Contents at a Glance Introduction... 1 Part I: Accounting and Bookkeeping Nonprofit Style... 7 Chapter 1: The Nuts and Bolts of Nonprofit Bookkeeping and Accounting...9 Chapter 2: Starting with Basic Bookkeeping and Accounting...25 Chapter 3: Introducing Financial Statements...43 Chapter 4: Keeping Good Records: Using a Manual System or Computer System...59 Part II: Balancing Your Nonprofit Books... 73 Chapter 5: Setting up the Chart of Accounts for Nonprofits...75 Chapter 6: Recording Transactions and Journal Entries...87 Chapter 7: Balancing the Checkbook: Donations and Expenses...103 Chapter 8: Balancing Cash Flow: Creating an Operating Budget...121 Chapter 9: Staying in Nonprofit Compliance...137 Part III: Accounting for Nonprofit Situations... 151 Chapter 10: Introducing Federal Grants...153 Chapter 11: Tracking and Accounting for Federal Dollars...167 Chapter 12: Getting Ready for the Grant Audit...187 Chapter 13: Accounting for Payroll and Payroll Taxes...205 Chapter 14: Doing the Accounting for Tax Form 990...225 Part IV: Wrapping Up the Books... 241 Chapter 15: Analyzing the Statement of Activities...243 Chapter 16: Reporting Financial Condition on a Statement of Financial Position...253 Chapter 17: Eyeing the Cash Flow Statement...267 Chapter 18: Organizing the Statement of Functional Expense...277 Chapter 19: Closing the Nonprofit Books...287 Chapter 20: Preparing for an Accounting Audit...301 COPYRIGHTED MATERIAL Part V: The Part of Tens... 313 Chapter 21: Ten Important Things to Know When Keeping Nonprofit Books...315 Chapter 22: Ten Tips to Keep Your Nonprofit Viable...321 Index... 327
Table of Contents 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
viii Nonprofit Bookkeeping & Accounting For Dummies 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
Table of Contents ix Naming Other Available Software...66 QuickBooks...67 Microsoft Office Accounting...67 Peachtree Accounting...68 Ensuring Your System Is Secure...69 Firewalls and virus scanners...69 User privileges and file 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
x Nonprofit Bookkeeping & Accounting For Dummies 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 Nonprofit 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
Table of Contents xi 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 grant...155 Finding and applying for federal grants for your nonprofit...156 Documenting where the money goes...157 Managing Federal Grant Money: The Do s and Don ts...159 2 CFR Part 215 for administrative requirements...160 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 visit...191
xii Nonprofit Bookkeeping & Accounting For Dummies 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 Nonprofit Employees...206 Deducting the Right Amount of Taxes...207 Salaries and wages...208 Overtime and cash advances...209 Calculating Specific FICA Payroll Taxes and Deductions...210 Paying Quarterly Payroll Taxes with Form 941 and Form 8109...212 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 contributions...239
Table of Contents xiii 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 ratio...275 Determining free cash flow...275 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
xiv Nonprofit Bookkeeping & Accounting For Dummies Chapter 19: Closing the Nonprofit Books........................287 Understanding the Need to Close Your Nonprofit s Books...288 Adjusting, Closing and Reversing Entries...289 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 Statements...296 Explaining changes in accounting methods...297 Noting all lawsuits...299 Including all contingent liabilities...299 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 Contributions...315 Keep a Donors List...316 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
Table of Contents xv 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
xvi Nonprofit Bookkeeping & Accounting For Dummies