A Guide to Bookkeeping for Non-Profit Organizations
A non-profit organization exists to achieve a goal or a set of goals. The money it has is an important tool to reach these goals; a good bookkeeping system is necessary to monitor the funds.
Every organization should elect or appoint a treasurer whose duties are to perform and record all financial transactions and prepare financial statements. In large organizations, the treasurer may delegate one or more of the duties to a financial committee.
The tools a treasurer needs to do a good job include journals, control procedures, and financial statements.
All financial records should be kept together in a separate file for at least six years after the end of the taxation year. Then most can be destroyed.
Records that should never be destroyed are the groups minutes and, if applicable, the share register, general and private journals, and any special contracts or agreements.
The treasurer must keep three separate journals for recording financial transactions. They are: (1) a receipts journal; (2) a disbursements or expenditures journal; and (3) a petty cash journal. These journals, readily available at office supply stores, are comprised of sheets of paper set up with columns as illustrated:
Items not fitting into any of the specified categories are recorded under "sundry", along with a note explaining specifically what the transaction was for.
To correct an error in any journal, cross it out with one small diagonal slash and record the correct information above the mistake.
Voided cheques should be recorded in the disbursements journal by writing the date, the cheque number and the word "void" in the name column. The amount, if already recorded, should be crossed out. The cheque itself should have "void" written across it, the signature ripped off and then attached to its stub.
An organization should have a Current Account which issues prenumbered cheques. The financial institution returns cancelled cheques and issues a statement showing all transactions on the account each month.
At least two signing officers, one being the treasurer, should be designated when opening the Current Account. Two officers should be required to sign each cheque to make it valid. Both signing officers have equal responsibility for the organizations funds. This protects the group from one person using the funds improperly. Cheques should be signed only after being completely filled out. The common practice of one signing officer pre-signing blank cheques should be avoided.
All transactions should go through the bank account. Cash received should never be used directly to pay a bill. Instead, the cash should be deposited and a cheque issued.
Money designated for a specific purpose can usually go through the Current Account with a separate column set up for it in each of the journals.
A bank reconciliation should be done each month as soon as the bank statement arrives. Each journal column is totalled and recorded at the bottom of the column. Bank service charges are expenses and must be included. The reconciliation takes the following form:
Starting or opening balance (same as previous months true bank balance)
An example Bank reconciliation follows:
If no errors have been made, the two true balances are equal.
Occasionally there may be small expenses for which issuing a cheque is not practical and thus a petty cash fund with a separate journal can be set up. To open it, a cheque written to "Petty Cash" is cashed. When money is paid out, a receipt must be obtained. The receipt values plus the cash should always equal the original amount of the fund. A new cheque should be issued at the end of each month to bring the cash value back to the original amount. The receipts should be kept on file. Setting up the petty cash journal, using those columns from the disbursements journal which are applicable, will make it easier when doing budget forecasts and year end statements.
Purchase orders are also an internal control used to prevent improper purchases on an organizations credit. A purchase order is a signed document describing the goods that gives a supplier permission to charge a purchase to an account. The authorized signature is pre-arranged to an account. One copy of the purchase order remains with the person signing it.
Financial statements are a method for reporting the financial resources of an organization and what it has done with them. Three statements should be prepared at the end of each financial year and also during the year to monitor the budget. They are: (1) Income and Expense Statement; (2) Balance Sheet; and (3) Changes in Financial Position Statement. All should be titled with the groups name and the date or time period it covers.
(1) The Income and Expense Statement is set up as follows:
Petty cash should not be an "expense" category. Petty cash disbursements should be added onto the applicable columns in the disbursements journal. Sundry items should be listed individually, rather than having a sundry total.
(2) The Balance Sheet shows all the assets and liabilities on a specific day. The statement is based on the following equation:
The assets are the resources that are available for use, the liabilities are the amounts owed to someone and the fund balance is the value of the assets that is not owed. The sheet is set up with assets listed and totaled on the left side. On the right side, liabilities are listed and totaled, the fund balance is recorded and then the two are added. The two sides of the balance sheet must be equal.
A simplified example of a balance sheet:
In a more complex situation, assets may be split into subcategories based on how liquid they are. Example categories are current assets (i.e. cash, accounts receivable), intermediate assets (i.e. equipment) and fixed assets (land, buildings). Likewise, liabilities can be divided into categories such as current liabilities (i.e. accounts payable) and long term liabilities (i.e. mortgages).
An organization must decide to use either the cash or accrual system of accounting. The accrual basis of accounting recognizes income when it is earned and expenses when they are incurred. For example, bills that must he paid by the organization are included as liabilities, and money that the organization is owed is listed as an asset. The accrual basis of accounting gives a truer financial picture than the cash basis, which only recognizes transactions when the cash changes hands and thus doesnt show all the assets and liabilities that a group has. One advantage of using the cash basis is that it is less complicated and takes less time to do.
(3) The Statement of Changes in Financial Position connects the previous two statements. It shows the change in the fund balance over a period of time and a simplified statement is set up as follows:
The statement of changes in financial position also notes any changes in the fund balance which are not truly revenues or expenses. Some examples of these changes which would be included are those which would increase the fund balance such as a bank loan or a gift of property and those which would decrease the fund balance such as repayment of a loan or purchase of a capital asset.
An audit is an annual examination of financial records to ensure their accuracy. Both incorporated and non-incorporated groups should have someone, preferably not a member, do the examination. Revenue Canada may decide to perform an audit on an incorporated group after receiving its tax return. One of the auditors procedures is to verify that journal entries agree with cancelled cheques.
To prepare for an audit, the treasurer should gather the years financial records, including journals, cancelled cheques, cheque stubs, receipts, bills and the three financial statements.
Following an audit, the auditor will prepare a signed statement giving his opinion regarding the accuracy and honesty of the financial records.
An organizations budget is a written plan to work toward its financial goals. An annual budget is usually prepared but the group should also keep its long range goals in mind.
To prepare an operating budget, the group must determine what it wants to achieve in the coming year and then realistically estimate all the costs involved, leaving some margin for the unexpected. Likewise, all the income should be estimated. The previous years Income and Expense Sheet is a good starting point and then it can be adjusted for inflation and changes in programming or funding. The group may find that it needs to alter its plans to suit the amount of money available.
As well as an operating budget, both a cash flow statement and a capital budget should be prepared at the beginning of each fiscal year. A cash flow statement predicts the monthly bank balances using estimated receipts and expenses. This is important because revenues and expenses often do not coincide and there must be money to cover expenses as they occur.
A capital budget looks at a longer time period than one year and plans for the purchase of major capital assets such as machinery, land or buildings.
A budget is only useful if it is used during the year to monitor the progress of the group. Predicted revenues and expenses should be compared to the actual income and expenses at least quarterly. Major differences should be looked into and, if necessary, plans changed to correct the situation.
Normally, a non-profit, unincorporated organization in Canada does not have to pay income tax unless one of its main objectives is to provide dining, recreation or sporting facilities for its members. However, if one or more employees is hired, income tax and others deductions must be paid monthly.
The treasurer may either keep a separate payroll journal to record gross wages, statutory deductions and net wages or post them in appropriate columns in the disbursements journal. If a separate journal is kept, totals must be transferred to the disbursements journal monthly. Statutory deductions include income tax, Canada Pension (CPP), Unemployment Insurance (UI) and, if applicable, health insurance. As well, the employer has to pay a contribution to CPP and UI. For details on these deductions and payments, see the booklet Income Deductions at Source, available at local District Taxation Offices, and the booklet Handbook for Groups, available at an Ontario Health Insurance Plan office.
Incorporation is a legal process which makes the group a corporate individual. The process may be complicated and thus a lawyer should be consulted.
One advantage of incorporation is that members are not liable for the debts of the group as they would be otherwise. Whether incorporated or not, it is advisable to look into fidelity insurance to cover losses due to embezzlement.
A group may apply for a charitable registration which, if granted, means donations to the group are tax deductible. More information and application forms are available at a District Taxation office.
For more information on bookkeeping, two excellent references are:
Bennett, Paul. Up Your Accountability. Washington D.C.: The Taft Group, 1973.
Ontario Ministry of Citizenship and Culture. Bookkeeping Procedures for Community Groups. Queens Park, Toronto, 1982.
For more information:
Toll Free: 1-877-424-1300
Local: (519) 826-4047