It is important for a not for a profit organization to keep accurate financial information. Not for profits/charities have a responsibility to ensure that funds are managed appropriately and expenditures are recorded properly.
Where restricted funds have been received, for example a government grant or a charitable donation, and there is a specific purpose for these funds, the organization has an obligation to ensure these funds are used accordingly.
Donors want to ensure that their funds are used for an appropriate purpose. Similar to the concept of ‘unearned revenue’ in a for profit organization, a not for profit organization aims to defer funds and only recognize the funds as income when the costs have been incurred.
Fund accounting helps the readers of financial statements understand the organization’s progress in fulfilling their obligations to their contributors or donors.
Once restricted funds are received, these should be accounted for using either the deferred method or restricted fund method. This will ensure that monies received for a certain purpose are recognized as revenue when the related expenditures are realized.
The next step is ensuring your accounting system is set up to handle the tracking of funds. Using separate classes and using sub accounts is a good way to ensure that funds are being accounted for in real time, rather than waiting until year end to have an accountant prepare financial statements.
For example, if an organization wants to keep separate funds received in their detail, one way this can be achieved it by setting up a separate notional bank account that is included as a sub account under the main operating account.
This allows the organization to determine the particular cash balance of specific funds at any time but also allows for the account to be easily consolidated with the operating account during the bank reconciliation process.
Converting records from paper to digital is not always a priority for a not for profit organization. This is usually because of lack of resources to implement the change. Some benefits of going paperless include:
Many not for profit organizations have an external auditor that will conduct an audit once per year to provide assurance that the financial statements are accurately presented. This approach follows a top down approach to ensure that what is presented is reasonable.
Larger organizations may also retain an independent consultant throughout the year to provide a bottom up approach. This is a hands-on approach that requires more continuous involvement to help make organizational improvements & increase efficiencies. Designing and implementing internal controls, upgrading reporting systems, training accounting staff and providing financial oversight on a monthly basis are all examples of this approach.
If you are a Canadian not for profit organization looking for a professional accountant to help work through the details and provide high level financial management for your organization, contact us today.
Robert Ng, CPA Professional Corporation is an independent accounting firm located in London Ontario.