Nonprofit Bookkeeping and Accounting For Dummies

Sharon Farris has been involved in the grants industry for more than ten years. She is the president of Farris Accounting & Consulting Training Services (FACT$) as well as the former president of the American Association of Grant Professionals (AAGP) Montgomery.

Introduction 1

About This Book 1

Conventions Used in This Book 2

What You’re Not to Read 2

Foolish Assumptions 3

How This Book Is Organized 3

Part I: Accounting and Bookkeeping Nonprofit Style 3

Part II: Balancing Your Nonprofit Books 4

Part III: Accounting for Nonprofit Situations 4

Part IV: Wrapping Up the Books 4

Part V: The Part of Tens 4

Icons Used in This Book 5

Where to Go from Here 5

Part I: Accounting and Bookkeeping Nonprofit Style 7

Chapter 1: The Nuts and Bolts of Nonprofit Bookkeeping and Accounting 9

Getting Started with Your Nonprofit’s Books 10

Identifying the difference between bookkeeping and accounting 10

Picking your accounting method 11

Understanding the basic terms 12

Adhering to GAAP 15

Keeping a paper trail 16

Auditing 101: It’s a GAAS! 16

Making Sure Your Books Are Balanced 17

Establishing a chart of accounts 17

Tracking transactions 17

Developing a budget 18

Staying within the lines: Compliance 18

You’re in the Money: The Lowdown on Federal Grants 19

Gleaning some grant basics 19

Following the rules 20

Going through a grant audit 20

Paying Uncle Sam: Employee Payroll Taxes 21

Getting a Grasp on Financial Statements 21

Figuring Out Where Your Nonprofit Is: Five Important Questions 23

Chapter 2: Starting with Basic Bookkeeping and Accounting 25

Understanding Bookkeeping and Accounting 25

What’s the difference between bookkeeping and accounting? 26

Defining some common financial terms 27

Finding the Right People to Manage the Books and Monitor the Finances 29

Considering a bookkeeper or an accountant 30

Doing it yourself 31

Opting for a fiscal sponsor or agent 31

Outsourcing the job 32

Hiring an independent auditor 33

Choosing Your Accounting Method 33

Keeping track of the cash 34

Accrual basis of accounting 34

Running Numbers on Your Assets 35

Evaluating assets by original cost or fair market value 35

Grasping depreciation methods 36

Keeping an Eye on Your Assets 39

Protecting your nonprofit’s physical assets 40

Setting internal controls 40

Chapter 3: Introducing Financial Statements 43

The Lowdown on Financial Statements: Why They’re Important 43

Seeing the benefits of tracking the money 45

Who uses these statements 45

Using Financial Statements to Your Advantage 47

Assist with grant proposals 47

Allow you to track donations 48

Track nonprofit activities 48

Indicate lawsuits: Contingent liabilities 49

Identifying the Financial Statements 49

Reading the statement of activities 49

Working with the statement of financial position 52

Developing the cash flow statement 52

Grasping the statement of functional expense 55

Documenting the notes to the financial statements 55

Chapter 4: Keeping Good Records: Using a Manual System or Computer System 59

Going the Manual or Computer Route? 59

Choosing a Manual System 61

Knowing the pros and cons 61

Eyeing the parts of a manual system 62

Trying Excel: The Easy Computer Route 63

Breaking down the spreadsheet 64

Converting your manual system into a spreadsheet 65

Naming Other Available Software66

QuickBooks67

Microsoft Offi ce Accounting 67

Peachtree Accounting 68

Ensuring Your System Is Secure 69

Firewalls and virus scanners 69

User privileges and fi le sharing 70

Miscellaneous security programs 71

Backing Up Your System 71

Part II: Balancing Your Nonprofit Books 73

Chapter 5: Setting up the Chart of Accounts for Nonprofits 75

Identifying and Naming Your Nonprofit’s Main Types of Accounts 75

Accounting for assets 77

Labeling liabilities 78

Net assets: What you’re worth 79

Revenue: What you earn 80

Nonprofit expense: What you spend 82

Net income/increase – decrease in net assets 85

Coding the Charges: Assigning Numbers to the Accounts 85

Chapter 6: Recording Transactions and Journal Entries 87

Choosing Your Basis of Accounting 87

Going through the Accounting Process 88

Eyeing the specifics of the process 89

Looking at the two sides of an account 90

Recording Journal Entries 91

Step one: Write the transaction date 92

Step two: Write the account names 93

Step three: Write the amount of each debit and credit 93

Step four: Write an explanation or reason for transaction 94

Posting to the General Ledger 94

Reaching the Trial Balance 97

Preparing the trial balance: The how-to 97

Understanding which accounts require adjustments 98

Finding errors 99

Correcting errors 101

Chapter 7: Balancing the Checkbook: Donations and Expenses 103

Getting the Lowdown on Your Checkbook Register 104

Adding and Tracking Nonprofit Donations 105

Logging donations in your register 106

Raking in the cash, checks, and other donations 107

Handling and recording the donations 110

Subtracting Your Expenses 111

Making the necessary deductions in your checkbook Register 111

Identifying common expenses 112

Relying on direct or automatic bank drafts 115

Tie It Together: Balancing the Checkbook 116

Using the bank statement 116

Entering the information into QuickBooks 118

Smoothing Out and Avoiding Errors 118

Finding and addressing errors 118

Considering outstanding checks 119

Chapter 8: Balancing Cash Flow: Creating an Operating Budget 121

Eyeing the Importance of Having a Budget in the Nonprofit World 121

Getting Off to a Good Start: Preparing to Create an Operating Budget 123

Setting clear guidelines 124

Identifying your nonprofit’s objectives 125

Eyeing goals 126

Staying organized 128

Coming Up with an Operating Budget 130

Walking through the steps to the budget: The how-to 131

Getting your budget approved 134

Reviewing Budget Performance 134

Establishing a budget task group 135

Making adjustments 135

Chapter 9: Staying in Nonprofi t Compliance 137

Understanding Why Being Compliant Is Important for Your Nonprofit 138

Staying in Compliance: The How-To 138

Register with the proper state authority 138

Account for nonprofit activities 139

Hire professional help 139

Abide by IRS statutes 140

Following Accounting Standards 140

The fascinating FASB 141

The world according to GAAP 143

Sorting out the Sarbanes-Oxley Act (SOX) 146

Avoiding Activities that Can Call Your Compliance into Question 149

Conflicts of interest 149

Lobbying or supporting candidates 149

Unrelated business income 150

Part III: Accounting for Nonprofit Situations 151

Chapter 10: Introducing Federal Grants 153

Grasping Why Federal Grant Money Is Important to Nonprofits 154

The 4-1-1 on Grants: Just the Basics 155

Defining a federal grant155

Finding and applying for federal grants for your non-profit 156

Documenting where the money goes 157

Managing Federal Grant Money: The Do’s and Don’ts 159

2 CFR Part 215 for administrative requirements160

OMB Circular A-122 for cost principles 160

OMB Circular A-133 for government audit requirements 161

Working Through the Details of Your Grant Agreement 162

Summarizing the grant budget 163

Knowing the due dates for financial status reports 164

Indicating special conditions 164

Keeping the award/project period in mind 165

Treatment of program income 165

Figuring your indirect cost rate 165

Federal and nonprofit shares 165

Chapter 11: Tracking and Accounting for Federal Dollars 167

Understanding Your Obligation 168

Managing Grant Funds 169

Maintaining a separate budget for your grant dollars 169

Making changes to your grant 170

Handling the responsibility of subgrantees 171

Drawing Down Federal Dollars 173

Transferring grant money 174

Tracking the electronic transfer 175

Knowing when to request a drawdown 176

Reporting Requirements 176

Financial Standard Form 269 177

Progress reports 182

Closing Out a Grant 185

Chapter 12: Getting Ready for the Grant Audit 187

Understanding the Purpose of the Grant Audit 188

Who Should Undergo an Audit? 189

When You’re Notified: Comprehending the Nitty Gritty of the Audit 190

Identifying the Types of Grant Audits 190

The relatively painless desk audit 191

Knock, knock: Knowing what to expect during a monitoring site visit191

Preparing for the program officer’s perusal of your procedures 192

Inspector general audit: When the situation is really serious 194

Knowing What the Auditor Looks For 195

Preparing the books for audit review 196

Proving your agency’s existence with organizational records and documents 197

Tracking all grant expenses 198

Auditing Cash Management 198

Minimizing cash on hand 199

Segregating duties through internal controls 199

Receiving the Report of Audit Findings 201

Classifying the audit finding 202

Following the corrective action plan 202

Chapter 13: Accounting for Payroll and Payroll Taxes 205

Setting Up Payroll Accounts for Nonprofi t Employees 206

Deducting the Right Amount of Taxes 207

Salaries and wages 208

Overtime and cash advances 209

Calculating Specifi c FICA Payroll Taxes and Deductions 210

Paying Quarterly Payroll Taxes with Form 941 and Form 8109212

Completing Form 941 213

Filing Form 941 215

Completing Form 8109 (Making tax deposits) 216

Completing End-of-Year Forms 219

Filling out the W-2 219

Filling out the W-3 220

Where to send the W-2s and W-3s 222

Accounting for Contract Employees: Form 1099-MISC 222

Chapter 14: Doing the Accounting for Tax Form 990 225

Choosing the Right Form: Which One Do You Need? 226

Knowing What Happens If You Don’t File Form 990 227

Understanding the Minimal Requirements: Form 990-N (e-Postcard) 228

Filling Out Form 990-EZ 229

Filling Out Form 990 231

Walking through Form 990 231

Submitting Form 990 233

Completing Form 990-T (Reporting Unrelated Business Income) 234

Handling IRS Form 990 Extensions and Mistakes 236

Requesting an extension 236

Correcting Form 990 mistakes 236

Keeping in Line with IRS Regulations 238

Reporting nonprofit unrelated business income 238

Reporting nonprofit contributions239

Part IV: Wrapping Up the Books 241

Chapter 15: Analyzing the Statement of Activities 243

Understanding the True Meaning of the Statement of Activities 244

Revenues 246

Expenses 247

Gains and losses 247

What this statement doesn’t show 248

Evaluating the Data 248

Analyzing revenues and expenses 249

Determining change in net assets 250

Using the statement to make comparisons 251

Chapter 16: Reporting Financial Condition on a Statement of Financial Position 253

Grasping What the Statement Says about Your Nonprofit 253

Creating and Reading a Statement of Financial Position: The How-To 255

Understanding the statement’s structure 255

Classifying assets 258

Classifying liabilities and net assets 260

Evaluating the Numbers 264

Calculating working capital 265

Calculating a debt-to-equity ratio 265

Chapter 17: Eyeing the Cash Flow Statement 267

Seeing What the Cash Flow Statement Can Tell You about Your Nonprofit 267

Using the statement to see the big picture 268

Making decisions based on the statement 269

Understanding How to Create and Use a Cash Flow Statement 269

Getting the statement started 270

Identifying the parts of the statement 271

Doing the math 272

Analyzing Cash Flow Indicators 274

Calculating the operating cash flow ratio275

Determining free cash flow275

Chapter 18: Organizing the Statement of Functional Expense 277

Classifying Functional Expense 277

Keeping track of time 278

Allocating expenses 281

Using the Statement of Functional Expense to Calculate Ratios 284

Program spending ratio 285

Fundraising efficiency ratio 285

Chapter 19: Closing the Nonprofi t Books 287

Understanding the Need to Close Your Nonprofit’s Books 288

Adjusting, Closing and Reversing Entries289

Adjusting entries: Year-end 290

Closing entries: A 1-2-3 step 293

Reversing entries to close temporary accounts 295

Completing the Notes to the Financial Statements296

Explaining changes in accounting methods 297

Noting all lawsuits 299

Including all contingent liabilities299

Noting conditions on assets and liabilities 300

Putting Last Year Behind You and Looking Forward 300

Chapter 20: Preparing for an Accounting Audit 301

Understanding the Audit Purpose and Need 301

Considering the nonprofit constituency 302

Knowing who’s involved in the process 303

Searching for Accountability: Leaving a Paper Trail 305

Walking through the Audit Process 306

Phase I: Planning and design 306

Phase II: Calculating audit risk 306

Phase III: Analysis 307

Phase IV: Gathering final evidence and issuing the report 307

After the Audit Is Finished: Receiving the Auditor’s Report 308

Eyeing the importance of the opinion 308

Identifying the types of auditor opinions you can receive 309

If You Get Audited by the IRS 311

Part V: The Part of Tens 313

Chapter 21: Ten Important Things to Know When Keeping Nonprofit Books 315

Watch Cash Contributions315

Keep a Donors List316

Balance Your Nonprofit Checkbook 316

Leave a Paper Trail 316

Protect Your Nonprofit from Employee Theft 317

Consider Your Constituency 318

Stay in Compliance 318

Track the Truth in the Books 318

Keep Charities and Politics Separate 319

Get Free Support 319

Chapter 22: Ten Tips to Keep Your Nonprofit Viable 321

Keeping Your Books Balanced 321

File Paperwork with the IRS 322

Pay Bills on Time 323

Explore New Fundraising Ideas 323

Watch Your Nonprofit’s Bottom Line 323

Analyze, Plan, and Project Future Funding Streams 324

Get Grant-Writing Training 324

Get an Independent Audit 325

Get Acquainted with Elected Officials 325

Attend Networking Activities 326

Index 327