Handling Accounting

Posted :September 19, 2018

Updated :September 19, 2018

Managing Finances: Handling Accounting

Learn about the process of accounting and its uses for your organization, and obtain help in person or with some of the software available today.

WHAT IS ACCOUNTING?
HOW IS NOT-FOR-PROFIT ACCOUNTING DIFFERENT FROM ACCOUNTING FOR FOR-PROFIT ORGANIZATIONS?
WHAT IS AN ACCOUNTING SYSTEM?
WHEN SHOULD YOU DEVELOP AN ACCOUNTING SYSTEM FOR YOUR ORGANIZATION?
WHY SHOULD YOU DO ACCOUNTING FOR YOUR ORGANIZATION?
HOW DO YOU DO ACCOUNTING FOR NOT-FOR-PROFIT GROUPS?

For many community organizations, how to get cash is the burning question on everyone's mind. "How can we possibly get the money we need to do what we want to do?" Usually, the director, the staff, Board members - everyone - spends a good deal of time and energy trying to find the best answer to this question. And find it again, and again, and again.

Often - and to the detriment of many not-for-profit organizations - the equally important question "How do we handle the money we do have?" is ignored or is handled haphazardly, without proper thought and expertise. Proper accounting procedures are often left by the wayside, to be addressed at the last minute, if at all.

Despite this reality, thorough and proper accounting procedures are crucial to the financial sustainability of an organization. In the business world, statistics show that the second leading reason businesses fail is inadequate accounting procedures. For nonprofit organizations, then -- who often have much smaller incomes on which to survive -- the use of good accounting procedures is even more important.

In this section, we'll give an overview of the process of accounting and its uses for your organization. We'll also talk briefly about obtaining help with accounting, both in person and in some of the software that is available to use today.

This section is not meant to take the place of legal or professional accounting advice. In fact, we strongly recommend you obtain the assistance of a Certified Public Accountant (CPA) when trying to make heads and tails of your organization's figures. Instead, this section is meant to give you a foundation of understanding that you can use when choosing and speaking with those who will do the accounting for your organization.

WHAT IS ACCOUNTING?

Accounting is simply a system for providing financial information about a business or other type of organization. This system includes the everyday tasks of documenting, classifying, analyzing and interpreting the financial (bookkeeping) records of an enterprise. These jobs, taken together, can be used to evaluate the progress or failures of a business and to track its financial condition.

Accounting also includes activities that occur less often, such as auditing and figuring taxes. By auditing, we mean the examination of an organization's accounts by people who had no part in their preparation. Annual audits are required for all publicly held businesses and for many non-profit organizations. They are discussed in more detail below.

While accounting is sometimes confused with bookkeeping, you can see from the above paragraphs that accounting is much more comprehensive. Bookkeeping is simply a means of accurately entering information into the organization's books. Depending on the complexity of your organization's finances, you may or may not require knowledge of accounting. An accountant will generally know how to analyze the organization's finances, and how to set up an appropriate accounting system to track them.

In the United States, there are a lot of regulations that dictate how accounting procedures must be carried out. Most public and many nonprofit organizations are required to follow generally accepted accounting principles (GAAP), which are developed by two different organizations: the Governmental Accounting Standards Board (GASB ) and the Financial Accounting Standards Board (FASB).

The GASB was developed in the mid-1980s as a way to oversee accounting for governmental agencies. It works to improve standards of state and local governmental accounting, financial reporting, and to guide the public, including issuers, auditors, and users of governmental financial reports. Some not-for-profits that receive government funding are also subject to its control.

Not-for-profits not subject to GASB control should follow the standards set forth by the FASB, which also sets regulations for for-profit organizations. The FASB works to establish and improve standards of financial accounting and reporting to guide the public, including issuers, auditors, and other users of financial information such as funders and Board members.

SPECIAL TOPIC IN ACCOUNTING: WHAT IS AN AUDIT?

An audit is a process for testing the accuracy and completeness of information presented in an organization's financial statements. This testing process lets an independent Certified Public Accountant issue what is referred to as an opinion on how fairly the agency's financial statements represent its financial position and whether they comply with generally accepted accounting principles (GAAP).

The audit report is addressed to the organization's Board of Directors, and usually includes the following:

A cover letter signed by the auditor, stating the opinion
Financial statements, including the statement of financial position (balance sheet), statement of financial activity (income statement), and statement of cash flows. Health and social service organizations also have a statement of functional (i.e., operational) expenses.
Comparison of previous fiscal years (optional)
Notes to the financial statements, as required by GAAP, which might include information about functional expenses, a depreciation schedule (that is, a schedule of the decline in value of certain items the group owns), further information about contributions and volunteer services, and other significant information not obvious in the financial statements.

In addition to the financial statements, the audit may include results of an investigation on whether the money is being spent exactly as specified in grants and contracts -- both general areas and line items -- and whether the organization functions as it says it does. For example, for audits of one literacy project, the director had to provide the minutes from all Board meetings during the audited year. This regulation was to show that the Board actually met, and also to prove that financial decisions that required a Board vote actually got one.

Some not-for-profits are legally required to obtain audits. Many states require an audit for not-for-profits that receive contributions over a specified amount (the amount varies from state to state) and/or not-for-profits who hire a paid fundraiser. You might want to contact the Secretary of State for regulations in your state. In addition, not-for-profits that receive $300,000 or more in federal funding during a fiscal year are usually required to have a specific audit, called an A-133 audit.

In addition to the financial statements required for audit purposes, not-for-profits are required by federal and state governments to file various information returns to maintain their tax-exempt status and document tax compliance. The primary federal reports are the annual Form 990 and Schedule A to the 990. (These are available from the IRS). State governments may require additional reports.

Your organization may choose to obtain an audit even if you are not legally required to do so.

Common reasons to obtain an audit include:

Funders commonly request audited financial statements or a review (see below )
The Board may seek reassurance that the financial information they are considering is accurate and complete. In cases where financial problems or irregularities in the financial system have occurred, the Board and the general public may look to an audit to provide assurance that these problems have been resolved.
The audit process can be valuable to your executive director and finance staff because it confirms your financial picture and helps you strengthen internal control procedures.
Finally, an audit signals a new phase in the organization's maturity. As your organization's financial transactions become more complex, undergoing the rigors of an audit will help your staff develop and understand the financial systems required to track and manage finances responsibly.

Alternatives to an audit include a review, which is a more limited examination of the financial statements by a CPA, and a compilation. During a review, a CPA asks questions of management and conducts some analysis, but does not undertake the extensive testing required for an audit. A review provides only limited assurance that the financial picture is fairly presented. A review may cost less than half of what an audit does, however, and it may satisfy state requirements for smaller not-for-profits. Contact your Secretary of State's office for details.

A compilation is a report prepared by an accountant using financial data supplied by the organization. The accountant organizes this financial information into standard financial reporting formats but does not review the numbers for accuracy or provide assurance regarding the information that is included.