January 2013 ‘How To’ How to Maintain Accounts for NGOs ? Regular maintenance of accounts is crucial to a well-functioning organization. Often, NGOs ignore this aspect and maintain their accounts haphazardly. This creates problems while closing accounts for the year or when seeking new funds. Accounting system for an NGO is not very different from that of other organizations. This ‘How to’ supplement provides a step-by-step guide to maintaining accounts for an NGO. ‘How To’ | Supplement | livelihoods | January 2013 | Regular maintenance of accounts is crucial to a well-functioning organization. Often, NGOs ignore this aspect and maintain their accounts haphazardly. This creates problems while closing accounts for the year or when seeking new funds. Accounting system for an NGO is not very different from that of other organizations. This ‘How to’ supplement provides a step-by-step guide to maintaining accounts for an NGO. Accounting books The basic accounting books any organization should maintain are: • Vouchers books • Receipts books • Journal • Ledger • Cash book Cash book for local funds (non FCRA grants) Cash book for FCRA funds Petty cash book • Bank Book Other Books which finance section of an NGO needs to oversee / manage: • Fixed Asset register • Advance Register • Salary Register • Stock Register • Cheque issue register • Bank Pass book / Statements • Bank Reconciliation statement • Vehicle Log Books • Minutes Book • Grant Register • Contract / Agreement Register • Telephone Register • Attendance Register Vouchers and receipts are the most basic documents in accounting. Journals are made on the basis of vouchers and receipts. Ledger is prepared based on journal and cash book is prepared based on ledger. The final accounts summarise all of these transactions. Voucher Books and Receipt Books These books capture a transaction as and when it happens. Voucher is a document recording a liability (payment) or allowing the payment of a liability, or debt. A voucher would be held by the person or company who will receive payment. How to write a voucher: • Develop a format that suits your organization. Ensure that it has the organisation logo and name How to Maintain Accounts for NGOs | 2| ‘How To’ | Supplement | livelihoods | January 2013 | • It should have place for date, serial or voucher number • Record name of the person, organization and kind of transaction (salary, rent, etc.), reason for transaction, amount in words and amount in Rs. • Ensure the voucher is signed by the payer Receipt is a written acknowledgment of having received a payment or goods, etc. How to write a receipt: • Follow a standard format - date, receipt number, transaction type, amounts etc. • Signature and seal/stamp are a must after the completion of the transaction Petty Cash Book Record day-to-day small or “petty” expenditure in the ‘Petty Cash Book’. The opening balance of the petty cash book represents the cash in hand of the office. All expenditure and revenue recorded in the petty cash book are verifiable by vouchers. Record day-to-day small or “petty” expenditure in a petty cash book The opening balance of the petty cash book represents the cash in hand of the office. All expenditure and revenue recorded in the cash book are verifiable by vouchers. How to Maintain Accounts for NGOs | 3| ‘How To’ | Supplement | livelihoods | January 2013 | Record all transactions in a journal. This is the fundamental accounts book in an organization. The other accounts books are based on the journal. A fundamental principle of Accountancy is that every transaction should have debit (cash outflow) and credit (cash inflow) entries. The journal records these in detail. Ledger: Ledgers give you a clear picture of the funds spent and received under each head every month and the overall picture in one year. Ledger is prepared on the basis of the journal. It records the transactions in a systematic, accountwise format. Ledger entries are recorded under heads such as salaries, administration, programme, travelling, etc. Project-wise, funding agency-wise ledgers can also be maintained. Spend some time once in a month to update all the ledger balances and prepare trial balance to check the accuracy of the accounts. The journal does not show the balance available in an organsation, the ledger does. Calculate the trial balance in the ledger. Trial balance is the difference between the debit and credit. Cash Book The cash book records all the transactions in terms of receipts and payments. If the organization has a FCRA then two cash book are maintained, one for national projects and one for international projects. Cash book is based on the journal entries. All cash inflows are recorded in the receipts column and all cash outflows are recorded in the payments column. Trial Balances help reveal mistakes in accounts. If the book-keeping has been done properly, both sides of the trial balance will tally. In a double-entry system (each entry on debit side has an equal entry on the credit side), total of all How to Maintain Accounts for NGOs | 4| ‘How To’ | Supplement | livelihoods | January 2013 | entries on the debit side will match the total of all the entries on the credit side. Trial Balance for a ledger: ∑debit entries=∑credit entries Financial Statement Financial Statements are prepared once a year, on the basis of account books maintained by the organisation. There are three main statements that a non-profit normally prepares: 1. Receipts and Payments Account 2. Income and Expenditure Account, and 3. Balance Sheet These are then checked by the auditors, who issue a report. This is called an audit report. The audit report is an important document. It gives important information about the organisation’s financial health. Receipts and Payments Account The Receipts and Payments account records cash inflows and cash outflows. It is basically an annual summary of the cash book How to Maintain Accounts for NGOs | 5| ‘How To’ | Supplement | livelihoods | January 2013 | Usually, the Income and Expenditure statement of an NGO shows a tally between the two sides. However, any surplus is liable to tax and can be carried forward to the next financial year. Income and Expenditure Account Income and Expenditure Account is like an activity report for a year. It shows all the income for the year on one side (right hand side) and all the expenditure on the other side (left hand side). The difference between the two sides is shown as ‘surplus’ (higher income) or ‘deficit’ (higher expenditure). Usually, the Income and Expenditure statement of an NGO shows a tally between the two sides. However, any surplus Income Expenditure Operating Income: This is known as EBIT (earnings Operating Expenses: All the expenses which before interest and taxes). Operating income comes are incurred to run the business. It includes: Cost of goods sold including wages/ from subtracting operating expenses and depreciation salaries of assets from gross income Rent Power Office supplies Non-Operating Income / Other Income: The por- Non-operating expenses: Expenses which tion of an organization's income that is derived from are incurred on activities other than core acactivities not related to its core operations. tivities is liable to tax and can be carried forward to the next financial year. Income and Expenditure Account Receipts vs. Income All receipts are not income. For example money received from sale of fixed assets, loans taken, advances from customers, etc. is not income. Similarly, all income may not be received during the year. For example, money for credit sales may be received in the next year. Interest earned on fixed deposits. How to Maintain Accounts for NGOs | 6| ‘How To’ | Supplement | livelihoods | January 2013 | Payments vs. Expenditure Similarly, all payments are not expenditure. For example, money paid for purchase of fixed assets, loans repaid or given to others, advances to contractors, etc. are not expenditure. In some cases, an expense may occur but may be paid for later. For example, you may have organized a mela in Feb ‘12, but the bill of the tent house may be paid later in April ’12. In this case, if you are following accrual accounting, then this will be shown as an expense in 2011-12, and as a payment in 2012-13. Balance Sheet: The Balance Sheet is like a status report. It depicts the assets and liabilities of the organization on a particular date (usually the end of the financial year). Liabilities are obligation of the organization arising from the past events. Assets are the resources controlled by the organization as a result of past events and from where future benefits expected to flow. Steps to write balance sheet: Identify all your liabilities and assets from various books/entries Ascertain the values of assets and liabilities. (Refer to the rule of depreciation and discounting while deciding the values) Liabilities Share Capital Reserves and Surplus Current Liabilities Assets Net Fixed Assets (Land, Buildings and intangible assets [Goodwill, Royalty etc]) Current Assets (Cash and Bank balances, short term investments and other current assets.) Investments Both sides should tally How to Maintain Accounts for NGOs | 7| ‘How To’ | Supplement | livelihoods | January 2013 | Tips for an efficient accounting system Use single master bank account which is also eligible to receive foreign funds. Maintain project-wise ledgers / accounts for donor reporting. Update books of accounts regularly. Write cash book daily. Avoid alterations / over writings. Do not use whitener (Eraz-ex). Cut and write visibly. Minimize cash payments, encourage bank payments. Avoid pre signed blank cheques. Fine alternatives to overcome problems related to availability of signatories / trustees. Avoid multiple cash books. Reconcile your bank account regularly. Conduct Physical Verification of Assets at least once in a year and document the findings Take care of your old books and records How to Maintain Accounts for NGOs | 8|