accounting 101 for exempt organizations · non-cash transactions 6. ... checklist of required...
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OVERVIEW
YH ADVISORS, THE EXEMPT ORG EXPERTS EO ACCOUNTING 101 2
1. TERMINOLOGY
2. CHART OF ACCOUNTS / CLASS STRUCTURE
3. FINANCIAL STATEMENTS
4. FORM 990
5. NON-CASH TRANSACTIONS
6. RESTRICTIONS
7. ACCOUNTING SOFTWARE
8. BEST PRACTICE INTERNAL CONTROLS
9. OWNERSHIP OF ACCOUNTING FUNCTIONS
10. RESOURCES
TERMINOLOGY
YH ADVISORS, THE EXEMPT ORG EXPERTS EO ACCOUNTING 101 3
REVENUE
– Contribution vs Exchange vs Agency
EXPENSE – Tracked by “natural” account
– Categorized by functional class
• Program service
• Management & general
• Fundraising
NET ASSETS
– Equivalent to net worth of an organization
ASSETS
– What an EO has/owns, what is owed
to the EO, what the EO has invested and
what the EO has deposited with others
• Cash, investments, receivables, fixed
assets, inventory, etc
LIABILITIES – What an EO owes to others or holds on behalf
of others
• Accounts payable, credit card payable,
payroll related liabilities, short or long
term loans, etc
TERMINOLOGY
YH ADVISORS, THE EXEMPT ORG EXPERTS EO ACCOUNTING 101 4
ACCOUNTING FORMULA:
ASSETS = LIABILITIES + NET ASSETS
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)
– Preferred accounting treatment – Instituted by:
• FASB (Financial Accounting Standards Board)
• AICPA (American Institute of Certified Public Accountants)
CHART OF ACCOUNTS &
CLASS STRUCTURE
5
– CHART OF ACCOUNTS IS THE FOUNDATION OF AN EXEMPT ORGANIZATION’S
ACCOUNTING INFRASTRUCTURE AND PAVES THE WAY FOR TRANSPARENT FINANCIAL
REPORTING
• Cluttered and cumbersome COA = increased risk of fraud
• Concise and well organized COA = greater transparency to the reader of the nonprofit’s
financial statements
– CONSISTENCY IS KEY!
PERIODICALLY REVIEW THE CHART OF ACCOUNTS TO SEE IF ANY
ACCOUNTS CONTAIN RELATIVELY IMMATERIAL AMOUNTS • If so, and this information is not needed for special reports, inactivate these accounts
WHAT IS A CLASS STRUCTURE AND WHEN SHOULD SUCH BE
UTILIZED?
YH ADVISORS, THE EXEMPT ORG EXPERTS EO ACCOUNTING 101
CHART OF ACCOUNTS &
CLASS STRUCTURE
6
ACCOUNTS: • Listed in order of appearance in the financial statements (assets, liabilities, net assets,
revenues, expenses)
• Each account should define in 1-2 words the nature of the transaction
o Who was a contribution from?
o What was money spent on?
• All accounts should have a purpose beyond a single transaction to avoid a bulky Chart of
Accounts that lacks value
• Conversely, varying charges should not be combined or overly grouped in order to keep a listing
concise
• Use sub-accounts
• NEVER use:
o “Ask My Accountant”
o “Suspense” Accounts such as this are vague and add no value to the accounting infrastructure
YH ADVISORS, THE EXEMPT ORG EXPERTS EO ACCOUNTING 101
CHART OF ACCOUNTS &
CLASS STRUCTURE
7
CLASS STRUCTURE: • Why use?
o Streamlined Form 990 preparation
and Statement of Functional
Expenses
o Assists upper management in
determining how money is being
earned and used
• When to use?
– CREATING CLASSES:
• Start with Part IX of the Form 990 as
a guide: – Program Services
– Management and General
– Fundraising
• Create sub-classes as necessary: – Major programs
– Fundraising events
• Do not duplicate any of the accounts
in the natural revenue and expense
categories
YH ADVISORS, THE EXEMPT ORG EXPERTS EO ACCOUNTING 101
CHART OF ACCOUNTS &
CLASS STRUCTURE
8
Classes
Accounts MANAGEMENT & GENERALEducational
OutreachProgram #1 Program #2 Program #3
General
FundraisingChicago Event LA Event NYC Event
INCOME
Contributions
Corporate
Event Contribution
Foundation
Individual
In-Kind (Non-Cash)
Restricted
Sponsorship
Third Party Events
Special Event Revenue
Ticket Sales
Auction
Merchandise
PROGRAM SERVICE FUNDRAISING
YH ADVISORS, THE EXEMPT ORG EXPERTS EO ACCOUNTING 101
CHART OF ACCOUNTS &
CLASS STRUCTURE
9
Classes
Accounts MANAGEMENT & GENERALEducational
OutreachProgram #1 Program #2 Program #3
General
FundraisingChicago Event LA Event NYC Event
EXPENSE
Bank & Merchant Fees
Gifts & Appreciation
Grants
Grants for Services
Care Packages
Dues & Subscriptions
In-Kind (Non-Cash)
Insurance
D&O & General Liab
Health
Workers Comp
Licenses & Permits
Meetings
Merchandise (COGS)
Office Rent
Office Supplies
Payroll
Employee Wages
Payroll Service Charge
Payroll Taxes
Postage & Shipping
Printing
Professional Services
Accounting
Consulting
Legal
Other
Repairs & Maintenance
Software & Hardware
Special Event Expenses
Entertainment
Food & Beverages
Other Direct Costs
Outreach
Rent/Facility Costs
Staffing Costs
Taxes & Filing Fees
Travel, Mileage & Parking
Utilities
Internet
Telephone
Website & Social Networking
PROGRAM SERVICE FUNDRAISING
YH ADVISORS, THE EXEMPT ORG EXPERTS EO ACCOUNTING 101
FINANCIAL STATEMENTS
10
STATEMENT OF FINANCIAL POSITION
AKA: Balance Sheet
Reflects the overall financial position of an exempt organization at any
given point in time
Assets = Liabilities + Net Assets
YH ADVISORS, THE EXEMPT ORG EXPERTS EO ACCOUNTING 101
FINANCIAL STATEMENTS
11
STATEMENT OF ACTIVITIES
AKA: Income Statement or Profit & Loss (P&L)
Reports income and expenses for a specified period of time • The result of the activities of a given fiscal year represent the change to the EOs net assets
YH ADVISORS, THE EXEMPT ORG EXPERTS EO ACCOUNTING 101
FINANCIAL STATEMENTS
12
STATEMENT OF FUNCTIONAL
EXPENSES – GAAP requires that expenditures be
classified as programmatic or support
services
• This can be done via footnote
disclosures or the Statement of
Functional Expenses
– Also required to be reported on Part IX of the
Form 990
– Allocation “buckets”
• Program services
• Management & General
• Fundraising
YH ADVISORS, THE EXEMPT ORG EXPERTS EO ACCOUNTING 101
ALLOCATION METHODOLOGY – Allocation must be reasonable, consistent
and periodically reviewed and challenged
– Common metrics:
• Time
• Square footage
• Percentage of direct costs
• Number of employees
13
FORM 990
Primary source of information for
“users” of the Form 990:
• Members of the general public
• IRS / State authorities (ie: Attorney
General)
• Potential donors
• Newspapers and other media
• Competitors
• Watchdog groups
YH ADVISORS, THE EXEMPT ORG EXPERTS EO ACCOUNTING 101
PURPOSES OF FORM 990:
Provides transparency into the
operations of the exempt
organization
Ensure the adequate collection
of information for the various
types and sizes of exempt
organizations
• Facilitate comparisons between
similar types of exempt
organizations
FORM 990
14
12 CORE PARTS + (UP TO) 16 SCHEDULES:
– Heading
– Part I: Summary of organization's mission and basic structure
– Part III: Statement of Program Service Accomplishments
– Part IV: Checklist of Required Schedules
– Part V: Statements Regarding Other IRS Filings and Tax Compliance
– Part VI: Governance, Management & Disclosure
– Part VII: Compensation of Officers, Directors, Trustees, Key Employees, Highest Paid
Employees & Independent Contractors
– Part VIII: Statement of Revenue
– Part IX: Statement of Functional Expenses
– Part X: Balance Sheet
– Part XI: Reconciliation of Net Assets
– Part XII: Financial Statements & Reporting
YH ADVISORS, THE EXEMPT ORG EXPERTS EO ACCOUNTING 101
NON-CASH TRANSACTIONS
15
WHEN TO RECORD?
– Technical answer
• Upon receipt of item, estimate value
• Adjust books when item is sold
– “Real world” answer…
DONATED SERVICES
Contributed services must either
• Create or enhance nonfinancial assets, or
• Require specialized skills, are provided
by individuals possessing those skills,
and would typically need to be purchased
if not provided by donation
VALUATION OF NON-CASH ITEMS
– Determined by the exempt organization
when recording on books
– Do NOT include a value on charitable
contribution acknowledgement letter
– Valuation technique contemporaneously
documented and consistently applied
– Fair market value at the time of donation
based on all relevant factors, including:
• Item’s cost or selling price
• Sales of comparable items
• Item’s replacement cost, and
• An expert opinion (when necessary)
Use of equipment
YH ADVISORS, THE EXEMPT ORG EXPERTS EO ACCOUNTING 101
NON-CASH TRANSACTIONS
16
REPORTING – Creation of new accounts + separate line item on financial statements
• Need to book both non-cash revenue AND non-cash expense
– Form 990 reporting
• Part IV, Line 29
• Part VIII, Line 1g
• Corresponding expense should be in the appropriate line item on Part IX or Schedule G (if
expense relates to the conducting of a special event)
GAAP VS IRS TREATMENT
YH ADVISORS, THE EXEMPT ORG EXPERTS EO ACCOUNTING 101
GAAP STATES THAT ALL CONTRIBUTION REVENUE MUST BE
CLASSIFIED AS EITHER:
Unrestricted
• Lacking restrictions from DONORS as to how the contributed asset(s) should be
used
• Board designations and/or quasi-endowments are considered unrestricted
Temporarily Restricted
• Contributions with DONOR-imposed restrictions that limit the use of the assets by
either:
o Purpose
o Time
Permanently Restricted
• Contributions and support that is not expendable by the exempt organization
• Most prevalent is an endowment fund
17
DONOR RESTRICTIONS
YH ADVISORS, THE EXEMPT ORG EXPERTS EO ACCOUNTING 101
ACCOUNTING SOFTWARE
18
WHEN CONSIDERING:
Basic understanding of
computers/software required
Will not allow the user(s) to get
out of understanding the basics
of accounting and balancing a
check book
Requires just as much skill as
doing the accounting “by hand” • Garbage in = garbage out
ULTIMATE DOCUMENTATION
REQUIREMENT:
CONSISTENT
CONTEMPORANEOUS
YH ADVISORS, THE EXEMPT ORG EXPERTS EO ACCOUNTING 101
BEST PRACTICE
INTERNAL CONTROLS
19
At a MINIMUM, an exempt organization should have the following
documented policies and procedures: • Required Officers
o Typically President, Secretary and Treasurer
See the organization’s Bylaws
• Voting procedures
o Also found in the Bylaws
• Compliance monitoring
o Form 990
o Audit requirements
o Home state reporting requirements
o Foreign state reporting requirements
• Board resolutions and minutes
• Board member reimbursement and compensation policy
YH ADVISORS, THE EXEMPT ORG EXPERTS EO ACCOUNTING 101
BEST PRACTICE
INTERNAL CONTROLS
20
Additional policies considered best practices (if applicable): • Audit Committee
• Board giving policy
• Compliance with conditions placed upon grants or contributions
• Conflict of interest policy
• Document retention and destruction policy
• Expense reimbursement policy
• Financial reserve policy
• Gift acceptance policy
• Investment policy
• Joint venture policy
• Prohibition on loans to Board members
• Succession plan
• Whistleblower policy
YH ADVISORS, THE EXEMPT ORG EXPERTS EO ACCOUNTING 101
BEST PRACTICE
INTERNAL CONTROLS
21
FINANCIAL REPORTING & REVIEW
Why? • A financial statement is the lifeblood of
any exempt organization
• Financial statements are relied on to
know the condition, performance and
ability to efficiently sustain past and
future operations of a nonprofit
o Performing a regular review of the
financial statements helps mitigate
the risk of material misstatement in
financial statements due to error or
fraud.
• Great opportunity for Board involvement
o Reviewing the financial statements
should generate questions to
ensure adequate understanding
• Sets the appropriate tone at the top!
YH ADVISORS, THE EXEMPT ORG EXPERTS EO ACCOUNTING 101
What? • Basic:
o Statement of Financial Position
o Statement of Activities
o Budget to Actual P&L
• Additional Reports to Consider
o Statement of Functional Expenses
(if using a class structure)
o Previous year comparisons
o Cash flow projections
o P&L for specific programs or events
o Promises to give versus amounts
paid in
o Grants paid out YTD
BEST PRACTICE
INTERNAL CONTROLS
22
FINANCIAL REPORTING & REVIEW
Who? • Responsibility of preparation will vary
based on accounting functions
• Initial review by upper management
(COO, CEO, CFO, ED)
• Subsequent review by Finance
Committee or full Board of Directors
YH ADVISORS, THE EXEMPT ORG EXPERTS EO ACCOUNTING 101
When? • Timing depends on the nature of the
EOs operations
o For many EOs, a monthly financial
statement review is necessary, for others
(perhaps a small PF), quarterly or even
annually would be adequate
Whether large or small, effective financial management is an ongoing process
• Sound procedures and internal controls help ensure accurate and high-quality
reporting
• Evaluation of the information in financial reports allows management to understand
the financial operations of an organization, thus facilitates good management
decisions
• Regular review of the process leads to consistent improvements in financial
management
If employee base isn’t financially sophisticated enough to manage the
accounting infrastructure, outsource some or all of it to an expert
Ensure Board of Directors has at least one financial expert
Delegate regular review of financial statements and financial related
procedures to a Finance Committee
23
OWNERSHIP OF ACCOUNTING
FUNCTION
YH ADVISORS, THE EXEMPT ORG EXPERTS EO ACCOUNTING 101
RESOURCES
24
Guidestar – www.Guidestar.com
Nonprofit Accounting Basics – http://www.nonprofitaccountingbasics.org/
Form 990 Instructions – http://www.irs.gov/pub/irs-pdf/i990.pdf
National Council of Nonprofits – https://www.councilofnonprofits.org/
YH ADVISORS, THE EXEMPT ORG EXPERTS EO ACCOUNTING 101
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