ACCOUNTING BASICS Accounting is about keeping track of the organisation’s financial transactions. Depending on the size of your organisation, this may be done by staff, the board treasurer or finance committee chair, or a combination of the two. Small organisations may have one staff member assigned to this, such as a bookkeeper or the CEO, while larger ones may have both bookkeeping staff and accountants. In the latter case, the bookkeeping staff do the detailed work while the accountant generally analyses the information and prepares the financial reports. Small organisations usually use a cash basis accounting approach, meaning income is reported when received and expenses when they are paid. This varies from the accrual system, in which income is reported when the sale is made (as opposed to the date the money is received) and expenses are reported when incurred rather than when the bill is paid. Accounting is about bookkeeping (recording what comes in and goes out of accounts and petty cash), generating financial statements, and analysing and acting on the information. BOOKKEEPING Today there are many software programs for bookkeeping. However, the basics are still the same. In addition to separate savings and checking accounts, two journals are needed: Cash disbursements Cash receipts Large organisations with complex accounting may use several journals and ledgers, such as a payroll journal, accounts receivable ledger, accounts payable ledger, and general ledger. Cash Disbursements Journal: Post cash disbursements daily and total all the columns at the end of a month. These totals will become your expenses for the month on your financial statement. Section 2: Implementing Regulations—Accountability and Transparency Page 1 Your Organisation Cash Disbursement Journal Check Number Date To For Check Amount Office supplies Rent Utilities Phone Repairs Other ABC Office 1234 3 Jan 20XX Supply Co. Paper 25.49 25.49 UR Property 1235 5 Jan 20XX Management Rent 1500.00 1500.00 Phone 1236 10 Jan 20XX Sky Phone Co. Service 67.84 67.84 67.84 Bright Electric 1237 25 Jan 20XX Co. Electricity 125.88 125.88 1238 29 Jan 20XX Insurance 450.00 450.00 Jan 20XX Totals 2169.21 25.49 1500.00 193.72 67.84 0.00 450.00 Cash Receipts Journal: This tracks income and can be set up any way that makes sense. Total these monthly to use in preparing the financial statement. Your Organisation Cash Disbursement Journal Date From Invoice No. Amount Supplies Parts Labour Misc. 5 Jan 20XX Jane Doe 20135841 267.21 42.71 126.50 93.00 5.00 11 Jan 20XX Robert Smith 20135877 459.66 46.20 263.46 145.00 5.00 25 Jan 20XX John Roberts 20134255 731.26 54.00 322.26 350.00 5.00 Totals 1458.13 142.91 712.22 588.00 15.00 Employee File: If the organisation pays employees, you will need an employee file such as the one below. Depending on how many deductions are made (e.g., insurance, taxes) you can add more columns. This needs to be filled out for each pay period. NAME Hours Pay Rate Gross Pay Tax withheld Net Pay Section 2: Implementing Regulations—Accountability and Transparency Page 2 Chart of Accounts: This is a foundation tool for an accounting system as it lists all the accounts an organisation has and thus helps track financial transactions. Think of it as a map showing each account and describing the types of transactions to be entered into the account. While no two organisations likely have the same chart of accounts, all are organized around two reports: the balance sheet and the income statement. This means there is a similar order to all charts: first assets, followed by liabilities, net assets revenues, and expenses. Create a list that makes the most sense for your organisation and then add account numbers and change them as needed (though any deletions are best done at the end of the year). Account numbers are used for each entry posted and the chart tells you which number to use. The chart of accounts usually includes four columns: Account: Lists the account names Type: Lists the type of account—asset, liability, equity, income or expense Description: Contains a description of the type of transaction that should be recorded in the account Number The most common number system is: Asset accounts: 1,000 to 1,999 Liability accounts: 2,000 to 2,999 Equity accounts: 3,000 to 3,999 Sales and Cost of Goods Sold accounts: 4,000 to 4,999 Expense accounts: 5,000 to 6,999 The Balance Sheet: This shows the assets and liabilities of the organisation, usually at the end of the year. Assets (what the organisation possesses) consist of current cash, investments, and buildings and equipment, while liabilities (what the organisation owes) are both current and long term. For more information see the section on Financial Statements. Petty Cash: All organisations need to buy small items on a regular basis (e.g., notebooks, cell phone time) and so keep a petty cash fund, usually in a locked drawer or cashbox. Policy needs to be written to say how much should be available, who can access the fund, and who is accountable for it. A deposit to the petty cash fund is posted to the cash disbursements journal, usually on a monthly basis. When cash is withdrawn, a voucher is filled out that describes who took the money, how much, why, and when. It is a good idea to make a list of expenditures from the fund as money is taken, attach all the receipts as backup, and credit these to the cash disbursements journal. Section 2: Implementing Regulations—Accountability and Transparency Page 3 REFERENCES Small Business Accounting Systems. How to set up a system to take care of all your basic accounting needs. Lita Epstein. How to Set Up a Chart of Accounts for Bookkeeping. For Dummies. 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