Module 3 An Accounting Primer for NPOs: Basic Accounting Principles

1. Module 3 An Accounting Primer for NPOs: Basic Accounting Principles Convery 2013

2. Learning Objectives At the end of this module, you will understand: • the components of an accounting information system • double-entry accounting • GAAP and where it comes from • required financial statements • how financial statements “articulate” or fit together • the difference between the accrual and cash basis of accounting Convery 2013

3. Accounting Information System • Chart of accounts • Transactions • events with an economic impact on the organization • Journals (in which to record transactions) • General Journal • Cash Receipts Journal • Cash Disbursements Journal • Purchases/Payables Journal • Sales/Receivable Journal • Ledgers (showing the changes and balances in each account) • Trial balances (list of all the accounts and each balance) • Financial statements Convery 2013

4. Computerized Accounting Systems for NPOs • Simple systems designed for for-profit businesses adapted to NPOs • Peachtree, Quickbooks • Fund accounting software with “report writers” that prepare SFAS No. 117 statements • ERP (enterprise resources planning) Systems • Oracle, PeopleSoft, SAS, SCT/Banner Convery 2013

5. What is an Account? • An organized format used by entities to accumulate the dollar effect of transactions (often shown as a T) • A chart of accounts is a listing of all the account titles • The amounts of the financial statements are summations of a number of detailed accounts in the entity’s accounting system. Convery 2013

6. Chart of Accounts Challenge How do you build a chart of accounts that captures: • Function or program • Granting source, and • Object of expense (or line-item expense) • For each revenue and expense item? PROGRAM A GRANT 1 PROGRAM B GRANT 2 PROGRAM C GRANT 3 Add a third dimension for line-items; i.e., salaries, supplies, phone, travel Convery 2013

7. How Do Companies Keep Track of Account Balances? • Journals (with a chronological record of transactions in the form of journal entries) • Ledgers (a “book” with a page for each account name showing the increases and decreases to each account) Convery 2013

8. Normal Account Balances where + means increase and - means decrease Convery 2013

9. Accounting Equation Assets = Liabilities + Net Assets or Assets – Liabilities = Net Assets Convery 2013

10. Transaction Analysis(double entry accounting) • Which two (or more) accounts changed? • Did they increase or decrease? • Are those accounts Assets, Liabilities, Net Assets, Revenues, or Expenses? • Do you increase (or decrease) each account with a debit or a credit? • Is the accounting equation still in balance? Convery 2013

11. GAAP • GAAP stands for Generally Accepted Accounting Principles • For nongovernmental NPOs, the authoritative body for GAAP is the Financial Accounting Standards Board (FASB) • The highest level of authority are FASB Statements of Financial Accounting Standards (SFAS) • Of lesser weight, but very important is the AICPA’s Audit and Accounting Guide Not-For-Profit Organizations Convery 2013

12. GAAP for NPOs Financial Accounting Standards Board www.fasb.org : • Recognition of Depreciation SFAS No. 93 • Accounting for Contributions SFAS No. 116 • Financial Statement Display SFAS No. 117 • Accounting for Investments SFAS No. 124 • Agent, Trustee, or Intermediary SFAS No.136 • Mergers and Acquisitions SFAS No. 164 Convery 2013

13. Required NPO Financial Statements SFAS No. 117 • Statement of Financial Position • or Statement of Net Assets or Balance Sheet • Statement of Activities (operating statement) • Statement of Cash Flows • Statement of Functional Expenses • for Voluntary Health and Welfare Organizations Convery 2013

14. Elements of an NPO Balance Sheet • Assets • Current Assets • Noncurrent (long-term) Assets (including capital assets) • Liabilities • Current liabilities • Noncurrent liabilities (or long-term debt) • Residual (equity in a business) • Unrestricted Net Assets • Temporarily Restricted Net Assets • Permanently Restricted Net Assets Convery 2013

15. Elements of an NPO Statement of Activities • Revenues and gains • Expenses, costs and losses • Excess of Revenues (and Gains) over Expenses (and Costs and Losses) Convery 2013

16. Elements of an NPO Statement of Cash Flows Cash Flows from • Operations • see operations in the statement of activities • Investing Activities • purchase or sale of long-term assets • Financing Activities • issuance or repayment of long-term debt and equity transactions = Net Increase or Decrease in Cash + Beginning Cash Balance = Ending Cash Balance Convery 2013

17. Cash Basis • Definition: Revenues are recognized when the cash is received from customers, expenses are recognized when cash is paid • Argument for Cash Basis: - It (most often) matches the budget - Board members understand it - Inadequate cash flows put organizations at high risk Convery 2013

18. Accrual Basis • Definition: Revenues are recognized when goods are sold or services are rendered, not when received in cash; expenses are recognized when incurred, not when paid. • Arguments for Accrual Basis: • Monthly reports should lead into the audited annual financial statement so there are no surprises caused by auditor’s accrual adjustments (e.g., depreciation • This is the best way to measure the real cost of programs and the fairest reflection of net income (revenues less expenses) • All information is captured and matched in the proper time period Convery 2013