run the programs. The interpretation rendered from the results of various types of comparisons will always depend on the nature of the nonprofit.
To be fiscally responsible, a church’s Board should require regular financial reports at each Board meeting. The Board may request additional information such as a statement of financial position or statement of activities be presented at each meeting, as well as requesting descriptions of finances for each program or of affordability for upcoming major initiatives. They may request information prior to filing taxes, and they will certainly need to see any results from financial audits. The Treasurer should prepare and present accurate and complete financial reports to the Board.
Understanding The Difference Between The Budget And The Balance Sheet, Income And Expense Statement, And Statement Of Cash Flow
The Budgetshows the church’s projected expenses and revenues for a given period of time. Basic budgeting should be integrated into the church’s programs and services to determine planning steps, evaluation methods, timing of events, and costs related to achieving the church’s mission. There are five key steps in budgeting:
- Estimating expenses
- Estimating potential sources of income
- Bringing projected expenses in line with projected income
- The final proposed budget must then be reviewed and approved by the Board of Directors after fine-tuning.
- During the year, the budget must be evaluated periodically to determine whether projected and actual income and expenses are in line. (If not, and if the varianceamounts over or under budgetare substantial, then the budget must be updated and revised if it is to be of any use at all.)
When a church plans a budget it must estimate what the revenues and expenses will be for certain programs over a fixed period of time. The basic premise on which to base budgeting revenues and expenses is a well-laid out plan of activities for the next year.These predictions or forecasts can be made from historical data or, if none exists, from similar information garnered from other churches with similar parameters.
If a church delivers multiple programs, the staff and Board must determine the viability of each program and the revenues and costs associated with each. Variances between the actual and the projected budgets that appear throughout the year will be indicators of change within in the church.
The heart of budgetary control is studying and investigating the cause of variances between budgeted figures and actual income and expenses.
The Balance Sheet(Fig. 3) is one of the most fundamentally important documents a nonprofit can provide for use in its internal management. The balance sheet is a “snapshot” at a given point in time of the church’s value. The balance sheet establishes financial information to external entities. The balance sheet is often referred to as the Statement of Financial Position and complements the cash flow statement. It describes what you own, such as equipment and cash (assets), compared to what you owe, such as loans (liabilities).