Understanding basic bookkeeping

Accountability

Your organisation will need to be financially accountable to its members, its funders and donors, and to the government. Accountability means being able to demonstrate whether your organisation, and individual programs within your organisation, is making money, breaking even or losing money.

You will need to be able to show that that all transactions are recorded, all payments are authorised, all necessary information is available to managers, and nothing goes astray. For all of this you will need a bookkeeping system.

An efficient and appropriate bookkeeping system will allow you to know at any given moment what your organisation owns, how much money it has on hand, and what needs to be paid. It will also allow you to detect any irregularities in the funds before they get out of hand.

Each organisation has different accounting and financial reporting needs, depending on the amount and from where it receives and spends it. However, every organisation needs a bookkeeping system.

Financial Procedures Manual

As you work through what processes are right for your organisation in a financial management system, the details should be written down in a financial procedures manual. This will allow the relevant staff (and your management committee) to consult and operate safely within its specifications.

The manual should describe all the organisation's normal administrative tasks and specify who is responsible for each one. It should give simple descriptions of how functions such as paying bills, depositing cash, and transferring money between funds are handled.

Documenting your financial procedures is a good opportunity to check over your financial processes to see whether adequate controls are in place.

The Basics

Basically, bookkeeping is simply recording all your income and all your expenditure and having the information easily accessible. You must be able to know how much was spent or received, what it was for, and who authorized it.

All this information - how much, what for, and by whom - should be recorded on all your invoices, receipts, bills, cheques, and other financial records. If your receipts, for example, don't show all this information, you'll have to write it on to each receipt.

Authorisation limits

You will need to decide which of the members or employees is entitled to authorise spending, and how much each person is able to spend before they must check with their manager. An office assistant, for example, might have a spending limit of $ 50 for items of petty cash, while a department manager might have a limit of $ 10,000. All these details need to be recorded in the procedures manual and included in training programs.

Authorisation procedures

No matter what limits people have been given, it will probably be the case that in order to make an actual payment, staff will need to have the cheque signed by one or two of the office bearers, probably including the Treasurer. This can be inconvenient, if the Treasurer is not always available, but it is nonetheless important to have someone made responsible to have a watching brief over the expenditure as it happens.

In order to give some flexibility, many associations provide that any two of three or four people may sign.

Your bank will usually ask for a list of your office bearers (President, Vice-President, etc.) with an indication of who has signing authority. Each person who has signing authority will be required to fill out a form. This allows their signatures to be checked against the signatures on any cheques your organisation issues.

Remember that when the office bearers change, the bank should be advised, as new forms will have to be signed.

Accounting Systems

There are several basic methods for keeping your accounts, ranging from very simple systems for very small organisations to more sophisticated packages for organisations that handle larger sums of money.

Cash accounting

When small organisations are starting off they usually begin with a cash basis accounting system. At its simplest, this uses the association's receipts' book and bank deposit details to track income and the association's chequebook to track expenditure. This can work, if you are very careful to record all the details on every occasion, but it can become complicated if you need to work out payrolls and tax liabilities.

Ledgers

The next stage of sophistication is to keep ledgers or journals of income and expenditure - either one journal for each, or separate journals for separate types of income and expenditure such as Payroll, Sales, Accounts Payable, and Cash Receipts. The outcomes from all of these will be bought together in a General Ledger.

You can buy software to help you work with this system. Ensure you print out hard copy backups frequently, and remember to keep a hard copy audit trail where every transaction can be traced to an actual piece of paper - a receipt, cheque stub, or invoice - recording it.

The computer system goes on top of the paper system and adds more functions, but it is not an alternative to the paper system. You will need both, to guard against the very real risk that a computer crash or file corruption will leave you with no working records system. You must be able to recreate the ledgers if, for example, you are burgled. Thieves may take computers, but they very seldom take receipt books.

Cash Basis Accounting/Accrual Accounting

Cash basis accounting is the simplest form of keeping your ledgers, and small organisations may find it adequate. In cash basis accounting you make an entry in your ledger when you pay someone money or when someone pays you money.

Accrual accounting differs from the simpler cash basis accounting in that you make an entry into your ledger at the time you incur a debt or receive a grant, not on the date when you actually pay out or get in the money. Accrual accounting is generally preferable, if you can manage it, because it gives a better idea of where your organisation stands in the medium term. If your organisation works on short-term transactions and doesn't have long-term debts or commitments, you may be able to get away with cash flow accounting while you stay small.

Some non-profits use a modified-cash basis of accounting, which is a cross between accrual accounting and cash basis accounting. They will record payroll taxes withheld from employees or large revenue or expense items on an accrual basis. This means recording revenues when they are earned and expenses when obligations are incurred.

Handling Money

Receiving money

Cash receipts should be issued for all cash and cheques received. The receipt should include the date, the name of the person or organisation paying the money, what the money is for and the dollar amount.

Cash that is received should be deposited as soon as possible. Many (though not all) handibank facilities will take deposits after hours.

When cheques are received make sure they are made out to your organisation's name. If a cheque is made out to an individual staff member or office bearer, make sure he or she signs it, then writes on the back of the cheque "For Deposit Only to the Credit of (Name of Association)".

If your organisation wants to have the capacity to take in credit card payments, this will have to be negotiated with the card organisation.

Paying money

Bills can come in either as unpaid invoices where the money is still due or as reimbursements for payments made by someone authorized to do so.

It is important that there is a receipt or an invoice for every payment made.

Receipts or invoices for an expense should include the:

  • date,
  • name of individul or company being paid,
  • dollar amount,
  • cheque number and
  • purpose of the payment (e.g. rent, postage, etc.)

Petty Cash

Petty cash allows you to make small purchases or reimbursements, in cash, for items such as stamps, office supplies, parking, etc. You should set an upper limit on payouts from petty cash. Anything over $ 50, for example, should be paid by cheque. The fund should be enough to cover petty cash expenditures for about a month. If it is too small you will have to constantly replenish the funds, and if it is too large it means you have cash on hand which should be more safely kept in your bank account.

Keep petty cash in a locked box or drawer. It's better if only one or two people are responsible for petty cash. Buy or develop petty cash vouchers for documenting each transaction, and decide who in the organisation can approve petty cash payments.

Accounting for Taxes

You will also have to deduct tax from salaries and pay the retained tax to the Tax Office. For these reasons, you may find it preferable to keep a separate ledger for salary payments and withholdings.

Associations may have to pay income tax, Goods and Services Tax (GST), fringe benefits tax, and payroll tax, all of which have implications for the way you keep your accounts and the things you have to record about transactions. In particular, many community and not for profit organisations have some difficult decisions to make about how they want to approach the GST. You may need to consult an accountant about this.

Banking

Choosing a bank, and working out which of that bank's facilities you will want to use and to pay for, is important, and your choice may depend on local features or particular needs. Talk it over with the bank manager. Don't assume anything; make sure that the services you need are on offer, and find out what they cost.

Computer systems

You will almost certainly want to have your accounting system on the office computer. There are a number of software packages that can process your transaction records and produce balances and reports. Which one you choose depends on how complicated your accounts are and how much you can afford. There are specialised systems for non-profit organisations, but depending on how much money you have to put into staff training you may be better off with the standard systems that more people know how to work.

The Treasurer

There is more to managing non-profit finance than just good bookkeeping. The organisation's Treasurer will need to be able to prepare reports for the members, the management and the government that will show both the current situation and the possibilities for the future. The accounting system that you choose must be able to produce reports that will give the Treasurer the right information.

The Auditor

In most Australian states incorporated associations are required to have their accounts audited once a year if their turnover is above a certain level. For the situation in your State or Territory, consult ourcommunity.com.au's helpsheet on Incorporation.

There may be a chance to have someone with accounting experience donate time to helping you audit your accounts. Membership of ourcommunity.com.au allows you to post this request free of charge on our website.

Whatever the situation, you need to organise all your paperwork before the auditor arrives. You do not want them to have to put in extra time chasing down missing receipts. The auditor will produce a financial statement showing income and expenditure and a balance sheet showing your organisation's assets and liabilities.