Governmental and not-for-profit organizations face many financial obligations, including paying for goods and services, purchasing equipment and supplies, entering into contracts, and paying people for services.
Accounting for government and not-for-profit organizations is a dry subject that can be difficult to understand without the basics. This course will introduce the basic accounting concepts that government and not-for-profit organizations need to understand.
This course will also discuss how to analyze an organization’s financial performance to determine how much should be spent, when it should be spent, and on what products and services.
Many government agencies have difficulty spending money due to lack of awareness about what funds are available and how they are spent. Too many people assume that because an organization receives funding from a government agency that it must be good quality funding.
GAAP
This is an acronym that means Good Accounting Practice. It stands for the globally accepted rules for accounting in Australia, Canada, New Zealand, the United States and most of Europe.
In most countries, accountants are required to use this standard when reporting business income and spending. In fact, many do not due to the complexity in terms of terminology and standards.
It can be difficult for a non-accountant person to understand how something is reported. For example, many charitable organizations report their donations as a salary paid out by the organization rather than using donate as an verb.
This is why it is important for someone working with the organization to report how much was donated! This way, there is a complete picture of what is reported going into accounting reports and statements.
Financial statements
In an accounting set up, there is a section for the money. This section is called the money side of the organization. It includes all of the funding sources that your organization receives, such as donations, grants, and advertisements.
Your organization may also have its own bank account or credit card payouts, depending on who you ask!
Your organization also creates a spending plan to ensure you are meeting your spending needs. This plan can be done weekly, monthly, or even yearly depending on what needs you are checking off.
In an accounting set up, there is a place for the money spent. It is called the side of Expense Management and includes everything that was spent by your organization in terms of fees and charges.
Understanding financial statements
Governmental and not-for-profit organizations need to understand how to create financial statements. This can be done in several ways, the most common being by using an accountant.
There are two basic ways to create a financial statement for a government or non-profit organization: utilizing the income statement and the expenditure statement.
The income statement shows how much money the organization receives in total, such as funds received from donations, sales, etc. The expenditure statement shows how much money the organization spends, typically showing where this money came from and going back to donations or sales.
Both the income and expenditure statements can use figures, dates, and explanations. Knowing which one shows which parts of the organization are spending money and which are receiving it is a way to fix this issue.
Cash accounting vs. accrual accounting
There are two main ways to account for your business’s receipts and payments. They are called cash accounting and accrual accounting. Both methods work with the same information, just one may use a different terminology to describe it.
With cash accounting, you put your money into your business’s bank at the beginning of the month. That money goes into an account of yours, where it remains until it is spent or deposited in someone else’s bank.
With accrual accounting, you keep track of how much money your business spends and how much it takes in. The difference is that with accrual accounting, there is a record of what went where.
Accrual Accounting vs.
Fundamental accounting equations
In addition to understanding your business, knowing the basics of accounting for government and not-for-profit organizations will help you create and maintain a profitable business.
Government and non-profit companies purchase their supplies and services through a set of accounting equations. This is done by creating accounts and placing transactions in order to pay for supplies and services.
By knowing these basic accounting equations, you will be able to create an easy flow of money in your business, allowing it to grow with confidence.
Assigning cash value to non-cash transactions
Most transactions have a corresponding value assigned to them, either through an invoice or charge account, and most businesses consider these values reasonable.
However, in the case of transactions that have no value (i.e., debt cancellation or discharge), the business can assign a low value to avoid creating an obligation on someone’s time and trouble.
In addition, it is still possible to assign a high value if needed as proof of transaction. Many times, this is useful for law enforcement officers as evidence of fraud or an attempt at fraud may be hard to prove without such an assignment.
Most businesses would agree that assigning a price to something is important and can help prevent fraudulent charges on accounts. This is another reason why it is important to learn the basics of accounting for government organizations.
Recording basic transactions
Once your organization is set up, you will likely record some transactions. The most common transaction you will make is buying something. When you buy something, you’ll have to account for an exchange of money in order to make a purchase.
In order to take a purchase action, such as ordering online or contacting a vendor, you must input your information into the system and then complete a transaction. Most websites offer easy links to their sites so that you can do so.
Once your organization is set up, check out how well it records events by attending a event or two and seeing how well it gets recorded.
Balancing the ledger
Now that your business has everything it needs in its operation, it’s time to add value to the world around you. You can start by linking your revenues and expenses together, and creating a reserve to handle any unexpected costs.
A reserve is money set aside to cover upcoming expenses. It helps ensure you have enough money in your business account to cover daily operations and year-round revenue growth.
To create a reserve, go through your records and calculate how much money has gone into each account over the last year. Then, subtend a new “zero” amount of money and put it in the other account, creating the foundation for your next month.
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