Why keep accounts and what accounts to keep?
Once you collect money for a cause, you know it is not yours to do what you wish with, to spend on treats or food and clothing, lose behind the sofa or invest in a horse race...you need to treat the donated money with care and be able to account for what you got and what you did with it.
Relying on the Bank
So, you collect money, get a grant or donation for a specific cause, put it in a bank account specially opened for this purpose, get a cheque book and spend it carefully on the cause. The bank provides statements of the income and expenditure. Why is more needed?
Limitations for donors
If the money is to be spent in a very few transactions, this may be in principle sufficient provided that you keep very clear detail on the cheque stubs so that you can identify exactly each item on the bank statement when it comes to you. However, this will not normally satisfy donors/agencies who do not expect to deal with a situation where the financial information is only on cheque stubs for example.
Limitations for you
It also does not give you a clear overall picture of what has happened. On the bank statement every item is in date order of being handled by the bank, rather than grouped by type of expenditure for example.
Also, very often there is a wide range of transactions, from discrete grants to those to being helped by the charity for example to purchase of stamps and stationery. It is not cost effective, convenient nor often indeed possible to use cheques or bank transfers for the small items and the solution is often to draw an amount – say €20 - periodically for petty cash for which a separate record of the detail needs to be kept.
Basic Cash Account
So a record of the amounts you have paid out as well as of the amount(s) paid in should be kept by you so that you can see clearly what you are doing, know what money you still have available to you, and account for it as required. The simplest way of doing this is by setting up a cash account, recording each item of money coming in and going out.
Money received example:
|Date ||Description ||Amount ||Lodged ||Total|
|1/1/10 ||donation ||€50 ||2/1/10 ||€50|
|12/1/10 ||collection ||€47 ||13/1/10 ||€97|
Money spent example:
|Date ||Description ||Amount ||chq/PO no,. ||Total|
|15/1/10 ||bus hire ||€40 ||0001 ||€40|
|15/1/10 ||picnic ||€30 ||0002 ||€70|
|17/1/10 ||entry tickets ||€27 ||0003 ||€97|
You should ensure that you keep invoices and receipts to back up this account.
This very simplified example shows the amounts received and spent on taking children on an outing. At any stage you can balance the account by taking the total in the end column for your receipts and the total in the end column for your expenditure and you will know what money you have left, without waiting for the bank statement.
Categorising expenditures in ways that are useful for you
However, as the year goes on, and there are lots of entries, the information is not easily organised to help you plan for future fundraising or for the events. It may be useful to keep either project accounts – in the example above, these would be spending accounts for each outing as well as the main spending account. The outing account would be a duplicate of the main account items for each event. This way you could monitor what each event costs you and plan your budget for future events more effectively. Or it may be useful to keep accounts categorising specific types of expenditure – in this example, all the bus hire items, all the picnics, all the entry tickets as well as the main spending account.
Computer based accounting software provides for coding items so that the computer can sort items into differently categorised accounts. This is useful in working out how much you are spending and are likely to need for a future event or a project, or how much you need for payroll or telephone expenses or whatever.
As described in this budgeting article, there is a difference between a cash account which records every item as cheques/cash is spent or received and an income and expenditure account which has somewhat different timing rules and includes depreciation for example. For very small organisations with limited assets, the difference is not likely to be material, and if you keep a) good cash accounts, and b) records of tangible assets (equipment and furniture and stocks of stationery for example), c) debtors (money due to you) and d) creditors (money you are due to pay) you will be able to keep good control during the year.
A basic record of assets can simply be a list on a spreadsheet showing what you own – what you paid for them. In the paragraphs on company accounts below, there is an explanation about depreciation of assets.
|Assets ||Bought ||Cost|
|4 desks ||1/6/2010 ||€1,200|
|2 PCs ||1/3/2010 ||€1,500|
Each item should have a label attached which is not easily removed, which gives the item a number (1, 2, 3, 4 respectively for each desk) and your organisation’s name. This helps ensure that it is not lost in any moving round of furniture or stolen.
In this simplified example, all assets are being depreciated over 3 years – one third of the original cost is written off each year. The debtors and creditors listings can be equally simple. The debtors’ one is simply a total of all the requests for payment (including invoices and membership fees) that you have issued, and all the requests for payment you have received and that have not yet been paid. It is very useful to keep these lists if only as a reminder to yourself as you chase up payments, and you have all the key information in front of you as to when you issued the invoice or request for member’s fee, or received the notification of grant and the amounts of all the suppliers you need to pay, so nothing will be overlooked.
If you have an accountant to do monthly accounts this work will be done for you. If not, at the end of the quarter/year, your accountant can complete an income and expenditure account and balance sheet for you and explain to you the financial implications of what is involved. Some questions you might like to ask are covered in the Final Accounts (below).
As an organisation grows and if it becomes a company, it need additional accounts which are somewhat more developed than these. Are these just extra things that have to be done to be compliant with law and donor conditions or do they have a value for the community or voluntary
organisation itself? The answer is yes, they do have value if you have equipment or other things you own which you will use for more than one year. If you put such items into the cash accounts we have already set up above, you will know your cash position – which is very important and you do need to continue to keep these – but it will not fully reflect the value to you of the items which is spread over a number of years.
The balance sheet, which is required if your organisation is a company starts with a statement of your assets – the things the organisation owns, such as property, furniture and equipment and the amounts shown are net of depreciation which is the process which writes down the value of assets as they are used. (There will also be a note in the ‘Notes to the accounts’ section giving a full picture of the assets and the amount of depreciation that has been written down – charged to the income and expenditure account.)
Reviewing again what you do with assets, suppose you buy an item at the very end of the year, what you do is that you record the full cost of such items as an asset on the Balance Sheet. This is a separate statement showing the financial value of the organisation at the end of a year. If the item will last 3 years, you divide the cost by 3 and put that amount (1/3) into the income and expenditure account as ‘depreciation’ in the following year. The balance sheet at the end of that following year will show the item at the remaining 2/3 of full cost – the value remaining after you have used the item for a year. For the next two years, the process is repeated, until the item has been ‘written off’. In reality it is probably replaced, in which case the process starts again.
Using the example of the desks and PCs we have already had above, the position would be like this:-
|Assets ||Bought ||Cost ||Depreciation ||Net Value|
|4 desks ||1/6/2010 ||€1,200 ||€400 (1 year) ||€800|
|2 PCs ||1/3/2006 ||€1,500 ||€1,000 (2 years) ||€500|
Other items on the balance sheet are debtors – amounts to be received by you, maybe grants owed to you, refunds etc; and creditors – amounts you owe to suppliers and anyone else. There will also be any cash and or (deposit savings/bonds etc) which you had at the end of the year and the balance on any loans outstanding. There may also be reserves – if you have had lower expenditure than income in one or more years – that is money left over to carry forward to the next year.
The balance sheet will always balance as it is a full statement of all the things owned and due to the organisation – its property, the amounts due to it and its cash less the amounts its owes in loans and in amounts payable for example to suppliers, and this is exactly balanced by the reserves. It is normally stated for two years, so it shows the state of the resources of the
organisation at the beginning of the year, and then the end year balance sheet shows the state of the resources at the end of the year. The income and expenditure account shows the amounts that came in and out in the year.
The three elements opening and closing balance sheets and income and expenditure accounts lock into one another and were designed to ensure that all of the resources supplied to a company have been fully accounted for.
Final accounts – financial summary of the story of the year
There should be no surprises for you in the final year accounts if you have been keeping your records up to date all through the year. Your cash accounts will be different to your final income and expenditure account by the amount of the non-cash items and differences in the timing for accounting purposes for payments/receipts and actually making them, but normally these differences are small. You should go over these items with your accountant carefully and ensure that they are correctly recorded, and that you understand what has happened.
There should be no surprises for you in the final year accounts....
Your balance sheet will show you the total amount of your debtors (amounts receivable by your organisation) and your creditors (amounts payable by your organisation at the beginning and at the end of the year. You should review whether the value of amounts due to be received and amounts due to be paid are rising or falling and also whether it is taking longer to collect money into your account. Your debtors (amounts receivable) and creditors (amounts payable) listings will give you more information and your accountant will be able to help you assess whether you need to take further action to handle cash more efficiently, or whether the increasing size of the organisation means that debtors and creditors are higher and that you need more cash to operate.
A cash flow statement for the year may be prepared by your accountant. It will start with the profit or loss made for the year, add back any non-cash items such as depreciation to show the cash surplus or loss made for the year, adjust for changes in debtors and creditors (amounts receivable and payable) and other elements. For a commercial company this is important to show how much money the business is generating and how efficiently it is using its
cash. It is less useful to a not-for-profit where a higher balance at the end of the year may or may not reflect efficient and effective management.
Your accountant will take you through the numbers in your annual accounts, and remember Brecht’s line –‘what you don’t not know yourself, you don’t know’, and there are no stupid questions!