ledger
DESCRIPTION
free notes of accountingTRANSCRIPT
Ledger
Collection of an entire group of similar accounts in double-entry bookkeeping. Also called book of final entry, a ledger records classified and summarized financial information from journals (the 'books of first entry') as debits and credits, and shows their current balances. In manual accounting systems, a ledger is usually a loose leaf binder with a separate page for each ledger account. In computerized systems, it consists of interlinked digital files, but follows the same accounting principles as the manual system
What is a general ledger account?A general ledger account is an account or record used to sort and store balance sheet and income statement transactions. Examples of general ledger accounts include the asset accounts such as Cash, Accounts Receivable, Inventory, Investments, Land, and Equipment. Examples of the general ledger liability accounts include Notes Payable, Accounts Payable, Accrued Expenses Payable, and Customer Deposits. Examples of income statement accounts found in the general ledger include Sales, Service Fee Revenues, Salaries Expense, Rent Expense, Advertising Expense, Interest Expense, and Loss on Disposal of Assets.
Some general ledger accounts are summary records which are referred to as control accounts. The detail that supports each of the control accounts will be found outside of the general ledger in what is known as a subsidiary ledger. For example, Accounts Receivable could be a control account in the general ledger, and there will be a subsidiary ledger which contains each customer's credit activity. The general ledger accounts Inventory, Equipment, and Accounts Payable could also be control accounts and for each there will be a subsidiary ledger containing the supporting detail.
General Ledger
Definition: A general ledger is the master set of accounts that summarize all transactions
occurring within an entity. There may be a subsidiary set of ledgers that summarize into the
general ledger. The general ledger, in turn, is used to aggregate information into the financial
statements of a business; this can be done automatically with accounting software, or by
manually compiling financial statements from the information in a trial balance report (which is
a summarization of the ending balances in the general ledger).
The general ledger contains a debit and credit entry for every transaction recorded within it, so
that the total of all debit balances in the general ledger should always match the total of all
credit balances. If they do not match, the general ledger is said to be out of balance, and must
be corrected before reliable financial statements can be compiled from it.
The general ledger is comprised of all the individual accounts needed to record the assets, liabilities, equity, revenue, expense, gain, and loss transactions of a business. In most cases, detailed transactions are recorded directly in these general ledger accounts. In some cases where the volume of transactions would overwhelm the record keeping in the general ledger, transactions are shunted off to a subsidiary ledger, from which just the account totals are recorded in a control account in the general ledger. In the latter case, a person researching an issue in the financial statements must refer back to the subsidiary ledger to find information about the original transaction.
Similar Terms
The general ledger is also known as the book of final entry.
Definition:A ledger contains summarized financial information that is classified by assignment to a specific account number using a Chart of Accounts.A ledger can be a physical book or also refer to software or spreadsheets where the financial information is recorded.
A General Ledger contains a summary of all the information recorded in subsidiary ledgers, which are ledgers that break down and show more information according to classifications.
Financial information for ledgers is taken from the company's journal.Also Known As: Book of Final Entry
What is a Ledger?
A ledger is an accounting book that facilitates the transfer of all journal entries in a
chronological sequence to individual accounts. The process of recording journal
entries into the ledger is called posting.
Type of Ledger Collect information from
General Ledger
The general ledger accumulates information from
journals. Each month all journals are totalled and
posted to the General Ledger. The purpose of the
General Ledger is therefore to organise and
summarise the individual transactions listed in all the
journals.
Debtors Ledger
The Debtors Ledger accumulates information from
the sales journal. The purpose of the Debtors Ledger
is to provide knowledge about which customers owe
money to the business, and how much. More
information on Debtors Ledger
Creditors Ledger
The Creditors Ledger accumulates information from
the purchases journal. The purpose of the Creditors
Ledger is to provide knowledge about which
suppliers the business owes money, and how much.
General Journal Description | Entries | Example
General Journal Description
The general journal is part of the accounting record keeping system. When an event occurs
that must be recorded, it is called a transaction, and may be recorded in a specialty journal or
in the general journal.
There are four specialty journals, which are so named because you record specific types of
routine transactions in them. These journals are:
Sales journal
Cash receipts journal
Purchases journal
Cash disbursements journal
There could be more specialty journals, but the four accounting areas represented by these
journals contain the bulk of all accounting transactions, so there is usually no need for
additional journals. Instead, by default, all remaining transactions are recorded in the general
journal.
General Journal Entries
Examples of transactions recorded in the general journal are:
Asset sales
Depreciation
Interest income and expense
Stock sales
Once entered, the general journal provides a chronological record of all non-specialized entries
that would otherwise have been recorded in one of the specialty journals.
Journal Entry Format
Transactions are recorded in all of the various journals in a debit and credit format, and are
recorded in order by date, with the earliest entries being recorded first. These entries are
called journal entries (since they are entries into journals). Each journal entry includes the
date, the amount of the debit and credit, the titles of the accounts being debited and credited
(with the title of the credited account being indented), and also a short narration of why the
journal entry is being recorded.
General Journal Accounting Example
An example of a journal entry that would be recorded in the general journal is:
Date Account Debit Credit
June 30 Depreciation expense 10,000
Accumulated depreciation 10,000
To record depreciation for the month of June
Journal Process Flow
After the transactions are recorded in these journals, you "post" the summary of all the
transactions in each journal to the general ledger, which contains all of a company's accounts.
An account is a separate, detailed record associated with a specific
asset,liability, equity, revenue, or expense item. Examples of accounts are:
Accounts Receivable (an asset account)
Accounts Payable (a liability account)
Retained Earnings (an equity account)
Product Sales (a revenue account)
Cost of Goods Sold (an expense account)
In summary, you record an accounting transaction into a journal, and then post the information
in the journal into the accounts which are stored in the general ledger. The general journal is
the repository for transactions that are not recorded in a specialty journal. Thus, the general
journal can be considered an intermediate repository of information for some types of
information, on the way to its final recordation in the general ledger.
Other Issues
The general journal was more visible in the days of manual record keeping. With nearly
everyone now using accounting software to record their accounting transactions, it is not so
readily apparent. Instead, the software makes it appear as though all transactions center
around the general ledger, with no specialty journals in use at all.
Journal
Definition
An accounting record where all business transactions are originally entered. A
journal details which transactions occurred and what accounts were
affected. Journal entries are usually recorded in chronological order, and using the
double-entry method of bookkeeping.
********************************************************************Cashbook
Journal in which all cash receipts and payments (including bank deposits and withdrawals) are recorded first, in chronological order, for posting to general ledger. Cash book is regularly reconciled with the bank statements as an internal auditing measure. In larger firms, it is commonly divided into two parts: (1) Cash disbursement journal in which all cash payments (such as accounts payable, operating expenses,petty
cash purchases) are recorded, and (2) Cash receipts journal in which all cash receipts (such as accounts receivable, cash sales, sale of assets) are recorded.
WHAT ARE THE ELEMENTS OF AN ANNUAL BUDGET?
WHY SHOULD YOU PREPARE AN ANNUAL BUDGET?
SOME PRACTICAL CONSIDERATIONS
PLANNING AND GATHERING INFORMATION TO CREATE A BUDGET
PUTTING IT ALL TOGETHER: CREATING AND WORKING WITH A BUDGET DOCUMENT
WHAT ARE THE ELEMENTS OF AN ANNUAL BUDGET?
It can be daunting to start the process of creating a budget, especially if you're not familiar with some of the common accounting and budget terminology you will encounter, so we have provided a glossary of terms covered here, located toward the bottom of the page under the In Summary section of the page.
It is important for organizations to create accurate and up-to-date annual budgets in order to maintain control over their finances, and to show funders exactly how their money is being used. How specific and complex the actual budget document needs to be depends on how large the budget is, how many funders you have and what their requirements are, how many different programs or activities you're using the money for, etc. At some level, however, your budget will need to include the following:
Projected expenses. The amount of money you expect to spend in the coming fiscal year, broken down into the categories you expect to spend it in - salaries, office expenses, etc.
Fiscal year simply means "financial year," and is the calendar you use to figure your yearly budget, and which determines when you file tax forms, get audited, and close your books. There are many different
fiscal years you can use. Businesses often use the calendar year -- January 1 to December 31. The federal government's fiscal year runs from October 1 to September 30. State governments -- and therefore state agencies and many community-based and non-profit organizations that receive state funding - usually use July 1 to June 30. Most organizations adopt a fiscal year that fits with that of their major funders. You'll want to prepare your budget specifically to cover your fiscal year, and to have it ready before the fiscal year begins. In many organizations, the Board of Directors needs to approve a budget before the beginning of the fiscal year in order for the organization to operate.
Projected income. The amount of money you expect to take in for the coming fiscal year, broken down by sources -- i.e. the amount you expect from each funding source, including not only grants and contracts, but also your own fundraising efforts, memberships, and sales of goods or services.
The interaction of expenses and income. What gets funded from which sources? In many cases, this is a condition of the funding: a funder agrees to provide money for a specific position, for instance, or for particular activities or items. If funding comes with restrictions, it's important to build those restrictions into your budget, so that you can make sure to spend the money as you've told the funder you would.
Adjustments to reflect reality as the year goes on. Your budget will likely begin with estimates, and as the year progresses, those estimates need to be adjusted to be as accurate as possible to keep track of what's really happening.
WHY SHOULD YOU PREPARE AN ANNUAL BUDGET?
It sharpens your understanding of your goals It gives you the real picture - by accurately showing you what
you can afford and where the gaps in funding are, your budget allows you to plan beforehand to meet needs, and to decide what you're actually able to do in a given year
It encourages effective ways of dealing with money issues - by showing you what you can't afford with known
income, a budget can motivate you to be creative - and successful - in seeking out other sources of funding
It fills the need for required information - the completed budget is a necessary element of funding proposals and reports to funders and the community
It facilitates discussion of the financial realities of the organization
It helps you avoid surprises and maintain fiscal control
SOME PRACTICAL CONSIDERATIONS
It's important to note that not everyone has the skills or desire to create and manage a budget single handed. Fortunately, there's help available, both within the organization (by hiring a bookkeeper, accountant, or CFO) and elsewhere. There are organizations like SCORE (Service Corps of Retired Executives) that exist to assist with things like budgeting. Local universities or government agencies may maintain offices that help small businesses and non-profits with financial planning. The possibility of an accounting or similar position shared with or loaned by another organization may also exist.
PLANNING AND GATHERING INFORMATION TO CREATE A BUDGETTHE PRELIMINARIES: WHAT WILL YOU NEED TO SPEND MONEY ON NEXT FISCAL YEAR?
It is important to know what the priorities are and what makes the most sense for the organization at its particular stage of development. Actually figuring out what you should be spending your money on involves an organization-wide planning process.
Consider these questions:
What are the activities or programs that will do the most to advance your cause and mission, and that you think you can carry out with the income and resources you know you have or can foresee?
How many staff positions will it take to run those activities or programs well?
How much, how (hourly wages, salary, consultant fees, benefits), and from what sources will those staff members be compensated?
What else will be needed to run the organization and its activities -- space, supplies, equipment, phone and utilities, insurance, transportation, etc.?
ESTIMATING EXPENSES: WHAT WILL IT ALL COST?
Step 1: Develop ways of estimating your expenses
Estimate your expenses for the coming fiscal year. In some cases -- yearly rent, or salaries, for instance -- you'll probably have real figures for what these expenses will be. In other cases -- telephone and utilities, etc. -- you'll have to estimate of an average monthly cost.
Be sure to add in some money in a "miscellaneous" category, in order to be prepared for the unexpected. There are always expenses you don't anticipate, and it is part of conservative estimation to make allowances for them.
Conservative estimation: When preparing a budget, try to be as accurate as possible. Always use actual figures if you have them, and when you don't, estimate conservatively for both expenses and income.
When you estimate expenses, guess high -- take your highest monthly phone bill and multiply by 12, for instance, rather than taking an average. By the same token, when you're estimating income, guess low -- the smallest number realistically possible. Estimating conservatively when you plan your budget will make it more likely that you stay within it over the course of the year.Step 2: List the estimated yearly expense totals of the absolute necessities of the organization
For most organizations, they include, but aren't necessarily limited to:
Salaries or wages for all employees, listed separately by position Fringe benefits for all employees, also broken out by position.
Remember that even if you have no formal fringe benefits, you still have to pay part of the Social Security and Medicare taxes, as well as Workers' Compensation and Unemployment Insurance,
for any regular employees (people who work a fixed schedule). These costs can be considerable, amounting to 12 to 15% added on to your total payroll.
Rent and/or mortgage payments for the organization's space Utilities (heat, electricity, gas, water) Phone service Internet provider or server costs, depending on your
organization's needs Insurance (liability, fire and theft, etc.)
Step 3: List the estimated expenses for things you'll need to actually conduct the activities of the organization
Program and office supplies: pencils, paper, software, educational material, post-it-notes, etc.
Program and office equipment. Wherever you classify computers and peripherals, copiers, faxes, etc., be sure to figure in the annual estimated costs of repairs or service contracts in addition to purchase or lease costs.
For budgeting purposes, it may be useful to separate program supplies and equipment from office supplies and equipment. In the case of state and federal funding, at least some office expenses are often considered "administrative", and funding for administrative expenses may be limited, sometimes to as little as 5% of your budget.Step 4: List estimated expenses for anything else the organization is obligated to pay or can't do without
Loan payments Consultant services - these may include an annual audit,
accounting or bookkeeping services, payments to other organizations for specific services, etc.
Most non-profit organizations are required, either by funders or by the IRS, to undergo an audit every year. This means that a CPA (Certified Public Accountant) must check the organization's financial records to make sure they are accurate, and work with the organization to correct any errors or solve problems. If there is nothing illegal or seriously wrong, the CPA then prepares financial statements using the organization's books, and certifies that the organization follows acceptable accounting practices and that its financial records
are in order. The larger an organization's budget, the more complicated an audit is likely to be, the more time it is likely to take, and the more it is likely to cost. An audit of a $100,000 budget might cost $2,000 to $4,000, for instance; that of a $1 million budget might cost $15,000.
Printing and copying, if not done within the organization Transportation: travel expense for staff, participants, and/or
volunteers; and vehicle upkeep and expenses for any organization-owned vehicles
Postage and other mailing expenses
Now that you've gathered your necessary expenses, you can take a look at your wish list.
Step 5: List estimated expenses for things which you aren't sure you can afford, but would like to do
These might include staff positions, new programs (including staff, supplies, space), equipment, etc.
Step 6: Add up all the expense items you have listed
This total is what you would like to spend to run your organization. In other words, it's your projected expense for the coming fiscal year.
ESTIMATING INCOME: WHERE ARE WE GOING TO GET ALL THAT MONEY?
Use last year's figures, if you have them, as a baseline and estimate conservatively, rather than being overly optimistic, and laying yourself open to disappointment and worse.
Step 1: List all actual figures or estimates for what you can expect from your known funding sources
This includes sources that have already promised you money for the coming year, or that have regularly funded you in the past. These may include federal, state or local government agencies; private and community foundations; United Way; religious organizations; corporations or other private entities.
Step 2: If your organization fundraising, estimate the amount you'll raise in the next fiscal year
Fundraising efforts might include community events (a raffle, a bowl-a-thon), more ambitious events (a benefit concert by a world-class performer), media advertising, or phone or mail solicitation.
Step 3: If you charge fees or sell services, estimate the amount you'll take in from these activities
This could be consulting services your organization offers, training materials that you created that can be sold to others interested in the same work, etc.
Step 4: If you solicit members who pay yearly dues or fees, estimate the amount that membership will yield
Step 5: If you sell items, estimate what these sales will bring in
This could include pins, T-shirts, books, blood pressure cuffs, etc.
Step 6: If you sublet or rent space to others, record the estimate of what this will bring in
Step 7: If you have any income from investments, estimate what you'll realize from these
This could include investments, endowment income, annuities, or interest income (e.g., from a certificate of deposit, or from a Money Market or checking account)
Step 8: List and estimate the amounts from any other sources that are expected to bring in some income in the coming fiscal year
Step 9: Add up all the income items you have listed
This total is the money you have to work with, your projected income for the next fiscal year.
PUTTING IT ALL TOGETHER: CREATING AND WORKING WITH A BUDGET DOCUMENTANALYZING AND ADJUSTING THE BUDGET
Step 1: Lay out your figures in a useful format
If your budget is going to be useful, it has to be organized in such a way that it can tell you exactly how much you have available to spend in each expense category.
The easiest way to do this is by using a grid, usually called a spreadsheet. In its simplest terms, a spreadsheet will have a list of funding sources along its top edge and a list of expense categories running down its left-hand edge, so that each vertical column represents a funding source, and each horizontal row represents an expense category. Where each column and row meet (this meeting place is called a cell), there should be a number representing the amount of money from that particular funding source (the column) that goes to that particular expense category (the row). A simple spreadsheet for a small organization might look like this:
Spreadsheet: United Consolidated Metropolitan Health Agency (UCMHA)
Dept of Public Health United Way Membership Dept of Welfare Totals
Salaries 15,000 2,500 2,500 21,000 41,000
Fringe 3,000 500 500 4,200 8,200
Supplies 300 200 0 500 1,000
Equipment 1,500 1,500 0 0 3,000
Phone 400 150 0 600 1,150
Utilities 500 200 0 500 1,200
Insurance 800 200 0 400 1,400
Rent 4,000 500 0 3,000 7,500
Totals 25,500 5,750 3,000 30,200 64,450
A spreadsheet format allows you to assign restricted funds to the proper categories, so that you can see how much money is actually available to you for any given expense category. In the above example, if the Department of Public Health says that no more than $18,000 of its grant can be spent on salaries and fringe, for instance, then you know that you have to find the rest of the $49,200 total in those categories from other sources.
Step 2: Compare your total expenses to your total income
If your projected expenses and income are approximately equal then your budget is balanced.
If your projected expenses are significantly less than your projected income, you have a budget surplus. This circumstance leaves you with the possibility of expanding or improving the organization, or of putting money away for when you need it.
If your projected expenses are significantly greater than your projected income, you have a budget deficit. In this case, you'll either have to find more money or cut expenses in order to run your organization in the coming year.
Step 3: (For balanced budgets) Make sure you are able to use your money as planned
If you've filled in the numbers in accordance with your funding restrictions, your spreadsheet should immediately let you know whether you have enough in each of your expense categories. If there is a problem, there are several ways of addressing it.
It may be possible to come to an arrangement with the funder that allows you to use the money in the ways that you'd like to, or that allows you more freedom
You may be able to reassign some expenses from one category to another. If you don't have enough money to pay an Assistant Director, for example, it may make sense to make her the coordinator of a particular program, and to pay part of her salary out of the funds allotted to that program.
In some cases, it might be necessary to rethink your priorities a bit, so that the money can be spent in accordance with funding restrictions
It's important to remember, however, that the mission, philosophy, and goals of your organization should drive its funding, and not the other way around. Creating a program simply to make use of available funding is usually a bad idea, unless the program is one you've already planned for, and will clearly fit in with and advance the mission of your organization.
Step 4: (For budget surpluses) Be aware that it may not show up as cash until the end of the coming fiscal year
The most conservative course is to try to stick to your budget, and invest the excess money at the end of the year. This will give you something to draw on in emergencies, or money you can use in the future for something that the organization really wants or needs to do.
"Invest" here doesn't necessarily mean putting money in the stock market, which usually doesn't make sense unless you have a lot of money, and you're willing to stay with it for a long period of time - ten years or more. Certificates of Deposit, which give high interest rates in return for keeping money in the bank for a set period (generally, you can choose a period of from six months to five years), or Money Market accounts, which give a high interest rate in return for keeping a large balance, are easy ways for an organization to earn interest on its money, while still keeping it available for emergencies.
You can use your surplus to improve working conditions within the organization: raise salaries, add a benefit package, etc. It is important to remember that once you've instituted this type of change, you're obligated to maintain it.
You can buy items that you haven't been able to afford previously
You can consider adding positions or starting a whole new program or initiative, perhaps one you've been planning for a long time. If you're starting a new program, you're also implicitly making a commitment to maintaining it for a period of years, so that it will have enough time to be successful.
You can think about a long-term capital investment, like buying a building. You could lock in your rent for the duration of the mortgage (probably 20 years), and you might be able to provide the organization with income as well, by renting part of the building to other organizations.
Your surplus may not be large enough to enable your organization to make significant changes on its own, but it may provide the means for you to enter into a collaboration with other
organizations to achieve a goal that none could have accomplished alone.
Step 5: (For budget deficits) Consider combining several or all of the following possibilities to make your budget work
If you have enough money in the bank or in investments from prior years, you can use it to make up the gap in your budget
You can try to raise the additional money you need through grantwriting, fundraising efforts and events, increasing your fees for service, etc. If you have a plan for raising money - such as a raffle to finance a new copier - it should be listed with your estimated income. But be aware that such a projection isn't "real" money until the financial goal it represents is actually reached.
You can explore saving some money by collaborating with another organization to share the costs of services, personnel, or materials and equipment
You can try to cut expenses by reducing some of your costs: use less electricity, use recycled paper, try to get donations of some items you planned to buy, etc.
You can cut expenses by eliminating some things from your budget
A Guide for Budget Cutting
If you're going to cut your budget, it's a good idea to have a rational system for doing so. Here is a suggested step-by-step process which allows you to look at what is more and less necessary, and to make considered decisions about what you can do without and what you can't.
Look first at those items that aren't essential to the running of the organization.
Can you cut or cut down the amount of physical, tangible items you need to run the program, or cut the cost of services in some way?
Finally, if nothing else will serve to balance the budget, you may have to consider cutting back on whatever it is the organization
does, which usually translates to dealing with the positions of paid staff.
o Reduce the hours of one or more staff, if people are on hourly wages - for instance, consider reducing the work week from 40 to 37.5 hours, or even further
o Reduce one or more positions from full to half time - keep in mind that in many organizations, this reduction would eliminate benefits for those affected
o Ask staff to pay a larger share of their fringe benefits (if there are fringe benefits)
o Lay off one or more staff members
You can borrow the money you need, being sure to add the loan payments to your projected expenses and figure them into your revised budget
CREATING AN ACTUAL BUDGET DOCUMENT
While the spreadsheet is probably what you'll use to keep track of your finances, you might also want to put the budget in a form everyone in the organization can understand.
Probably the simplest budget document is one which lists projected expenses by category and projected income by source, with totals for each. Thus, anyone can see how much you intend to spend, how much you intend to take in, and what the difference is, if any. Referring back to the spreadsheet example above, a simple budget would look like this:
UCMHA Annual Budget for Fiscal 2001 (July 1, 2000 to June 30, 2001)
Expenses: Estimated Dollar Amount:
Salaries 41,000
Fringe 8,200
Supplies 1,000
Equipment 3,000
Phone 1,150
Utilities 1,200
Insurance 1,400
Rent 7,500
Total Expenses 64,450
Income:
Department of Public Health 25,500
United Way 5,750
Membership 3,000
Department of Welfare 30,200
Total Income 64,450
Another possible form would be similar, but would include a budget narrative, explaining how various items were arrived at.
The salary item, for instance, might look like this:
Salaries
Director ($17.00/hr for 20 hrs / week, for 52 weeks) $17,680
Health Educator ($14.95/hr for 30 hrs / week, for 52 weeks)
$23,322
Total Salaries$41,002
Other categories would be handled in the same way, with explanations of what they included and how the money would be spent.
A final possibility would be to use the spreadsheet itself as a budget document, for those who wanted to see exactly how the money was to be allocated. Many organizations provide their Boards with both a simple budget and a spreadsheet, so that those Board members who are eager to understand the organization's finances can get a clear picture, while others can simply see whether the budget is in balance.
WORKING WITH YOUR BUDGET
Most organizations make sure to review their budgets on a regular schedule - once a month is usually reasonable - and revise them to keep them accurate. If you get a grant you didn't anticipate, or if your
spending estimates are off, these things should be figured into the budget.
The budget becomes the basis for financial documents that you might prepare during the course of the year (balance sheets, for instance) which give an up-to-the-minute picture of the financial status of the organization.
Your budget should:
Tell you if there are still any gaps in funding, and exactly where they are
Show you exactly what you need to do to close those gaps Make it possible to keep careful track of your money, to adjust to
changes, and not to overspend
IN SUMMARY
Devising a budget process that examines the organization's priorities, and using it to produce an accurate, balanced budget for the coming fiscal year will help you keep control of the organization's finances, and will help guide the work of the organization. A rational and accurate budget will allow you to give accurate reports to funders and to spend their money as you have promised. And it will give you clear guidelines about what you can spend and when.
GLOSSARY
This glossary covers some of the basic accounting terminology used in the section.
Accounting: The method by which one keeps track of and manages money. There are various accounting systems that an organization can use, but the goals of all of them are to assure accurate records, and to give the organization the ability to know exactly how its money is being spent and how its financial position compares to its budget at any given moment.
Audit: A CPA (Certified Public Accountant) checks the organization's financial records to make sure they are accurate, and works with the organization to correct any errors or solve problems. The CPA then prepares financial statements using the organization's books, and
either certifies that the organization follows acceptable accounting practices and that its financial records are in order, or explains any problems with the financial records and suggests corrective measures.
Balanced Budget: Projected expenses and projected income are approximately equal.
Budget Deficit: Projected expenses are significantly greater than projected income.
Budget Surplus: Projected income is significantly greater than projected expenses.
Conservative Estimation: Using the highest reasonable figures when estimating expenses and the lowest reasonable figures when estimating income, so you will be more likely to create a budget that will keep you from overspending.
CPA: Certified Public Accountant. A certified audit, which is what most funders require, must be conducted by a CPA.
Fiscal Year: This term means financial year, and is the calendar which you use to figure your yearly budget (July 1 to June 30, for example) and which determines when you file tax forms, get audited, and close your books.
Fund Accounting: The practice of keeping a separate record of the expenditures for each separate grant or contract administered by an organization. Thus, a grass roots AIDS prevention initiative might keep separate records for funds they receive from the Department of Health, the Department of Social Services, the Department of Welfare, a local community foundation, and the AIDS Action Committee.
Line-Item: An expense category (salaries, telephone, office supplies).
Line-Item Budget: Generally, a budget agreed upon with a funder that specifies how much of the funder's money will be spent on each line-item. It could also refer to any budget that is broken out by line-item.
Projected expenses: The amount of money you expect to spend in the coming fiscal year, broken down into the categories you expect to spend it in -- salaries, office expenses, etc.
Projected income: The amount of money you know or can reasonably expect to take in for the coming fiscal year, broken down by sources -- i.e. the amount you expect from each funding source, including not only grants and contracts, but also your own fundraising efforts, memberships, interest and investment income, and sales of or fees for goods or services.
Spreadsheet: A grid format for setting out a budget in order to see expenses, income, and the ways they interact all in one place. In a budget spreadsheet, each vertical column represents a funding source, and each horizontal row represents an expense category. In the space where a column and row meet (called a cell) a number represents the amount of money from that column's funding source spent on that row's expense category.
What are accounting adjustments? An accounting adjustment is a business transaction that has not yet been included in the
accounting records of a business as of a specific date. Most transactions are eventually
recorded through the recordation of (for example) a supplier invoice, a customer billing, or the
receipt of cash. Such transactions are usually entered in a module of the accounting software
that is specifically designed for it, and which generates an accounting entry on behalf of the
user.
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However, if such transactions have not yet been recorded as of the end of an accounting
period, or if the entry incorrectly states the impact of the transaction, the accounting staff
makes accounting adjustments in the form of adjusting entries. These adjustments are
designed to bring the company's reported financial results into compliance with the dictates of
the relevant accounting framework, such as Generally Accepted Accounting
Principles or International Financial Reporting Standards. The adjustments are primarily used
under the accrual basis of accounting. Examples of such accounting adjustments are:
Altering the amount in a reserve account, such as the allowance for doubtful accounts or
the inventory obsolescence reserve.
Recognizing revenue that has not yet been billed.
Deferring the recognition of revenue that has been billed but has not yet been earned.
Recognizing expenses for supplier invoices that have not yet been received.
Deferring the recognition of expenses that have been billed to the company, but for which the
company has not yet expended the asset.
Recognizing prepaid expenses as expenses.
Some of these accounting adjustments are intended to be reversing entries - that is, they are
to be reversed as of the beginning of the next accounting period. In particular, accrued
revenue and expenses should be reversed. Otherwise, inattention by the accounting staff may
leave these adjustments on the books in perpetuity, which may cause future financial
statements to be incorrect. Reversing entries can be set to automatically reverse in a future
period, thereby eliminating this risk.
Accounting adjustments can also apply to prior periods when the company has adopted
a change in accounting principle. When there is such a change, it is carried back through
earlier accounting periods, so that the financial results for multiple periods will be comparable.
What is depreciation?
Depreciation is the assigning or allocating of a plant asset's cost to expense over the
accounting periods that the asset is likely to be used. For example, if a business purchases
a delivery truck with a cost of $100,000 and it is expected to be used for 5 years, the
business might have depreciation expense of $20,000 in each of the five years. (The
amounts can vary depending on the method and assumptions.)
In our example, each year there will be an adjusting entry with a debit to
Depreciation Expense for $20,000 and a credit to Accumulated Depreciation for
$20,000. Since the adjusting entries do not involve cash, depreciation expense is referred
to as a noncash expense.
DepreciationIn accountancy, depreciation refers to two aspects of the same concept:
1. the decrease in value of assets (fair value depreciation), and
2. the allocation of the cost of assets to periods in which the assets are used
(depreciation with the matching principle).
The former affects the balance sheet of a business or entity, and the latter affects the net
income that they report. Generally the cost is allocated, as depreciation expense, among the
periods in which the asset is expected to be used. This expense is recognized by businesses
for financial reporting and tax purposes. Methods of computing depreciation, and the periods
over which assets are depreciated, may vary between asset types within the same business
and may vary for tax purposes. These may be specified by law or accounting standards,
which may vary by country. There are several standard methods of computing depreciation
expense, including fixed percentage, straight line, and declining balance methods.
Depreciation expense generally begins when the asset is placed in service. For example, a
depreciation expense of 100 per year for 5 years may be recognized for an asset costing
500.