Part I Accounting and Bookkeeping Nonprofit Style Book

Part I Accounting and Bookkeeping Nonprofit Style Book
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    Sharon FarrisPresident, Farris Accounting & Consulting Training Services (FACT$)Learn to:• Read and understand nonprofit financial statements• Keep accurate books• Follow nonprofit accounting laws and regulations• Comprehend the latest tax changesNonprofit Bookkeeping & Account...

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    01_430620-ffirs.indd iv01_430620-ffirs.indd iv4/1/09 10:08:29 PM4/1/09 10:08:29 PM

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    by Sharon FarrisPresident of Farris Accounting & Consulting Training Services (FACT$)NonprofitBookkeeping & AccountingFORDUMmIES‰

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    Nonprofi t Bookkeeping & Accounting For Dummies®Published byWiley Publishing, Inc.111 River St.Hoboken, NJ 07030-5774www.wiley.comCopyright © 2009 by Wiley Publishing, Inc., Indianapolis, IndianaPublished by Wiley Publishing, Inc., Indianapolis, IndianaPublished simultaneously in CanadaNo ...

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    About the AuthorSharon Farris, president of Farris Accounting & Consulting Training Services (FACT$), is an accountant and grant consultant. She is a Certifi ed Grants Manager (certifi ed by Management Concepts) and received her bachelor’s degree in accounting from Troy University of Montgo...

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    DedicationTo my beautiful daughter, Keisha, and my mother, Beatrice Rembert. May we continue to share laughter together.Author’s AcknowledgmentsThis fi nal product took a consortium of friends from my inner circle to write and publish. I want to thank many people for making this book possible. ...

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    Publisher’s AcknowledgmentsWe’re proud of this book; please send us your comments through our Dummies online registra-tion form located at http://dummies.custhelp.com. For other comments, please contact our Customer Care Department within the U.S. at 877-762-2974, outside the U.S. at 317-572-...

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    Contents at a GlanceIntroduction ................................................................ 1Part I: Accounting and Bookkeeping Nonprofit Style ...... 7Chapter 1: The Nuts and Bolts of Nonprofi t Bookkeeping and Accounting ............... 9Chapter 2: Starting with Basic Bookkeeping and Acco...

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    Table of ContentsIntroduction ................................................................. 1About This Book .............................................................................................. 1Conventions Used in This Book .............................................................

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    Nonprofit Bookkeeping & Accounting For Dummies viiiChapter 2: Starting with Basic Bookkeeping and Accounting . . . . . .25Understanding Bookkeeping and Accounting ............................................ 25What’s the difference between bookkeeping and accounting?...... 26Defi ning some...

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    ix Table of ContentsNaming Other Available Software ............................................................... 66QuickBooks ........................................................................................... 67Microsoft Offi ce Accounting ................................................

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    Nonprofit Bookkeeping & Accounting For Dummies xSubtracting Your Expenses ........................................................................ 111Making the necessary deductions in your checkbook register .......................................................................................

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    xi Table of ContentsPart III: Accounting for Nonprofit Situations .............. 151Chapter 10: Introducing Federal Grants . . . . . . . . . . . . . . . . . . . . . . . . .153Grasping Why Federal Grant Money Is Important to Nonprofi ts .......... 154The 4-1-1 on Grants: Just the Basics .............

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    Nonprofit Bookkeeping & Accounting For Dummies xiiPreparing for the program offi cer’s perusal of your procedures ...................................................................................... 192Inspector general audit: When the situation is really serious ..... 194Knowing What the...

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    xiii Table of ContentsPart IV: Wrapping Up the Books ................................ 241Chapter 15: Analyzing the Statement of Activities. . . . . . . . . . . . . . . .243Understanding the True Meaning of the Statement of Activities .......... 244Revenues ...........................................

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    Nonprofit Bookkeeping & Accounting For Dummies xivChapter 19: Closing the Nonprofi t Books . . . . . . . . . . . . . . . . . . . . . . . .287Understanding the Need to Close Your Nonprofi t’s Books .................... 288Adjusting, Closing and Reversing Entries ...............................

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    xv Table of ContentsChapter 22: Ten Tips to Keep Your Nonprofi t Viable . . . . . . . . . . . . . .321Keeping Your Books Balanced ................................................................... 321File Paperwork with the IRS .....................................................................

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    Nonprofit Bookkeeping & Accounting For Dummies xvi

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    IntroductionCounting the money in your wallet or purse is an act of accounting. If you ever make a note of how much you have, you’re even performing a bookkeeping function. You count things all the time in everyday life without thinking twice about accounting. For example, you count the plates ...

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    2Nonprofit Bookkeeping & Accounting For Dummies This book serves as a tool that you can pick up from time to time during your accounting cycle to brush up on the following steps: 1. Your nonprofit enters into a transaction with a second party. 2. You or your employee prepares a business docum...

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    3 IntroductionFoolish AssumptionsWhile writing this book, I made the following assumptions about you, my dear reader. Some may be more relevant than others. ✓ You’re the executive director of a newly formed, small nonprofit, and you want to know how to manage your own books. ✓ You direct or...

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    4Nonprofit Bookkeeping & Accounting For Dummies And when you’re ready to get your hands dirty, you can read about record keeping and then decide whether to design your own computer system or use store-bought software.Part II: Balancing Your Nonprofit BooksThis part covers the nuts and bolts...

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    5 IntroductionIcons Used in This BookFor Dummies books use little pictures, called icons, to get your attention in the margins. Here’s what they mean: This icon highlights techniques or draws your attention to something noteworthy. This icon highlights important information to keep in mind and ...

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    6Nonprofit Bookkeeping & Accounting For Dummies

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    Part IAccounting and Bookkeeping Nonprofit Style

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    In this part . . .Before you can dive into the pool of nonprofit book-keeping and accounting, you have to be familiar with basic accounting terminology and financial statements. After grasping the fundamentals, you can account for your nonprofit activities. You may want to use a manual record-kee...

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    Chapter 1The Nuts and Bolts of Nonprofit Bookkeeping and AccountingIn This Chapter▶ Getting an overview of bookkeeping and accounting▶ Performing a balancing act with your books▶ Hitting up Uncle Sam for some free money▶ Closing the year with financial statementsYour accounting year indic...

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    10 Part I: Accounting and Bookkeeping Nonprofit Style Getting Started with Your Nonprofit’s BooksBefore you can fully get going with your books, you first need to know where to begin. Start by identifying your destination: to have audited financial statements. You begin with a journal entry of ...

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    11 Chapter 1: The Nuts and Bolts of Nonprofit Bookkeeping and AccountingYou may say, well, what’s the real difference here. Accountants understand the why of everything that takes place, whereas a bookkeeper may not grasp the concept behind the action. I’m not saying that bookkeepers function...

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    12 Part I: Accounting and Bookkeeping Nonprofit Style Understanding the basic termsBefore jumping into bookkeeping and accounting, make sure you understand some basic terminology. Throughout this book, I use the basic language the professionals use. That’s all you need to get a good grasp of pr...

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    13 Chapter 1: The Nuts and Bolts of Nonprofit Bookkeeping and AccountingTo break down the accounting process, start with the basic accounting equation:Assets = Liabilities + Owner’s equityThis equation needs to stay in balance. That’s why some call it double-entry accounting. (Check out Chapt...

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    14 Part I: Accounting and Bookkeeping Nonprofit Style ✓ Homes ✓ Inventory ✓ Pledges receivable ✓ Prepaid expenses ✓ Property (land) ✓ VehiclesA liability is something you owe or an obligation of time, money, or resources. Anything that must be paid is considered a liability. Some com...

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    15 Chapter 1: The Nuts and Bolts of Nonprofit Bookkeeping and AccountingSome people refer to this as T accounting because the record keeping is set up in the shape of a giant T. Imagine taking a piece of paper and drawing a horizontal line across the top and a vertical line down the middle. You...

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    16 Part I: Accounting and Bookkeeping Nonprofit Style Keeping a paper trailLeaving tracks in the sand is essential to proper management of your non-profit’s books. You need documentation to prove why you did what you did. It adds credibility to your management of funds. Good housekeeping starts...

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    17 Chapter 1: The Nuts and Bolts of Nonprofit Bookkeeping and Accounting ✓ An operational audit (also called the management audit or performance audit) measures and evaluates how efficiently you’re operating and how effectively you’re managing your nonprofit’s resources. Boards of directo...

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    18 Part I: Accounting and Bookkeeping Nonprofit Style So how can you keep track of transactions? Don’t feel overwhelmed. You don’t need a PhD in aeronautical engineering. The following are a couple of easy ways to track them. Check out Chapters 6 and 7 for more on recording transactions and ...

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    19 Chapter 1: The Nuts and Bolts of Nonprofit Bookkeeping and AccountingYou’re in the Money: The Lowdown on Federal GrantsFinding donations and revenue for your nonprofit may be frustrating at times. The good news: The federal government provides free money in the form of grants that you can ap...

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    20 Part I: Accounting and Bookkeeping Nonprofit Style Although many sources other than the federal government offer grants, I focus on Uncle Sam’s jackpot. Billions of dollars are available from 26 federal agencies to: ✓ Help nonprofits implement programs to benefit communities ✓ Do work th...

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    21 Chapter 1: The Nuts and Bolts of Nonprofit Bookkeeping and Accountingyour accounting system to see how you separate your grant money from the rest of your money. Your auditor also looks at other areas, such as your organization’s travel, personnel, and purchasing policies and procedures. Don...

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    22 Part I: Accounting and Bookkeeping Nonprofit Style Your financial statements include ✓ Statement of activities: Also called the income statement, the statement of activities lists all revenues earned and all expenses paid for a time span of usually one year. It indicates whether your organiz...

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    23 Chapter 1: The Nuts and Bolts of Nonprofit Bookkeeping and Accounting ✓ Notes to the financial statements: The notes section tells the story behind the numbers. The notes describe your organization, explain your accounting methods, and explain any changes in those methods, potential lawsuits...

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    24 Part I: Accounting and Bookkeeping Nonprofit Style ✓ What do I need to do with my records so I’m ready if I’m ever audited by the IRS? One thing I’ve noticed about the government is how much it loves documentation. Record and store for safe keeping the transactions you make. Leave a p...

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    Chapter 2Starting with Basic Bookkeeping and AccountingIn This Chapter▶ Going over basic bookkeeping and accounting terminology▶ Getting staffed: Bookkeepers, accountants, or doing it yourself▶ Understanding your choices of accounting methods▶ Taking steps to protect against employee thef...

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    26 Part I: Accounting and Bookkeeping Nonprofit Style recording, classifying, and summarizing transactions, events, and things in terms of money — and then interpreting the results. If you look inside your wallet and count your money, you have accounted for how much you have.Bookkeeping, on the...

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    27 Chapter 2: Starting with Basic Bookkeeping and Accounting Accountants evaluate the overall results of economic activity by identifying, measuring, recording, interpreting, and communicating every transaction according to set rules and guidelines. They end the process by preparing financial sta...

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    28 Part I: Accounting and Bookkeeping Nonprofit Style Thinking of a nonprofit in terms of break-even analysis, in which revenues equal expenses, is one way to understand the idea of a nonprofit acquiring income, and may motivate people to give to the organization.Identifying cash flows and operat...

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    29 Chapter 2: Starting with Basic Bookkeeping and AccountingAsset accounts can be current or long term and include the following accounts: land, building, equipment, accumulated depreciation, cash, grants and accounts receivables, nonprofit inventory, prepaid rent, prepaid insur-ance, and supplie...

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    30 Part I: Accounting and Bookkeeping Nonprofit Style on staff to handle the chore. You’ll need to hire a reliable company, which may be expensive, or you can find a consultant, who may charge a bit more because he has to pay his own taxes.Regardless of whether you or someone in your organizati...

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    31 Chapter 2: Starting with Basic Bookkeeping and Accounting Hiring a bookkeeper to record transactions and keeping a CPA on retainer can save you some money in the long run. A bookkeeper who communicates with a CPA makes the job easier for both. Plus, bookkeepers come a lot cheaper than accounta...

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    32 Part I: Accounting and Bookkeeping Nonprofit Style What type of relationship you have with your fiscal agent varies. Your fiscal agent may handle all of your money or just your grant money. You may approve the day-to-day transactions of your nonprofit and/or pass your bills and invoices on to ...

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    33 Chapter 2: Starting with Basic Bookkeeping and Accounting When looking for people to outsource to it’s best to get referrals from your peers. You can thumb through the phone book, do a search on the Internet, or run an ad in the newspaper, but referrals are best. Even if you outsource your a...

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    34 Part I: Accounting and Bookkeeping Nonprofit Style they’re paid for. You record transactions at the moment a purchase is made, whether you pay for it or charge it. So if you buy those nifty office supplies on credit and pay the bill four weeks later, the transaction is recorded when you boug...

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    35 Chapter 2: Starting with Basic Bookkeeping and Accountingcredit accounts payable for the cost of the office supplies. When the bill is paid, you debit accounts payables and credit cash. The accrual basis gives you a more accurate account of what is owed at any given time. It also requires end-...

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    36 Part I: Accounting and Bookkeeping Nonprofit Style An original cost is the purchase price paid for an asset. Historical cost is also referred to as original cost, and it’s an approach that keeps assets on the books at their purchased price with no regard for inflation or the economy.If all a...

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    37 Chapter 2: Starting with Basic Bookkeeping and AccountingThe executive director and board, with the advice of an accountant, decide which depreciation method to use. You can use a different method for different assets. The most important thing to remember here is that you want to reflect the m...

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    38 Part I: Accounting and Bookkeeping Nonprofit Style salvage value into account, but the tables are useful and can be applied to amounts adjusted for salvage value. IRS Publication 946, How to Depreciate Property, is a good source of information about depreciation methods. You can find the publi...

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    39 Chapter 2: Starting with Basic Bookkeeping and AccountingReturning to the example from the previous section, suppose your computer system has a total cost of $30,000, a salvage value of $3,000, and is expected to last three years. Figure 2-1 shows a comparison of the straight-line and double-d...

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    40 Part I: Accounting and Bookkeeping Nonprofit Style The next time you’re ready to hire an employee, perform a background check on her. You can even get the potential employee to pay for the background check. Oftentimes this can be done through your state’s attorney general’s office or ot...

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    41 Chapter 2: Starting with Basic Bookkeeping and Accountingand balances and then expand upon them for protections that are even more specific to your organization and its operations: ✓ Require two signatures on all checks over a set amount (usually more than a typical payroll tax deposit amoun...

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    42 Part I: Accounting and Bookkeeping Nonprofit Style Insuring or bonding nonprofit employeesChecks and balances and segregation of duties establish some internal controls (refer to the preceding sections), but you can take your internal protections a step further with risk-management strategies....

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    Chapter 3Introducing Financial StatementsIn This Chapter▶ Reviewing nonprofit financial statements▶ Identifying external and internal users▶ Viewing a snapshot of nonprofit statementsIf you’ve ever made a major purchase or tried to secure a large sum of money to purchase a home, the lendi...

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    44 Part I: Accounting and Bookkeeping Nonprofit Style expected and required to perform and record financial functions in an effec-tive, efficient manner. (See more about tax-exempt status in Chapter 14.)Your nonprofit doesn’t pay corporate taxes, but you’re required to submit information to t...

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    45 Chapter 3: Introducing Financial StatementsIn the following sections I give a brief overview of how you can use these statements to benefit and sustain your nonprofit. Tracking your income and spending helps you stay on track financially. Doing so is essential for you to know where your nonpro...

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    46 Part I: Accounting and Bookkeeping Nonprofit Style ✓ Nonprofit accountant: He tracks and accounts for your financial activi-ties. His work forms the basis of your financial statements. ✓ Board members: These folks are responsible for oversight of the entire operation. They use your financ...

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    47 Chapter 3: Introducing Financial Statementswhat you’re supposed to be doing. Public watchdogs go to extreme mea-sures to expose you if you’re not doing the right thing. After the media gets wind that you may not be doing what you should be doing with the money, you may be tried in public.U...

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    48 Part I: Accounting and Bookkeeping Nonprofit Style A glance at the financial statements can either make you or break you. For example, if your organization has an operating budget of $25,000 and you’re applying for a $150,000 grant, do you think it matters to the funder that you’ve never m...

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    49 Chapter 3: Introducing Financial StatementsIndicate lawsuits: Contingent liabilitiesAccurate financial statements also provide important information about incidents or potential liabilities, such as lawsuits, in the notes section of the statements. This information reveals how much money may b...

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    50 Part I: Accounting and Bookkeeping Nonprofit Style Figure 3-1: A statement of activities. OASIS, Inc.Statement of ActivitiesFor Year Ended December 31, 20XXTemporarilyUnrestrictedRestrictedTotalRevenue Contributions$150,74312,500$163,243 Event income: Annual Conference47,81847,818 ...

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    51 Chapter 3: Introducing Financial StatementsAt the very bottom of the statement of activities you find net income (or net assets). Net income is the difference between revenues and expenses. This figure is transferred to the statement of financial position as an asset (see the “Working with t...

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    52 Part I: Accounting and Bookkeeping Nonprofit Style Working with the statement of financial positionThe statement of financial position (also referred to as the balance sheet or the statement of changes in fund balance) reports the amounts of a nonprofit’s assets, liabilities, and net assets ...

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    53 Chapter 3: Introducing Financial Statements Figure 3-2: An example statement of financial position. OASIS, Inc. Statement of Financial PositionDecember 31, 20XXAssetsCurrent assets Cash: Checking Account69,000$ Mentoring Checking22,193$ ...

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    54 Part I: Accounting and Bookkeeping Nonprofit Style Donations can fluctuate, so your cash flow will go up and down within any given month. If you make a sudden move while driving your car on the inter-state at 70 mph, you’re subject to crash. The same is true of your nonprofit; if sudden chan...

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    55 Chapter 3: Introducing Financial StatementsGrasping the statement of functional expenseThe statement of functional expense presents expenses listed on the state-ment of activities based on their use. The statement of functional expense separates expenses based on how much time was spent doing ...

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    56 Part I: Accounting and Bookkeeping Nonprofit Style Figure 3-4: An example statement of functional expense. OASIS, Inc. Statements of Functional Expense For Year Ended December 31, 20XXManagement Program& GeneralFundraisingTotalMentoringTutoringAdvertising 1,1401,140Awards11,27511,27520...

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    57 Chapter 3: Introducing Financial StatementsReading the notes can provide to the internal and external users additional information that may greatly influence their judgment about the future liveli-hood of your organization. In the notes, you can find the following: ✓ Summary of accounting po...

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    58 Part I: Accounting and Bookkeeping Nonprofit Style information. Furthermore, the disclosure principle requires that any perti-nent information that affects the representation of your nonprofit’s financial position — positively or negatively — be disclosed in the notes. According to the g...

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    Chapter 4Keeping Good Records: Using a Manual System or Computer SystemIn This Chapter▶ Designing a manual accounting system▶ Exploring software assistance▶ Protecting your computer systemTo keep good records, you need a central location where you keep all of your transactions. Having quick...

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    60 Part I: Accounting and Bookkeeping Nonprofit Style them to understand how the numbers come together. Computers sometimes break down, freeze up, or just outright stop working. Being able to do your books on paper can save you when a computer glitch sneaks up on you or the system fails.However, ...

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    61 Chapter 4: Keeping Good Records: Using a Manual System or Computer SystemChoosing a Manual SystemA manual bookkeeping system is great if you’re a hands-on type of person. With this system, you can easily monitor all transactions because you have hard copies of all records. Furthermore, writi...

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    62 Part I: Accounting and Bookkeeping Nonprofit Style Eyeing the parts of a manual systemTo use a manual bookkeeping system, you need to understand the tools you need: a checkbook register, an adding machine with a tape, and a filing system. This section focuses on the three main components you u...

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    63 Chapter 4: Keeping Good Records: Using a Manual System or Computer Systemstatements, the first thing your accountant will want to see is proof of pur-chases and transactions. If you’re not organized and don’t have everything in order, you’re in for a frustrating experience. To keep your ...

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    64 Part I: Accounting and Bookkeeping Nonprofit Style In the following sections, I show you how you can take baby steps and use Excel in your bookkeeping. You can see how a simple spreadsheet can make your life easier. For more detailed information about how to use Excel and all of its bells and ...

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    65 Chapter 4: Keeping Good Records: Using a Manual System or Computer SystemConverting your manual system into a spreadsheetIf you’ve been using a manual bookkeeping system and want to move to a com-puter system, an Excel spreadsheet is a good place to start. You can use Excel to verify your to...

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    66 Part I: Accounting and Bookkeeping Nonprofit Style Here’s how to use the SUM function: 1. Click the cell where you want your total to appear on your spreadsheet. 2. Click the SUM function button on your toolbar. 3. Drag your mouse over the cells that you want to add and press the Enter butto...

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    67 Chapter 4: Keeping Good Records: Using a Manual System or Computer SystemQuickBooksQuickBooks is widely used by smaller organizations because of its price and ease of use. You can purchase QuickBooks Premier, which includes a version for nonprofit organizations, for $400 to $1,000, depending o...

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    68 Part I: Accounting and Bookkeeping Nonprofit Style Even though Office Accounting is ideally suited for small businesses, it’s not specifically designed for nonprofit organizations. However, it is affordable. Another drawback is that you may be forced to upgrade other Microsoft programs to ke...

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    69 Chapter 4: Keeping Good Records: Using a Manual System or Computer SystemEnsuring Your System Is SecureYour nonprofit’s financial records contain important and confidential infor-mation that you can’t risk losing, damaging, or having fall into the wrong hands. Security is especially import...

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    70 Part I: Accounting and Bookkeeping Nonprofit Style folders. They also monitor and scan the information that comes into your computer from outside your firewall, as well as stored information within your network. When the virus scanner finds a virus, its job is to stop it before the virus sprea...

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    71 Chapter 4: Keeping Good Records: Using a Manual System or Computer System Most computer systems use password protection and identification to allow users the right to access certain files. It’s a good idea to have your administra-tor set up your computer system so users have to change their ...

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    72 Part I: Accounting and Bookkeeping Nonprofit Style • Third-party software: This type of backup duplicates your com-puter storage system as a mirror image of computer files and folders. Internet sites can provide free online storage for a certain amount of time. This option is a good choice ...

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    Part IIBalancing Your Nonprofit Books

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    In this part . . .Keeping your books in balance can feel like a juggling act. Before starting your first act, though, you need to set a few things in action. This part helps you jump into everything related to keeping your nonprofit’s books balanced.I explain the importance of setting up a char...

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    Chapter 5Setting up the Chart of Accounts for NonprofitsIn This Chapter▶ Organizing a chart of accounts▶ Setting up accounting codes▶ Sorting all types of accountsIn order for you to easily keep track of where money is coming from and going to in your nonprofit, you use a chart of accounts....

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    76 Part II: Balancing Your Nonprofit Books services you provide. Your chart of accounts consists of accounts found on your financial statements. Knowing which accounts go with which statements helps you to indentify the main types of accounts. For instance, the statement of financial position has...

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    77 Chapter 5: Setting up the Chart of Accounts for Nonprofitsaccounts by giving them a name and number, and it’s the first thing any bookkeeper needs to keep your books in order. It arranges all similar accounts in order to give clarity to what’s what. If you run out of numbers, you can assig...

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    78 Part II: Balancing Your Nonprofit Books ✓ Contributions receivable: When people give you pledges, you record them here, even if the donor restricts the pledged contribution to use in a future period. However, if the pledge won’t be paid until a future period, it should be classified as a ...

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    79 Chapter 5: Setting up the Chart of Accounts for NonprofitsSee the following list of liabilities and an explanation of each. ✓ Accounts payable: This account records current liabilities, which represent debts that must be paid within a relatively short period, usually no longer than a year. ...

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    80 Part II: Balancing Your Nonprofit Books ✓ Unrestricted net assets: This account records the balance of unrestricted net assets (unrestricted assets less liabilities that will be paid with unrestricted assets). Unrestricted net assets generally result from revenues that were derived from pro...

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    81 Chapter 5: Setting up the Chart of Accounts for NonprofitsYour chart of accounts helps you keep track of revenue sources. Notice how revenue accounts are identified by the second digit (see Figure 5-1). Revenue accounts often start with the number 4. (Check out the “Coding the Charges: Assig...

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    82 Part II: Balancing Your Nonprofit Books ✓ Fees from special events: When you collect membership fees and funds raised through special events, you record them in this account. Subaccounts should be established for each type of fee collected. ✓ Special events (net revenue): This account rec...

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    83 Chapter 5: Setting up the Chart of Accounts for Nonprofits ✓ Unemployment insurance contribution: This account records the employer’s contribution for employees’ costs of the state unemployment insurance program. ✓ Workers compensation: Here’s where you record the cost of workers com...

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    84 Part II: Balancing Your Nonprofit Books ✓ Repair and maintenance: Can you guess what this account covers? Yep, the costs of routine repairs and maintenance, including service contracts. ✓ Computer services (accounting, payroll, and so on): This account records the cost of purchased comput...

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    85 Chapter 5: Setting up the Chart of Accounts for NonprofitsNet income/increase – decrease in net assetsThe statement of activities subtracts all expenses from revenues to get net income or an increase or decrease in net assets. To calculate your net assets results, take the change in net asse...

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    86 Part II: Balancing Your Nonprofit Books Within each category of accounts, the second digit identifies the subclassifi-cation. For example, ✓ Within 1110 to 1231 of asset accounts, you have • 1111 to 1170 as current assets. • 1210 to 1231 as long-term assets. ✓ Within 2110 to 2220 of li...

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    Chapter 6Recording Transactions and Journal EntriesIn This Chapter▶ Getting an overview of the accounting process▶ Making entries in the journal▶ Transferring information to the general ledger▶ Seeing if everything balances▶ Finding and fixing errorsJust like a coin has two sides (a hea...

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    88 Part II: Balancing Your Nonprofit Books can wait until later. The method you choose affects when you make journal entries about transactions. They’re centered on how and when you recognize revenues and expenses.You need to choose between the two following methods: ✓ Cash-basis accounting: ...

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    89 Chapter 6: Recording Transactions and Journal EntriesEyeing the specifics of the processTo fully understand how to record and track your nonprofit’s financial transactions, you need to understand the ins and outs of the process. You also need to know what the different accounts are and how p...

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    90 Part II: Balancing Your Nonprofit Books Figure 6-1: The accounting process. RevenueJournalingClosedBooksPostingUnadjustedTrial BalanceAdjustingEntriesAdjustedTrial BalanceFinancialStatementLooking at the two sides of an accountBefore you begin recording transactions and making journal entries...

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    91 Chapter 6: Recording Transactions and Journal Entries Think of accounts as having two sides. The debit side is on the left, and the credit side is on the right. And because credits increase revenue, liability, and equity accounts, debits decrease them. Think of your journal page like a capital...

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    92 Part II: Balancing Your Nonprofit Books of the transaction. At the time you record journal entries, you don’t need to make any specific reference; just make sure you get the info recorded. See Chapter 5 for more about making the entries in the right accounts.Every transaction is recorded in ...

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    93 Chapter 6: Recording Transactions and Journal EntriesSo, for example, you receive a check for $1,000 from a donor on Oct. 8, 2010. Besides putting a smile on your face for receiving the money, you also need to deposit the check. You create the following journal entry: DateDebitCredit20XXOct. ...

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    94 Part II: Balancing Your Nonprofit Books For example, for the $1,000 donation, record the amount as such: DateDebitCredit20XXOct. 8Cash Donation Revenue1,0001,000Step four: Write an explanation or reason for transactionEach transaction has an explanation. The final step to recording a journal ...

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    95 Chapter 6: Recording Transactions and Journal Entriesare placed first, followed by revenues and expenses (statement of activities accounts).Your journal is the book of original entry. Depending on the magnitude of your accounting transactions, posting journal entries information from the journ...

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    96 Part II: Balancing Your Nonprofit Books most nonprofits, donations from individuals, corporations, foundations, and state and federal grants each are recorded in a separate account. ✓ Expenses: These are usually the last group of general ledger accounts. You name your expense accounts accord...

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    97 Chapter 6: Recording Transactions and Journal Entries Figure 6-3: A sample general ledger page. CashNo. 1110DateDebitCreditBalance20XX1-Oct2,0002,00052002,20065001,700102001,500133001,800141001,700192001,900224001,500295002,0001-Nov3002,30012002,10021002,00031002,10075001,60082501,850142,0003,...

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    98 Part II: Balancing Your Nonprofit Books accounting software on the market today doesn’t allow you to enter accounts that are out of balance. They’ll send a warning message when debits and credits don’t balance. To prepare a trial balance, you write down all your account titles from your ...

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    99 Chapter 6: Recording Transactions and Journal EntriesAdjusting entries affects accounts on the statement of activities. Revenue and expenses accounts may require adjustments. You probably need to prepare adjustments for the following accounts: ✓ Prepaid expenses include payments in advance o...

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    100 Part II: Balancing Your Nonprofit Books Ferreting out basic errorsYour general ledger is only as accurate as your journal. If you entered incorrect data while journaling, you probably transferred the same wrong information to the ledger. Go back to the beginning and compare journal entries to...

  • Page 119

    101 Chapter 6: Recording Transactions and Journal EntriesCorrecting errorsSo after hunting through your transactions, you find your error. Although some errors are easier to find than others, most are easily correctible. Errors made in calculations and balancing, posting to the wrong side of an a...

  • Page 120

    102 Part II: Balancing Your Nonprofit Books If the incorrect information from the journal has already been recorded in the ledger, you have to take a few more steps to make everything right. I explain how in the next section.Making a ledger correctionIf you find a mistake after it’s been posted...

  • Page 121

    Chapter 7Balancing the Checkbook: Donations and ExpensesIn This Chapter▶ The key to your account: The checkbook register▶ A pleasant task: Taking in and tracking donations▶ The dreaded chore: Paying bills and recording expenses▶ Performing checks and balances: Reconciling your checkbook r...

  • Page 122

    104 Part II: Balancing Your Nonprofit Books This chapter focuses on how to use the checkbook register to balance your nonprofit’s checking account and shows you how to record and log transac-tions when they occur. If you just opened a checking account, balancing the account in your head may see...

  • Page 123

    105 Chapter 7: Balancing the Checkbook: Donations and Expenses Figure 7-1: A nonprofit’s checkbook register. Another lifesaver to keeping your register balanced is online banking. You can see an updated and current balance in your account when you access your account online. Online banking giv...

  • Page 124

    106 Part II: Balancing Your Nonprofit Books The following sections focus on how to log monetary donations into your checking account, the different types of donations you may encounter, and why you need to differentiate between them.Logging donations in your registerAs your nonprofit receives don...

  • Page 125

    107 Chapter 7: Balancing the Checkbook: Donations and ExpensesRaking in the cash, checks, and other donationsPeople can write checks, hand you cash, or pay by credit card when they donate money to your organization. Larger groups may give you a grant to finance your mission. No matter what form t...

  • Page 126

    108 Part II: Balancing Your Nonprofit Books The best way to handle a cash donation is to give the donor a receipt if the donation is made in your office. If you receive cash in the mail, you should send the donor a receipt. You don’t want to turn down cash just because it’s hard to track, but...

  • Page 127

    109 Chapter 7: Balancing the Checkbook: Donations and Expenses If you can afford it, purchase a check-swiping system, such as TeleCheck, to speed up the checking-clearing process. These systems are connected directly to banks and reject a check if the money isn’t in the account. This is the bes...

  • Page 128

    110 Part II: Balancing Your Nonprofit Books This method results in the deposit going directly into your bank account around the same day of each month. You need to pay attention to the timing of these deposits so you can record them in your checkbook register on the right day. Banks don’t recor...

  • Page 129

    111 Chapter 7: Balancing the Checkbook: Donations and Expenses 3. Write down the deposit in your checkbook register. Not writing down a deposit can throw your checking account out of whack. Forgetting to write down a deposit is not as bad as forgetting to write down a written check. 4. Take the ...

  • Page 130

    112 Part II: Balancing Your Nonprofit Books For example, you have $1,840 in your checking account, and you have to write checks to cover your utilities for $300, your rent for $1,000, and your insurance for $300. You subtract each check from your total; now you know you have $240 in your account....

  • Page 131

    113 Chapter 7: Balancing the Checkbook: Donations and Expenses ✓ Rent: This is an expense for your office space or building that you’re leasing. ✓ Utilities: These include telephone, fax, electricity, water, garbage, and so on. ✓ Payroll/wages: These are expenses in paying those who provi...

  • Page 132

    114 Part II: Balancing Your Nonprofit Books • Non-sufficient funds (NSF) fees: Your bank charges these fees for processing a check or credit card transaction when the money wasn’t available in your account. This is commonly referred to as a bounced check. • Fee per transaction: These fees ...

  • Page 133

    115 Chapter 7: Balancing the Checkbook: Donations and ExpensesRelying on direct or automatic bank draftsTo prevent potential errors, you can set up automatic or direct bank drafts with your checking account. Automatic or direct bank drafts are bills that are paid directly out of your checking acc...

  • Page 134

    116 Part II: Balancing Your Nonprofit Books Tie It Together: Balancing the CheckbookMost nonprofits hire a bookkeeper to handle the day-to-day finances of the organization and a part-time accountant to tie it all together. Bookkeepers and accountants perform different duties. A good bookkeeper ca...

  • Page 135

    117 Chapter 7: Balancing the Checkbook: Donations and Expenses 2. Repeat Step 1 for your deposits. 3. Repeat Step 1 for withdrawals and debit card purchases. If the bank shows something that isn’t listed in your checkbook register, check your records to make sure you made the transaction. If y...

  • Page 136

    118 Part II: Balancing Your Nonprofit Books ✓ ATM/debit card transactions and fees. You may have recent transac-tions that occurred between the time the statement was printed and now. ✓ Deposits made or recorded after the statement date. ✓ Bank fees and earned interest not recorded in the ...

  • Page 137

    119 Chapter 7: Balancing the Checkbook: Donations and Expensesare? Somewhere along the line you may have written down the digits you’re adding in the wrong order (or entered them in the wrong order if you’re using a calculator or adding machine). To figure out whether an error is caused by tr...

  • Page 138

    120 Part II: Balancing Your Nonprofit Books Some banks have time restraints on how long a check can be held before cashing. Some are only good for 90 days, but you should find out from your bank how long it will honor payments on checks. You may want to consider printing “Void after 6 months”...

  • Page 139

    Chapter 8Balancing Cash Flow: Creating an Operating BudgetIn This Chapter▶ Outlining your nonprofit’s goals▶ Projecting and comparing revenues and expenses▶ Sticking to your planYour organization needs to know where it’s going, whether you put it in writing or not. However, to spend mon...

  • Page 140

    122 Part II: Balancing Your Nonprofit Books quarter, or year. It expresses in monetary terms what your objectives are. It’s almost impossible to know when you’ve reached your target goal if you don’t know what you need. Without a budget, you’re on a cross-country road trip without a map. ...

  • Page 141

    123 Chapter 8: Balancing Cash Flow: Creating an Operating BudgetGetting Off to a Good Start: Preparing to Create an Operating BudgetBefore you can put together your nonprofit’s operating budget, you have to make the necessary preparations. If you were planning a month-long trip to Europe, you w...

  • Page 142

    124 Part II: Balancing Your Nonprofit Books Start your budget process by forming a team that includes your executive director, chief financial officer, and finance committee or budget task group (see “Establishing a budget task group” later in the chapter for more on this topic). Then make s...

  • Page 143

    125 Chapter 8: Balancing Cash Flow: Creating an Operating Budget Having clear guidelines helps you recognize the importance of budget maintenance for your organization. Your budget allows you to focus on items and issues that are relevant to your board’s fiscal priorities.Identifying your nonpr...

  • Page 144

    126 Part II: Balancing Your Nonprofit Books Eyeing goalsWithout a vision, organizations perish. Your nonprofit’s goals are visionary statements that motivate you and others to do something. Goals are end results that you desire to obtain. Before you can put together your operating budget, you n...

  • Page 145

    127 Chapter 8: Balancing Cash Flow: Creating an Operating BudgetAfter you set your organization’s goals, you then have to prioritize them. Some people assign numbers to their goals based on priority. To prioritize, you need to rank in order the steps needed to accomplish your goals. Whatever th...

  • Page 146

    128 Part II: Balancing Your Nonprofit Books organization, except you may have different categories. (Check out the “Coming Up with an Operating Budget” section later in this chapter for how to develop your program budgets.) After you set a goal, begin working toward achieving it right away. E...

  • Page 147

    129 Chapter 8: Balancing Cash Flow: Creating an Operating BudgetYour budget and work plan should be scheduled so everyone involved is on the same page. Developing a budget calendar with a timeline can help your board, finance committee, budget task group, and treasurer stay on track. You can use ...

  • Page 148

    130 Part II: Balancing Your Nonprofit Books As you set your goals, you establish an outline of tasks to ensure that you reach the goal. As you accomplish a goal, cross it off the list and start on another one.To complete your tasks, you use a bit of time and money. If you know how much of each is...

  • Page 149

    131 Chapter 8: Balancing Cash Flow: Creating an Operating Budget Figure 8-1: A draft budget for a mentoring program. RevenuesActualBudgetDifference Private donations50,00045,0005,000 Public donations150,000140,00010,000 Collected Fees25,00028,000-3,000 Total Income225,000213,00012,000Exp...

  • Page 150

    132 Part II: Balancing Your Nonprofit Books This process is time consuming and one of the reasons many organizations don’t create a budget. However, by not taking this step, you miss things that need attention, like how you fund your activities and if there’s a less costly way to provide more...

  • Page 151

    133 Chapter 8: Balancing Cash Flow: Creating an Operating BudgetOne of three things is going to happen: You’ll get what you expect (project), or you’ll get more or less. Yet, forecasting your expectations is crucial to your organization’s budgetary process.So when separating actual and proj...

  • Page 152

    134 Part II: Balancing Your Nonprofit Books If your budget shows a negative number, you’ve got a net decrease in assets, meaning your expenses are larger than your revenues. You can handle this a couple of ways: ✓ You can take a look at your expenses and see where you can cut some costs. ✓ ...

  • Page 153

    135 Chapter 8: Balancing Cash Flow: Creating an Operating BudgetFurthermore, after your accounting period ends, you need to evaluate the budget and look for ways to become more cost efficient before you start the new budget for the next year. The following sections address some ways you can revie...

  • Page 154

    136 Part II: Balancing Your Nonprofit Books With the budget in front of them, your board members may make adjust-ments by revising tasks and schedules. Some programs may be canceled and budget line items reallocated. You may also consider scaling back on purchases or increasing the costs of servi...

  • Page 155

    Chapter 9Staying in Nonprofit ComplianceIn This Chapter▶ Obeying federal and state guidelines▶ Conforming to GAAP, FASB, and SOX▶ Ensuring the auditor’s independence▶ Keeping your activities on the up and upKnowing the rules of engagement for your nonprofit is similar to follow-ing the ...

  • Page 156

    138 Part II: Balancing Your Nonprofit Books Understanding Why Being Compliant Is Important for Your NonprofitThe IRS has the authority to give and take away your nonprofit status. So, the bottom line is you want to keep the IRS happy and stay in compliance with the appropriate federal and state l...

  • Page 157

    139 Chapter 9: Staying in Nonprofit Compliancerequire nonprofits to register with the secretary of state’s office, state department of revenue, and/or state attorney general’s office. Some states offer benefits similar to the IRS by granting a sales tax exemption. To find your state laws, vis...

  • Page 158

    140 Part II: Balancing Your Nonprofit Books When hiring your nonprofit’s CPA, you should try to adhere to the Sarbanes-Oxley (SOX) Act. Check out the “Sorting out the Sarbanes-Oxley Act (SOX)” section later in this chapter for the two specific points that SOX now regulates when hiring a CP...

  • Page 159

    141 Chapter 9: Staying in Nonprofit ComplianceThe fascinating FASBThe FASB governs and provides financial accounting and reporting oversight for your nonprofit. You don’t deal directly with these folks, but you need to stay abreast of rules that they create. In most cases, your state or the IRS...

  • Page 160

    142 Part II: Balancing Your Nonprofit Books • Permanently restricted net assets • Temporarily restricted net assets • Unrestricted net assets For definitions of these three types of net assets, check out Chapter 16.You need to classify your contributions because you’ll use this informat...

  • Page 161

    143 Chapter 9: Staying in Nonprofit ComplianceFASB Statement No. 117: Financial Statements of Not-for-Profit OrganizationsFASB Statement No. 117 covers financial statements of nonprofits. It specifies information to be reported in financial statements and how to report assets, liabilities, net as...

  • Page 162

    144 Part II: Balancing Your Nonprofit Books All GAAP-based financial statements are presented using the accrual basis of accounting, which deals with the recognition of transactions. For example, all transactions are recorded on the books when they occur, no matter when cash actually exchanges h...

  • Page 163

    145 Chapter 9: Staying in Nonprofit Compliance ✓ Matching principle: This principle requires donations and revenues received and expenses incurred to be recorded in the same period you receive or incur them. In other words, you should recognize expenses in the period you incur the expense. For ...

  • Page 164

    146 Part II: Balancing Your Nonprofit Books it to prior years or to organizations of similar size. In making these comparisons, changes in accounting methods affect the numbers on your financial statements. Using one accounting method for three months and then switching to a different method bef...

  • Page 165

    147 Chapter 9: Staying in Nonprofit ComplianceSelecting an audit committee to hire an independent CPAOne of the many Sarbanes-Oxley Act initiatives deals with audit committees and auditors’ independence. An audit committee is responsible for board finan-cial and accounting oversight. The commit...

  • Page 166

    148 Part II: Balancing Your Nonprofit Books ✓ Employment relationships: A one-year cooling-off period is required before you can hire certain individuals who were formerly employed by your auditor in a financial reporting oversight role. The audit committee should consider whether hiring someo...

  • Page 167

    149 Chapter 9: Staying in Nonprofit ComplianceAvoiding Activities that Can Call Your Compliance into QuestionCertain acts by your executive director, employees, and board members may be misunderstood by the IRS and your constituents. Questionable activities usually involve deals with family membe...

  • Page 168

    150 Part II: Balancing Your Nonprofit Books As for politicking, supporting your favorite candidate by casting your one vote for them is okay. However, you threaten your nonprofit’s status if you go any further. Don’t use your organization’s Web site to promote a candidate and don’t distr...

  • Page 169

    Part IIIAccounting for Nonprofit Situations

  • Page 170

    In this part . . .This part covers everything related to the feds. Grant money is an important source of revenue for your nonprofit, so you need to know how to access that money. When keeping your nonprofit’s books, you need to pay special attention to the federal grant system if you receive an...

  • Page 171

    Chapter 10Introducing Federal GrantsIn This Chapter▶ Understanding the significant role of grants▶ Identifying funding opportunities▶ Following grant guidelinesMost nonprofit executives spend sleepless nights worrying about finances and wondering if donors will continue to support the orga-...

  • Page 172

    154 Part III: Accounting for Nonprofit Situations Grasping Why Federal Grant Money Is Important to NonprofitsFinding money to fund your nonprofit’s projects can be a time-consuming and stressful experience. However, a significant amount of federal grant money is available if you know where to t...

  • Page 173

    155 Chapter 10: Introducing Federal Grantswith all the strict guidelines and hoops to jump through, if your nonprofit isn’t taking advantage of this money, you’re losing out on funds that can make a real impact on your organization.The 4-1-1 on Grants: Just the BasicsRight now people are sitt...

  • Page 174

    156 Part III: Accounting for Nonprofit Situations If you’re lucky enough to get a grant, then you’re a grant recipient. A grant recipient is expected to ✓ Be a good steward of the grant money ✓ Use the grant money for intended purposes ✓ Keep copies of all bills and expenses paid for wi...

  • Page 175

    157 Chapter 10: Introducing Federal Grants So where can your nonprofit locate these federal grant monies? Three primary places to find grant opportunities for your nonprofit are ✓ Grants.gov: Grants.gov is the one-stop shop designed to provide a level playing field for all organizations. Every ...

  • Page 176

    158 Part III: Accounting for Nonprofit Situations accountability, federal grants are under serious scrutiny. Although opening a separate bank account for grant funds isn’t required, federal auditors and monitors require that nonprofits account for and keep track of every pur-chase, sale, and pa...

  • Page 177

    159 Chapter 10: Introducing Federal Grants ✓ Bid quotes and records of procurements ✓ Time and attendance reports for employees ✓ Payroll (salary and fringe benefits) expenses ✓ Leases for equipment ✓ Contractual agreements Being organized with these records helps when it comes time for...

  • Page 178

    160 Part III: Accounting for Nonprofit Situations 2 CFR Part 215 for administrative requirementsThe 2 CFR Part 215 circular (formerly known as Circular A-110) addresses all nonprofit organizations, institutions of higher education, and hospitals, and lays out the specific rules for administrative...

  • Page 179

    161 Chapter 10: Introducing Federal GrantsCosts are classified as reasonable, allocable, and allowable. ✓ Reasonable cost: A reasonable cost isn’t any higher than what an aver-age person would pay under the same circumstances. In other words, just because Uncle Sam is paying, doesn’t mean y...

  • Page 180

    162 Part III: Accounting for Nonprofit Situations You’re spending federal money that comes out of the U.S. Treasury. The fed-eral government wants to make sure you’re spending it for the intended pur-pose and that you’re following the rules and guidelines. For more information about OMB A-1...

  • Page 181

    163 Chapter 10: Introducing Federal Grantsgrant agreement relationship between the federal government and your organization. The purpose of the relationship is to transfer money to you so you can accomplish the common good.You may get a letter or an e-mail with a downloadable file about your gran...

  • Page 182

    164 Part III: Accounting for Nonprofit Situations Knowing the due dates for financial status reportsUnless otherwise noted in the special conditions (see the next section), finan-cial status reports are due quarterly, annually, and at the end of the project period to close out the grant. The quar...

  • Page 183

    165 Chapter 10: Introducing Federal GrantsKeeping the award/project period in mindYour grant has a beginning date and an ending date, which is called your proj-ect period. Your project period may range from one to three years. I always mark both my wall and electronic calendars to keep up with gr...

  • Page 184

    166 Part III: Accounting for Nonprofit Situations the expense. The Notice of Grant Award will indicate the amount the federal agency pays (called the federal share) and what, if any, the nonprofit must match (called the nonprofit share).For example, if you submit a grant application stating it wi...

  • Page 185

    Chapter 11Tracking and Accounting for Federal DollarsIn This Chapter▶ Managing federal dollars▶ Overseeing subgrantees▶ Filling out reports▶ Completing the grant agreementGo ahead and celebrate. You worked hard and you received the federal grant. You’ve been awarded grant funding to est...

  • Page 186

    168 Part III: Accounting for Nonprofit Situations Understanding Your ObligationAs grant recipient, you’ve agreed to fulfill a need in society, and the federal government has agreed to give you the money to do so. As a grant recipient, you’re responsible for ✓ Managing the money: This can be...

  • Page 187

    169 Chapter 11: Tracking and Accounting for Federal Dollars ✓ Handling the paperwork: I know you don’t want to be a paper pusher, but if you’re going to spend the government’s money, you have to keep track of every detail. Here’s what you have to do: • Prepare and file reports on time...

  • Page 188

    170 Part III: Accounting for Nonprofit Situations government expects you to spend the money. You’re expected to be a wise steward and to exercise good judgment when making decisions about what to buy and how much to pay.Within your nonprofit, you need to keep a separate budget and set up sepa-r...

  • Page 189

    171 Chapter 11: Tracking and Accounting for Federal DollarsFollowing up this call with an e-mail to verify the request is always a good idea. After your program manager approves the changes, you receive a grant adjustment notice by mail; add the notice to your grant files. Get all approved change...

  • Page 190

    172 Part III: Accounting for Nonprofit Situations Creating the grant agreement for subgranteesWhether you call it an agreement or a contract, you need to have something in writing that states the terms of your agreement with the subgrantees — how much money you’ll allocate, to whom you will a...

  • Page 191

    173 Chapter 11: Tracking and Accounting for Federal DollarsGenerally, grantees give subgrantees a deadline of two weeks before the reports are due to the grantor. As the lead agency or grantee, your financial reports are due 45 days after the end of the quarter. Therefore, if you’re managing su...

  • Page 192

    174 Part III: Accounting for Nonprofit Situations Before you can gain access to your grant money, you need to submit some information authorizing your bank to process the drawdown. The drawdown is the process by which you request your grant money from the awarding agency. You have to submit paper...

  • Page 193

    175 Chapter 11: Tracking and Accounting for Federal Dollars One disadvantage to the telephone method is that it can leave you won-dering whether your request actually transmitted because you don’t receive documentation verifying the transaction. But, you can create your own spreadsheet of the ...

  • Page 194

    176 Part III: Accounting for Nonprofit Situations If you want assurance that you and your award agency have the same bal-ances, you can request a grant summary from your federal program manager. A grant summary is a printout of all of your grant transactions according to the awarding agency’s ...

  • Page 195

    177 Chapter 11: Tracking and Accounting for Federal Dollars ✓ A financial status report, called the Standard Form 269: Your financial status report gives a brief summary of how much money was awarded, how much money was spent, and how much money you have left in your budget. This report is file...

  • Page 196

    178 Part III: Accounting for Nonprofit Situations Figure 11-1: Financial Status Report — Standard Form 269A. Filling out SF-269AAccording to the OMB, the SF-269A takes about 90 minutes to complete. Each item on the form has a number or letter, which makes explaining it rather easy. The top por...

  • Page 197

    179 Chapter 11: Tracking and Accounting for Federal DollarsThe following steps explain the items on the SF-269A and what to do for each one: 1. Federal Agency and Organizational Element to Which Report Is Submitted: Insert the name of the federal agency that awarded the grant. 2. Federal Grant or...

  • Page 198

    180 Part III: Accounting for Nonprofit Situations the chart of reporting periods and due dates in the “Submitting SF-269” section. If this is your final report, your time period is the entire grant period, from the beginning date to the closeout date, including all extensions. 10. Transactio...

  • Page 199

    181 Chapter 11: Tracking and Accounting for Federal Dollarsincurred but that the agency hasn’t yet paid. If you don’t have any or if it’s a cost-sharing grant, leave this box blank. Although these expenses occurred within the Financial Status Report period, you may not have requested or pa...

  • Page 200

    182 Part III: Accounting for Nonprofit Situations Reporting Quarter Due DateJanuary 1–March 31 May 15April 1–June 30 August 14July 1–September 30 November 14October 1–December 31 February 14If you have the option to fax your financial status report, don’t wait until the due date to fax ...

  • Page 201

    183 Chapter 11: Tracking and Accounting for Federal DollarsYou can download the OMB’s progress reports, called the Performance Progress Reports (SF-PPRs), at www.whitehouse.gov/omb/grants/grants_forms.html.Some federal agencies have their own reports, so check with your federal program manager ...

  • Page 202

    184 Part III: Accounting for Nonprofit Situations participated, how many people directly benefited from your program, and so on. These numbers provide outcome measurements, which help the award-ing agency decide your project’s overall efficacy so far.I like to use brief condensed sentences that...

  • Page 203

    185 Chapter 11: Tracking and Accounting for Federal DollarsClosing Out a GrantCloseout of a grant occurs when the awarding agency determines that all applicable administrative actions and all required programmatic work under the grant have been completed, with the possible exception of the final ...

  • Page 204

    186 Part III: Accounting for Nonprofit Situations

  • Page 205

    Chapter 12Getting Ready for the Grant AuditIn This Chapter▶ Understanding why audits are important▶ Knowing the four types of grant audits▶ Pulling together the necessary paperwork▶ Following up on the grant audit findingsAs the executive director or manager of a nonprofit, you probably a...

  • Page 206

    188 Part III: Accounting for Nonprofit Situations Understanding the Purpose of the Grant AuditWhen your nonprofit receives federal money, a grant audit determines whether your organization performed and complied with the federally funded grant. Basically Uncle Sam wants to make sure you’re foll...

  • Page 207

    189 Chapter 12: Getting Ready for the Grant AuditTo complete the audit, the program officer verifies that your nonprofit adheres to the following three circulars. These circulars outline the rules a nonprofit has to follow if it receives federal money. Chapter 10 highlights some of the specifics ...

  • Page 208

    190 Part III: Accounting for Nonprofit Situations When You’re Notified: Comprehending the Nitty Gritty of the AuditYou’ll find out you’re due for an audit by letter. It will include details about the type of audit (see the next section for more on the types of grant audits) and who will per...

  • Page 209

    191 Chapter 12: Getting Ready for the Grant Audit You need to know the proper way to administer and manage your grant. Make sure you read over the cost principles and administrative requirements (con-tained in the OMB circulars; see Chapter 10 for more info) of your grant so you’re prepared for...

  • Page 210

    192 Part III: Accounting for Nonprofit Situations you’ve made toward achieving project objectives; to verify your compliance with the terms, conditions, and purpose of grant; and to identify technical assistance needs. Your monitoring site visit will be scheduled at a good time for you and your...

  • Page 211

    193 Chapter 12: Getting Ready for the Grant AuditWhen this team is scheduled to pay you a visit is left up to your program manager and the federal agency that awarded the grant. During this auditing site visit, your program officer checks out the following: ✓ Program compliance ✓ Subgrantee m...

  • Page 212

    194 Part III: Accounting for Nonprofit Situations ✓ Financial system (internal control system) ✓ Procurement system (policy and procedures) ✓ Travel system (policy and procedures) ✓ Personnel system (time and attendance reports) ✓ Property management or inventory system ✓ Project per...

  • Page 213

    195 Chapter 12: Getting Ready for the Grant AuditKnowing What the Auditor Looks ForIf you’ve ever put your house on the market, you know how people come in and look in closets, open up cabinets, pull out drawers, and see what’s what (which you may not be very comfortable with). Well, your aud...

  • Page 214

    196 Part III: Accounting for Nonprofit Situations In real estate, agents determine the odds of selling your home by three things: location, location, location. In the world of grants, successfully passing an audit also depends on three important things: documentation, documentation, documentatio...

  • Page 215

    197 Chapter 12: Getting Ready for the Grant AuditProving your agency’s existence with organizational records and documentsYou know your nonprofit exists; I trust that your nonprofit exists. But Uncle Sam wants unquestionable proof that your nonprofit is what you say it is. Your program officer ...

  • Page 216

    198 Part III: Accounting for Nonprofit Situations Having all of these documents and information at your fingertips when the auditor arrives saves time, and it shows that you’re organized and a good record-keeper.Tracking all grant expensesThe federal government has given your organization mone...

  • Page 217

    199 Chapter 12: Getting Ready for the Grant AuditAs a director or manager of a small- to medium-sized nonprofit, you need to have a system of cash management because having excess cash in your bank account is a sign of poor cash management. This section helps you reduce the amount of cash on hand...

  • Page 218

    200 Part III: Accounting for Nonprofit Situations to make sure your nonprofit has internal controls in place to protect the organization’s finances and assets.Your auditor will review your entire management system and look at the internal controls you’ve established. No audit is complete with...

  • Page 219

    201 Chapter 12: Getting Ready for the Grant AuditReceiving the Report of Audit FindingsWhen the auditor is finished with the audit, she issues an audit report, which tells your organization the results of the audit. The audit report is the final stage of the audit process, and it communicates aud...

  • Page 220

    202 Part III: Accounting for Nonprofit Situations Classifying the audit findingAnytime something is wrong in a court of law, juries, judges, and prosecutors consider the intent behind the misconduct. This is true with audit findings as well. If your auditor finds something wrong with your federal...

  • Page 221

    203 Chapter 12: Getting Ready for the Grant AuditSome common findings included on a corrective action plan are the need to monitor subgrantees and to establish segregation of duties. As a grant recipi-ent, you need to take the actions specified in the corrective action plan. If you need help, con...

  • Page 222

    204 Part III: Accounting for Nonprofit Situations

  • Page 223

    Chapter 13Accounting for Payroll and Payroll TaxesIn This Chapter▶ Creating payroll accounts for employees▶ Calculating federal, state, and local taxes▶ Paying quarterly payroll taxes▶ Submitting IRS payroll requirements▶ Reporting info about contract employeesYou’re the executive dir...

  • Page 224

    206 Part III: Accounting for Nonprofit Situations As an employer, you need to concern yourself with establishing and paying a fair rate of pay and submitting payroll tax payments on time. Some issues, such as minimum wage, have already been decided for you.Setting Up Payroll Accounts for Nonprof...

  • Page 225

    207 Chapter 13: Accounting for Payroll and Payroll Taxes Figure 13-1: Form W-4, Employee’s Withholding Allowance Certificate. Cut here and give Form W-4 to your employer. Keep the top part for your records.OMB No. 1545-0074Employee’s Withholding Allowance CertificateW-4FormDepartment of the T...

  • Page 226

    208 Part III: Accounting for Nonprofit Situations Figure 13-2: Quick and easy tax information. When figuring out how much to pay in federal payroll taxes for each employee, salary is by far the most important factor to consider. However, it’s not the only one. This section highlights the areas...

  • Page 227

    209 Chapter 13: Accounting for Payroll and Payroll Taxes Minimum wage laws are preset by the federal government, but most states also have minimum wage laws. An employer can never pay an employee less than the minimum wage set by the federal government.You figure out how much you need to pay in p...

  • Page 228

    210 Part III: Accounting for Nonprofit Situations In addition to overtime, cash advances are an important factor in determin-ing tax deductions. Cash advances are loans that the employer gives to an employee that will be repaid from the employee’s future pay. Giving cash advances to your nonpro...

  • Page 229

    211 Chapter 13: Accounting for Payroll and Payroll Taxesare used to fund Social Security and Medicare retirement benefits and to pro-vide for disabled workers and children of deceased workers.Employees pay 7.65 percent of their gross income for FICA, and their employer matches by also paying 7.65...

  • Page 230

    212 Part III: Accounting for Nonprofit Situations Paying Quarterly Payroll Taxes with Form 941 and Form 8109Quarterly payroll taxes are taxes that your nonprofit owes to the IRS for your match portion of FICA and the amount you withheld from your employees for their portion of FICA and for federa...

  • Page 231

    213 Chapter 13: Accounting for Payroll and Payroll TaxesI can’t stress enough how important paying these quarterly taxes is. If you fall behind, catching up can be extremely difficult. If you do fall behind on payroll taxes, talk with your tax accountant for clarity on what steps to take. You m...

  • Page 232

    214 Part III: Accounting for Nonprofit Situations Figure 13-3: Form 941, Employer’s Quarterly Federal Tax Return. 941 for 2008:(Rev. January 2008)OMB No. 1545-0029Employer’s QUARTERLY Federal Tax ReturnDepartment of the Treasury — Internal Revenue Service950108Employer identification numbe...

  • Page 233

    215 Chapter 13: Accounting for Payroll and Payroll Taxes 3. Complete Part 2. Part 2 determines your tax liability for the quarter. If you’re a small nonprofit, you probably owe less than $2,500; if you do, you can check the first box next to number 15 and go on to Part 3. (You can pay your pay...

  • Page 234

    216 Part III: Accounting for Nonprofit Situations by making payroll tax deposits. Most small nonprofits pay quarterly payroll taxes, and even smaller ones pay annually. Those nonprofits that pay annu-ally use an annual payroll tax report called Form 944. Annual Form 944 is due by January 31. Refe...

  • Page 235

    217 Chapter 13: Accounting for Payroll and Payroll Taxes Figure 13-4: Where to send your Form 941. If you live in Without a paymentWith a paymentConnecticutNew JerseyDept of Treasury Dept of Treasury IRSDelawareNew YorkIRSP.O. Box 70503District of ColumbiaNorth CarolinaCincinnati, OH 45999-0005C...

  • Page 236

    218 Part III: Accounting for Nonprofit Situations Figure 13-5: Form 8109, Federal Tax Deposit Coupon. ,.,For Information OnlyDo Not FileSEPARATE ALONG THIS LINE AND SUBMIT TO DEPOSITARY WITH PAYMENTOMB NO. 1545-0257Note. Except for the name, address, and telephone number, entries mustbe made in ...

  • Page 237

    219 Chapter 13: Accounting for Payroll and Payroll Taxessure you use a No. 2 pencil for everything but your name, address, and tele-phone number, for which you can use ink. The first box asks for the month that the tax year ends. If your accounting period starts in January and ends in December, e...

  • Page 238

    220 Part III: Accounting for Nonprofit Situations You find the following information on a W-2 Wage and Tax Statement: ✓ Employer’s federal identification number ✓ Employer’s name, address, and zip code ✓ Employee’s Social Security number ✓ Employee’s name, address, and zip code ...

  • Page 239

    221 Chapter 13: Accounting for Payroll and Payroll TaxesWage and Tax Statements are your W-2s; the W-3 transmits them. Your W-3 totals and reports the amounts for all the W-2s it transmits, so both the W-3 and W-2s are filed with Social Security. Figure 13-7: Form W-3, Transmittal of Wage and Tax...

  • Page 240

    222 Part III: Accounting for Nonprofit Situations Where to send the W-2s and W-3sAfter you complete these two forms, be sure to send all Copy A’s of Form W-2 along with Form W-3 by regular mail to the Social Security Administration by the due date:Social Security AdministrationData Operations C...

  • Page 241

    223 Chapter 13: Accounting for Payroll and Payroll Taxes Figure 13-8: Form 1099, Miscella-neous Income. 1211Nonemployee compensationCORRECTEDVOIDOMB No. 1545-0115Rents1PAYER’S name, street address, city, state, ZIP code, and telephone no.$2Royalties$Federal income tax withheldOther income3RECIP...

  • Page 242

    224 Part III: Accounting for Nonprofit Situations 1. At the top of the form underneath Payer’s, write your name, address, telephone number, and federal identification number. 2. Underneath Recipient’s, write the contract employee’s identification number, name, and address. 3. In box number...

  • Page 243

    Chapter 14Doing the Accounting for Tax Form 990In This Chapter▶ Selecting the right form▶ Avoiding unnecessary penalties▶ Filing according to standardsYour nonprofit organization is tax exempt, so you’re probably wondering why I include a chapter on filing a tax report. You may be surpris...

  • Page 244

    226 Part III: Accounting for Nonprofit Situations Choosing the Right Form: Which One Do You Need?Your gross receipts and total assets from grants, donations, contracts, and so on determine which version of Form 990 your organization must file with the IRS. Your organization may be exempt from inc...

  • Page 245

    227 Chapter 14: Doing the Accounting for Tax Form 990Knowing What Happens If You Don’t File Form 990If you don’t file your personal income taxes, you know Uncle Sam gets upset. The same is true for your organization. Although your nonprofit isn’t required to pay federal taxes, you still nee...

  • Page 246

    228 Part III: Accounting for Nonprofit Situations Understanding the Minimal Requirements: Form 990-N (e-Postcard)The IRS created Form 990-N specifically for small, tax-exempt nonprofit orga-nizations that gross less than $25,000 a year. See Table 14-1 in the “Choosing the Right Form: Which Form...

  • Page 247

    229 Chapter 14: Doing the Accounting for Tax Form 990Filling Out Form 990-EZForm 990-EZ (see Figure 14-1) is an annual information return that many orga-nizations exempt from income taxes have to file with the IRS. To find out if your organization can file Form 990-EZ rather than Form 990, see Ta...

  • Page 248

    230 Part III: Accounting for Nonprofit Situations All filing organizations must complete the top portion of the form and Parts I through V. The top portion of the form is self-explanatory with simple ques-tions that identify you by name and EIN. Just fill in the blanks.Parts I through V require i...

  • Page 249

    231 Chapter 14: Doing the Accounting for Tax Form 990organization’s public charity status, a private school’s nondiscrimina-tion policies and practices, lobbying, specified activities posing compli-ance concerns, and transactions or relationships with noncharitable exempt organizations. ✓ S...

  • Page 250

    232 Part III: Accounting for Nonprofit Situations Figure 14-2: The first page of Form 990. Draft as of December 19, 2007DO NOT FILEPart IOMB No. 1545-0047Return of Organization Exempt From Income Tax990FormUnder section 501(c), 527, or 4947(a)(1) of the Internal Revenue Code (except black lungbe...

  • Page 251

    233 Chapter 14: Doing the Accounting for Tax Form 990 ✓ Part VI — Governance, Management, and Disclosure: This part con-tains three sections: governing body and management, policies, and disclosure. These sections pose questions concerning the organization’s conflict of interest policies an...

  • Page 252

    234 Part III: Accounting for Nonprofit Situations Completing Form 990-T (Reporting Unrelated Business Income)Your nonprofit may be subject to corporate income taxes if you engage in for-profit business enterprises in which you gain unrelated business income. Unrelated business income is any incom...

  • Page 253

    235 Chapter 14: Doing the Accounting for Tax Form 990 Figure 14-3: Form 990-T, Exempt Organization Business Income Tax Return. OMB No. 1545-0687Exempt Organization Business Income Tax Return990-TFormSee separate instructions.Department of the TreasuryInternal Revenue ServiceEmployer identificatio...

  • Page 254

    236 Part III: Accounting for Nonprofit Situations Handling IRS Form 990 Extensions and MistakesSometimes you may need a little extra time to file Form 990. Or, perhaps you noticed an error after submitting it. So what happens when you can’t finish completing the form on time or you do complete ...

  • Page 255

    237 Chapter 14: Doing the Accounting for Tax Form 990 Figure 14-4: Form 8868, Application for Extension of Time to File an Exempt Organization Return. ● If this is for a Group Return, enter the organization’s four digit Group Exemption Number (GEN). If this is for the whole group, check this ...

  • Page 256

    238 Part III: Accounting for Nonprofit Situations Your organization can file an amended return at any time. You have to make your amended return available for public inspection for three years from the date of filing or three years from the date the original return was due, which-ever is later.If...

  • Page 257

    239 Chapter 14: Doing the Accounting for Tax Form 990 ✓ Is the income earned from a trade or business? ✓ Is the income earned from your regular daily operations? ✓ Is the income unrelated to the tax-exempt purpose of your charitable organization?If you answer yes to any of these questions, ...

  • Page 258

    240 Part III: Accounting for Nonprofit Situations ✓ Name of person or organization giving the donation. ✓ Amount of the donation. ✓ Date of the donation.Your auditor will use the information about your donors to verify contribu-tions received.You can review the FASB standards in the Financ...

  • Page 259

    Part IVWrapping Up the Books

  • Page 260

    In this part . . .Having a viable set of financial records that reflect your true financial position is your goal. At the end of the year, you want to create a summary of all account-ing activities for the current accounting period and pre-pare the accounts for the next one. Your statement of act...

  • Page 261

    Chapter 15Analyzing the Statement of ActivitiesIn This Chapter▶ Knowing what’s reported on the statement of activities▶ Comparing current revenues and expenses to prior periods and other nonprofitsRarely do financial disasters happen overnight. When I hear a news report about a nonprofit cl...

  • Page 262

    244 Part IV: Wrapping Up the Books Understanding the True Meaning of the Statement of ActivitiesYour statement of activities is a summary of all the income that you’ve earned and every expense that you’ve incurred for a particular time period. It also shows whether your net assets or equity h...

  • Page 263

    245 Chapter 15: Analyzing the Statement of Activities Figure 15-1: A sample statement of activities. OASIS, Inc.Statement of ActivitiesFor Year Ended December 31, 20XXTemporarilyUnrestrictedRestrictedTotalRevenue Contributions$150,74312,500$163,243 Event income: Annual Conference47,8184...

  • Page 264

    246 Part IV: Wrapping Up the Books RevenuesBasically, you have two types of donations to account for on the statement of activities: ✓ Unrestricted support: This money can be used for anything. For example, a donor gives $10,000 to your nonprofit and doesn’t specify how you can spend the mone...

  • Page 265

    247 Chapter 15: Analyzing the Statement of ActivitiesExpensesYour nonprofit incurs overhead (operating) and program expenses. Depending on your establishment, you may have program, general manage-ment, and fundraising expenses. You won’t forget to include your expenses if you refer back to your...

  • Page 266

    248 Part IV: Wrapping Up the Books Board Statement Number 117, www.fasb.org/pdf/fsp_fas117-1.pdf, and Financial Accounting Standard Board Statement Number 124, www.fasb.org/pdf/aop_FAS124.pdf.)What this statement doesn’t showThere are a few limitations to the statement of activities. You may ha...

  • Page 267

    249 Chapter 15: Analyzing the Statement of Activities ✓ Position yourself to better focus on organization and program efficiency ✓ Identify programs or areas that need your immediate attentionYou can also use information found on the statement of activities to figure out what percentage of yo...

  • Page 268

    250 Part IV: Wrapping Up the Books By converting these figures into percentages, you can evaluate the revenues much easier. To calculate the percentage for each revenue collected, divide the amount by the total revenues collected. For example, take the $45,000 collected from individual donors and...

  • Page 269

    251 Chapter 15: Analyzing the Statement of Activities ✓ A positive number means you’ve taken in more revenues than you have expenses. This is excess income, a surplus and you’re “in the black.” ✓ A negative number means your expenses are higher than your revenues. A negative number eq...

  • Page 270

    252 Part IV: Wrapping Up the Books Table 15-1 Comparing Prior Year Data to Current Year20092008200720062005Revenues$500,000$475,000$450,000$425,000$400,000Expenses$450,000$450,000$425,000$400,000$390,000Change in Net Assets$50,000$25,000$25,000$25,000$10,000Table 15-1 shows a comparative list cov...

  • Page 271

    Chapter 16Reporting Financial Condition on a Statement of Financial PositionIn This Chapter▶ Knowing what the statement of financial position reveals▶ Classifying assets and liabilities▶ Using the numbers to analyze your positionMany experts feel that out of all the financial statements, th...

  • Page 272

    254 Part IV: Wrapping Up the Books A statement of financial position reveals the overall value of your organiza-tion at a point in time. It shows your organization’s solvency (its ability to pay its bills) and liquidity (how quickly assets can be converted into cash) at a particular point in ti...

  • Page 273

    255 Chapter 16: Reporting Financial Condition on a Statement of Financial Position Although a statement of financial position is usually only prepared quarterly or annually, it represents a single point in time. It’s subject to change overnight. So if you’re having a board meeting and your fi...

  • Page 274

    256 Part IV: Wrapping Up the Books Figure 16-1: A statement of financial position shows your nonprofit’s financial position. OASIS, Inc. Statement of Financial PositionDecember 31, 20XXAssetsCurrent assets Cash: Checking Account69,000$ Mentoring Checking22...

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    257 Chapter 16: Reporting Financial Condition on a Statement of Financial PositionEvery balance sheet has two main parts: ✓ Assets: Assets are always shown first on the statement of financial position. Adding all current assets to your fixed assets and other long-term assets gives your total as...

  • Page 276

    258 Part IV: Wrapping Up the Books Here I’ve covered the basics of the statement of financial position and how it has to always stay in balance. The following sections explain the different parts of the statement of financial position and what information to include in the different fields. Her...

  • Page 277

    259 Chapter 16: Reporting Financial Condition on a Statement of Financial Position ✓ Investments: In the form of bonds, stocks, and real estate that you don’t intend to sell within a year. ✓ Property, plant, and equipment: Land, buildings, and equipment. ✓ Intangibles assets: Copyrights, ...

  • Page 278

    260 Part IV: Wrapping Up the Books Classifying liabilities and net assetsKnowing your nonprofit’s liabilities is important because you need to have assets available to pay your obligations. Have you ever heard someone say, “We’re not broke, but our assets are tied up”? This means the orga...

  • Page 279

    261 Chapter 16: Reporting Financial Condition on a Statement of Financial PositionLong-term liabilitiesHaving too much debt can be risky business. To determine how much of this risky debt your nonprofit has on its books, you can look at the long-term liabilities on the balance sheet. Long-term li...

  • Page 280

    262 Part IV: Wrapping Up the Books position. This is why the statement of activities is the first financial statement prepared. You can’t prepare the statement of financial position until after you have the difference between revenues and expenses.You need to report your net assets on your stat...

  • Page 281

    263 Chapter 16: Reporting Financial Condition on a Statement of Financial Position ✓ Temporary restricted net assets: These assets may have time or pur-pose restrictions or both. For example, your donor may tell you that the asset can only be used to support a specific program, invested for a s...

  • Page 282

    264 Part IV: Wrapping Up the Books Evaluating the NumbersThere is more to your statement of financial position than just the numbers or total amount of assets, liabilities, and net assets. Accountants take the numbers from this statement to evaluate how well you’re doing. You can do the same: T...

  • Page 283

    265 Chapter 16: Reporting Financial Condition on a Statement of Financial PositionCalculating working capitalWorking capital is the difference between current assets and current liabili-ties. Working capital indicates how much money you have available after paying your current liabilities and you...

  • Page 284

    266 Part IV: Wrapping Up the Books

  • Page 285

    Chapter 17Eyeing the Cash Flow StatementIn This Chapter▶ Growing with the cash flow▶ Recognizing all activities▶ Analyzing cash flow problemsThe cash flow statement is one of the major financial statements required by generally accepted accounting principles (GAAP). This statement basically...

  • Page 286

    268 Part IV: Wrapping Up the Books Almost every transaction in an organization affects cash. Cash includes balances in your checking and savings accounts, as well as currency and coins. Cash equivalents include short-term investments that are quickly and easily turned into a known amount of cash ...

  • Page 287

    269 Chapter 17: Eyeing the Cash Flow Statement The cash flow statement differs from the statement of financial position and statement of activities because it shows the cash flows of activities during the reporting period. Another difference is that the statement uses the cash basis of accounting...

  • Page 288

    270 Part IV: Wrapping Up the Books The following sections identify the different parts of this statement and explain how to read it so you can fully understand your organization’s cash flow status. If you’re interested in creating your own cash flow statement, I provide you with some hands-on...

  • Page 289

    271 Chapter 17: Eyeing the Cash Flow StatementIn practice, almost everybody uses the indirect method. For most organiza-tions, the cash flow statement is easier to prepare using the indirect method. And if you use the direct method, you must use the indirect method to reconcile the change in net ...

  • Page 290

    272 Part IV: Wrapping Up the Books Doing the mathAs Figure 17-1 shows, you use the cash flow amounts from three categories to determine your organization’s cash flow. You add the totals for each section to determine your organization’s increase or decrease in cash for that period. Here your o...

  • Page 291

    273 Chapter 17: Eyeing the Cash Flow StatementYour cash receipts and cash disbursements (payments) are recorded in your checkbook register. (Note: When I say cash, I’m talking about checks too.) Your checkbook register serves as a cash disbursements journal and a summary cash receipts journal. ...

  • Page 292

    274 Part IV: Wrapping Up the Books money, you receive cash from financing activities, and when you make loan payments you use cash for investing activities. Typical gifts with long-term restrictions are contributions for long-term endowment funds. You find these amounts in your activity posted to...

  • Page 293

    275 Chapter 17: Eyeing the Cash Flow Statement Financial ratios are only meaningful if a reference point is used. You should compare them to historical values and similar organizations. Ratios should be viewed as indicators, and some are limited by different accounting methods.Calculating the ope...

  • Page 294

    276 Part IV: Wrapping Up the Books For example, net cash flow from operating activities is $66,423 and cash used for purchases of fixed assets is $2,363. So you subtract $2,363 from $66,423, which equals $64,060.Many organization’s include debt payments made for loans that were taken out to buy...

  • Page 295

    Chapter 18Organizing the Statement of Functional ExpenseIn This Chapter▶ Allocating expenses by function▶ Analyzing spending and efficiencyYour statement of functional expense reveals by line item and category how much you’ve spent for the different categories of expenses reported on the st...

  • Page 296

    278 Part IV: Wrapping Up the Books You classify expenses according to function to measure how well you’re doing. In other words, you’re figuring out how much of the donors’ money is used to run programs versus being spent on other things. Your statement of functional expense breaks down all...

  • Page 297

    279 Chapter 18: Organizing the Statement of Functional Expense Figure 18-1: Sample statement of functional expense. OASIS, Inc.Statement of Functional ExpenseFor Year Ended December 31, 20XXAdvertising 4001,1001,500Awards11,00011,000Bank Service Charges200200Board Meeting3,0003,000Speaking Contes...

  • Page 298

    280 Part IV: Wrapping Up the Books Keeping time and attendance reports yields the following benefits: ✓ Helps settle disputes about an employee’s pay ✓ Creates a paper trail for auditors ✓ Verifies how federal dollars are spent ✓ Provides a way for management to keep up with employee co...

  • Page 299

    281 Chapter 18: Organizing the Statement of Functional Expense You can also ask volunteers to fill out a time and attendance report. If a volunteer donates professional services (such as legal or accounting services) that your nonprofit would otherwise have to pay for, you can account for the vol...

  • Page 300

    282 Part IV: Wrapping Up the Books ✓ Tutoring programs ✓ Support groupsOf course many programs benefit people, so these are just a few examples. Program expenses are expenses directly related to a program. Common program expenses are ✓ Supplies ✓ Wages of people working solely or directl...

  • Page 301

    283 Chapter 18: Organizing the Statement of Functional Expense ✓ Travel ✓ Utilities ✓ Administrative activities of the organization as a wholeFor example, you use the phone in your office for day-to-day business. You wouldn’t go out and buy a new phone just to operate a new program and to...

  • Page 302

    284 Part IV: Wrapping Up the Books The cost of all activities that create support for your nonprofit in the form of gifts, grants, contributions, and services are considered fundraising expenses. Some fundraising expenses stand out. For example, the cost of a direct mail campaign is easy to alloc...

  • Page 303

    285 Chapter 18: Organizing the Statement of Functional Expense Ratios are only as good as the numbers used to calculate them, so make sure the figures on your statement of functional expense are accurate.By figuring the ratios in the following sections, you can show that your donors’ contributi...

  • Page 304

    286 Part IV: Wrapping Up the Books You divide fundraising costs by total contributions to get your fundraising efficiency ratio. (You need to refer to your statement of activities to get the total contributions for the year; see Chapter 15 for more on the statement of activities.) To calculate th...

  • Page 305

    Chapter 19Closing the Nonprofit BooksIn This Chapter▶ Knowing why you need to close the books▶ Completing year-end entries▶ Including notes with your financial statementsAs you come to the end of your fiscal year, you need to wrap up your books for previous 12 months and start the books for...

  • Page 306

    288 Part IV: Wrapping Up the Books Understanding the Need to Close Your Nonprofit’s BooksDuring the course of the year, you’ve had money coming in (revenues) and money going out (expenses). This is a continuous cycle that will always take place in your organization. At the end of your fiscal ...

  • Page 307

    289 Chapter 19: Closing the Nonprofit BooksWhen you close the books, you transfer the balances of your revenue and expense accounts to an income summary account. (I explain the particular steps of closing out the books in the following section.) Remember, the balances for all your accounts; reven...

  • Page 308

    290 Part IV: Wrapping Up the Books trial balance which you’ll use to prepare your financial statements. Then you need to make closing entries to close your income and expense accounts to the income summary, and close the income summary to net assets. Finally, at the beginning of the next accoun...

  • Page 309

    291 Chapter 19: Closing the Nonprofit BooksWhen accounts like payroll overlap accounting periods, they require special consideration. The entire adjustment process is based on revenues being recognized in the accounting period in which they are earned and expenses recognized in the period they we...

  • Page 310

    292 Part IV: Wrapping Up the Books When you record the payment in January, you either debit accounts payable in your cash disbursements journal or debit telephone expense if you reversed the cash to accrual adjustment at the beginning of the year. I talk about reversing entries later in this chap...

  • Page 311

    293 Chapter 19: Closing the Nonprofit BooksAfter all adjustments are made to your books, you should do an adjusted trial balance to verify that everything balances. Your adjusted trial balance is the difference between the unadjusted trial balance and your trial balance after adjustments. Take a ...

  • Page 312

    294 Part IV: Wrapping Up the Books 2. Close revenue accounts. Your revenue accounts are also found in the general ledger and you have to reset each one of them to zero. To close a revenue account, you need to decrease it or zero it out by doing a debit. Revenue accounts have a normal balance of...

  • Page 313

    295 Chapter 19: Closing the Nonprofit Bookssummary, which means revenues exceeded expenses. If in this scenario, the debits had exceeded the credits, a deficit would have resulted, showing that expenses were more than revenues. The income summary account is closed to your net assets account on y...

  • Page 314

    296 Part IV: Wrapping Up the Books I moved the expense into from one period into another. If you run your books on the cash basis in January and don’t make any reversing entries, you recognize $50 of telephone expense when you pay December’s phone bill in January. You’d end up counting it t...

  • Page 315

    297 Chapter 19: Closing the Nonprofit Books Figure 19-2: A sample notes of disclosure. OASIS, IncNotes To Financial StatementsDecember 31, 2010NOTE 1 - Organization and Summary of Significant Accounting Policies Organization The OASIS, Inc is a nonprofit organization established under Section ...

  • Page 316

    298 Part IV: Wrapping Up the Books Changing accounting methods in the middle of your accounting period can have an adverse effect on your bottom line or income. All changes that bear a significant effect on your reported income or make changes to it should be disclosed.Some common accounting meth...

  • Page 317

    299 Chapter 19: Closing the Nonprofit Books ✓ The Consistency Principle: This principle states that consistency should be used with the same accounting events period after period. In other words, don’t switch between methods for the same accounting event every time a full moon rolls around.No...

  • Page 318

    300 Part IV: Wrapping Up the Books Noting conditions on assets and liabilitiesSometimes donors impose restriction on the assets they give your nonprofit, and these restrictions need to be included in the notes to your financial state-ments. Also, if you have pledged assets as collateral for loans...

  • Page 319

    Chapter 20Preparing for an Accounting AuditIn This Chapter▶ Understanding the reasons for getting an audit▶ Meeting the players in the nonprofit audit▶ Grasping the annual audit process▶ Ending with a clean bill of health▶ Bracing for an IRS auditThe very thought of being audited makes ...

  • Page 320

    302 Part IV: Wrapping Up the Books accounting period is the same as your fiscal year — whatever 12-month period was established in your bylaws.) It’s sort of like a final exam at the end of the accounting period. It tests your accountability in accordance with generally accepted accounting pr...

  • Page 321

    303 Chapter 20: Preparing for an Accounting Auditburden for providing services. In other words, the work you do should benefit citizens. Stakeholders use the results of an audit to confirm that you’re operating according to the status quo. ✓ Nonprofit watchdogs: Naysayers help you stay in lin...

  • Page 322

    304 Part IV: Wrapping Up the Books If you need to double-check your own accounting system for internal purposes (like if your board of directors requests an audit), you can use your staff to do it. This type of audit is called internal auditing. When you need an independent audit of your financi...

  • Page 323

    305 Chapter 20: Preparing for an Accounting Audit ✓ One with a budget between $300,000 and $500,000 may be considered medium size. If this describes your organization, you may want to form an audit committee, but it’s not a must. ✓ An organization with an operating budget of $500,000 or mor...

  • Page 324

    306 Part IV: Wrapping Up the Books If you find yourself searching for these items as you gather them, resolve to do a better job of keeping and organizing your documents next year. Chapter 4 has loads of helpful tips.Walking through the Audit ProcessHave you ever wondered exactly what auditors do...

  • Page 325

    307 Chapter 20: Preparing for an Accounting Audit ✓ Inherent: Inherent risk measures the likelihood that your financial state-ments have material misstatements before considering internal controls. Your auditor has to determine the likelihood that your financial state-ments may not be legit. Ju...

  • Page 326

    308 Part IV: Wrapping Up the Books contingent liabilities to include in the notes. Contingent liabilities are pend-ing lawsuits, potential losses, and balloon payments that your nonprofit may have to settle or pay.Your auditor does a final analysis to evaluate the going concern concept, which ind...

  • Page 327

    309 Chapter 20: Preparing for an Accounting Auditabout your financial statements. This opinion is professional in nature and is based on acceptable standards found in GAAP and GAAS. Your auditor issues a formal report stating his opinion after he completes his review of your non-profit’s financ...

  • Page 328

    310 Part IV: Wrapping Up the Books If you receive this opinion from your auditor, congratulations. Your nonprof-it’s financial status is a clean bill of health. You don’t have to worry if the IRS comes knocking.Qualified opinionJust by looking at the name, you’d think this would be the most...

  • Page 329

    311 Chapter 20: Preparing for an Accounting Audit ✓ A lack of independence or conflict of interest exists between your nonprofit and the auditor: Unless your auditor is independent, he shouldn’t issue an opinion about your financial statements. If you’re related to your auditor, this presen...

  • Page 330

    312 Part IV: Wrapping Up the Books Unless the IRS suspects that you’ve committed a crime, the IRS usually noti-fies you by mail that you’re going to be audited. If you’ve committed a crime or are under criminal investigation, the feds may just show up and take your records. (This is rare, b...

  • Page 331

    Part VThe Part of Tens

  • Page 332

    In this part . . .No matter how much you know, good advice is priceless! Like every For Dummies book, this part includes some fun and simple advice you can use on a daily basis. Here you can find ten tips on how to keep your organization operating according to accounting standards. Taking advanta...

  • Page 333

    Chapter 21Ten Important Things to Know When Keeping Nonprofit BooksIn This Chapter▶ Safeguarding your assets▶ Documenting donations▶ Getting helpAs the executive director or manager of a nonprofit, your job is to make sure your organization’s books are in order. You want to make sure your...

  • Page 334

    316 Part V: The Part of Tens Keep a Donors ListMaking a donors list and checking it twice pays off. A donors list is simply a complete and up-to-date list of all the people who have donated to your organization, including their names, phone numbers, and addresses, along with the dates they donate...

  • Page 335

    317 Chapter 21: Ten Important Things to Know When Keeping Nonprofit BooksProtect Your Nonprofit from Employee TheftUnfortunately, nonprofits face a similar problem that for-profits face — employees who steal from their own organizations. You can lessen the impact of employee theft by protecting...

  • Page 336

    318 Part V: The Part of Tens Consider Your ConstituencyYour constituencies are your donors and the people you serve. In the nonprofit world, your constituencies are your stakeholders — individuals who have a vested interest in your outcome to make a positive difference in the lives of the peopl...

  • Page 337

    319 Chapter 21: Ten Important Things to Know When Keeping Nonprofit BooksExecutive directors are required to sign off on financial statements stating that the records are presented accurately according to accounting records. Your signature means that the statements are a fair representation of yo...

  • Page 338

    320 Part V: The Part of Tens

  • Page 339

    Chapter 22Ten Tips to Keep Your Nonprofit ViableIn This Chapter▶ Managing day-to-day operations▶ Strategizing your future▶ Working your networkAccountability is more important than ever in the nonprofit sector. People think very hard about where to invest their hard-earned dollars, and to m...

  • Page 340

    322 Part V: The Part of Tens your bookkeeper do monthly financial reports. One thing you definitely want to watch in these reports is how your operating budget compares to what’s actually taking place in your organization. (For more information about how to compare your actual results to what y...

  • Page 341

    323 Chapter 22: Ten Tips to Keep Your Nonprofit Viableabout which form to file, go to www.irs.gov/charities/article/0,,id=184445,00.html. Check out Chapter 14 for more on the specific paperwork you need to file with the IRS.Pay Bills on TimeYour organization has a reputation, and you have to do w...

  • Page 342

    324 Part V: The Part of Tens Keeping a close eye on your nonprofit’s bottom line is key to survival. You may not be running the nonprofit to make money, but you can’t function without it. You need money to run programs, to pay employees, and to keep the lights on. Make sure you know how much...

  • Page 343

    325 Chapter 22: Ten Tips to Keep Your Nonprofit Viablefind a list of online courses at www.ed2go.com/. Or, if you prefer books over computer screens, take a look at Grant Writing For Dummies, 3rd Edition, by Beverly A. Browning (Wiley).If you prefer more personal attention, consider hiring a gran...

  • Page 344

    326 Part V: The Part of Tens Plus, when you’re applying directly to federal agencies for grants, you want to make sure your elected officials are aware of what your needs are so they can rally for you when related topics come up for discussion. Building relationships with your elected official...

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    Index• Symbols and Numerics •* (asterisk , 66/ (slash), 66– (minus sign), 6610-key adding machine, using a, 622 CFR Part 215 circular, 160, 189• A •abuse classifi cation in audit fi ndings, 202accelerated depreciation, 37acceptable risk, 306account, 25accountability in fi nancial audits...

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    328 Nonprofi t Bookkeeping & Accounting For Dummies assets (continued)fi xed, 77furniture as, 78grants and accounts receivable as, 258intangible, 259land as, 78leasehold improvements as, 78liquid, 54liquidity of, 258long-term, 258–259marketable securities as, 258money market accounts as, 7...

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    329329 Indexbonds payable account in general ledger, 95bookkeeper, hiring a, 30–31bookkeepingaccounting compared, 10–11, 26–27described, 26break-even analysis, 27–28Browning, Beverly A. (Grant Writing For Dummies), 325budgetadjustments to, making, 135–136approval of, 134described, 46dev...

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    330 Nonprofi t Bookkeeping & Accounting For Dummies checks and balancesestablishing, 40–41overview, 12check-swiping system, 109churches, 212circularsOMB Circular A-122, 160–161, 189OMB Circular A-133, 161–162, 189overview, 1592 CFR Part 215 circular, 160, 189classifi cations used in au...

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    331331 Indexdonation receivables account in general ledger, 95donationsadding and tracking, 105–111cash, 107–108by check, 108–109credit card, 109defi ned, 27direct bank draft, 109–110fi nancial statements used to track, 48grants as, 110overview, 105permanently restricted support, 246recor...

  • Page 350

    332 Nonprofi t Bookkeeping & Accounting For Dummies expenses (continued)licenses and permits as, 113management services as, 83Medicare contribution as, 82nonprofi t, 82offi ce furniture as, 113offi ce rent as, 84offi ce supplies as, 113overview, 49, 82payroll taxes as, 113personnel as, 82pri...

  • Page 351

    333333 Indexnonprofi t activities, fi nancial statements used to track, 48notes to, 23, 55–58overview, 21using, 47–49fi nancial status reportsdue dates for, 164reporting requirements, 177–182fi rewalls, 69fi scal agents, 31–32fi scal period, 55fi scal year, 287fi xed assets, 77fi xed expe...

  • Page 352

    334 Nonprofi t Bookkeeping & Accounting For Dummies goalsof individual programs, 127–128of organization, 126–127overview, 126government auditing standards (GAS), 188Government Performance and Results Act (GPRA), 190grant adjustment notice (GAN), 170–171grant auditarticles of incorporat...

  • Page 353

    335335 Indexinvesting activities on cash fl ow statement, 271, 273investment income as revenue, 82investments, 259irregularity classifi cation in audit fi ndings, 202IRS (Internal Revenue Service). See also specifi c formscompliance with, 140fi nancial audit by, 311–312free help from, 319lette...

  • Page 354

    336 Nonprofi t Bookkeeping & Accounting For Dummies • N •negative cash fl ow, 268Nelson, Stephen L. (QuickBooks For Dummies), 67net assetscalculating, 85, 250–251in chart of accounts, 79–80classifying, 261–263defi ned, 27overview, 80, 261–262permanently restricted, 80, 262restric...

  • Page 355

    337337 Indexoperating cash fl ow (OCF) ratio, calculating, 275operational audits, 17organizationin budget, 128–130calendar with timeframes and deadlines, using, 128–129goals of, 126–127overview, 128paperwork, discarding old, 129paperwork, fi ling, 129tasks, outlining your, 129–130organiza...

  • Page 356

    338 Nonprofi t Bookkeeping & Accounting For Dummies • Q •quarterly payroll taxesForm 941, 212–216Form 8109 (Federal Tax Deposit Coupons), 216–219overview, 212–213payroll taxes, 212–219questions, list of common, 23–24QuickBookscheckbook register, QuickBooks used to balance, 118o...

  • Page 357

    339339 IndexStandard Form 269 (SF-269)fi lling out short form, 178–181long form, 177overview, 164, 177–178short form, 177–181submitting, 181–182state authority, registering with the proper, 138–139state grants as revenue, 81statement of activitiescomparisons over time, viewing, 251–25...

  • Page 358

    340 Nonprofi t Bookkeeping & Accounting For Dummies trial balanceaccounting process, 89accrued expenses, adjustments to, 99adjusting entries in, 98–99depreciation, adjustments to, 99errors in, correcting, 101–102errors in, fi nding, 99–100hidden errors in, 100overview, 97prepaid expens...

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    For Dummies: Bestselling Book Series for BeginnersFtWeekly RemindersOrganizing a weekly to-do list with daily priorities ensures that important items are taken care of first and everything else is scheduled around them. As a director or manager of a nonprofit, planning your week and sticking to y...

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    Sharon FarrisPresident, Farris Accounting & Consulting Training Services (FACT$)Learn to:• Read and understand nonprofit financial statements• Keep accurate books• Follow nonprofit accounting laws and regulations• Comprehend the latest tax changesNonprofit Bookkeeping & Account...