What is Accounting?

The word accounting is derived from the root word account which, according to Merriam Webster's Dictionary can mean to furnish a justifying analysis or explanation.

In a previous post I spoke about the importance of reporting (or accounting for your organization's activities; specifically explaining the reporting of donations. In that post we talked about why that task can be a bit confusing to a treasurer with no bookkeeping or accounting experience!

This week I was asked by a Treasurer to explain how she should be coding her activity so it not only reports donations properly but the other financial activities of her club as well. Reporting this activity correctly to your board, the public and the IRS, is a close second in level of importance to safeguarding the organization’s assets AND REPUTATION! Here’s my brief refresher on categorizing (coding) your activity.

Non-profits must report total expenses by type and by function. The functions are broken into three categories: Fundraising, Program Services, and Administrative. Expense types can vary widely and are limited only by the amount of detail you wish to have in your category listing (supplies, postage, insurance, professional fees, rent are just a few examples).

Requiring charitable organizations to report expenses this way, provides the IRS and donors with information to use in determining if an appropriate amount of expenditures is being directed to activities that further an entity's exempt purpose. The IRS is interested in ensuring that the organization's financial resources are focused on performing its programs.

When we developed Treasurer’s Briefcase we understood many Treasurers are volunteers who have stepped forward to help their organizations, more often than not, with little if any accounting experience or understanding of the unique world of non-profit accounting.  Treasurer's Briefcase helps new treasurers by prepopulating many of the expense and revenue categories most non-profits will need.

We've created specialized templates for PTOs, PTAs, and other types of booster clubs.  These templates contain typical subcategories you might use, mapped into the IRS’ preferred top-level reporting categories. Those top-level categories are listed below with explanations to assist you in recording your activity.  Understanding the top-level categories will also allow you to create your own subcategories for your specific needs.

Program Expenses

The Programs categories are the direct and indirect cash receipts and disbursements related to providing the organization's programs and social services (i.e., the activities forming its basis for exemption from tax). Most often you will be recording cash disbursements to these categories but there will be occasions in which you will also be recording cash receipts.

For example, if you are a youth baseball league and you run a tournament charging an entry fee this cash receipt would be recorded under the Program Service subcategory Tournaments. A PTA running a Father Daughter Dinner Dance charging a fee for entry to defray the cost of the event is another example.

Fundraising

Fundraising often referred to as Ways and Means, includes fundraising events as well as the sale of goods for fundraising purposes. Fundraising costs include those associated with soliciting others to contribute money or other property, time, or the use of facilities or other property as well as costs incurred to encourage contributions. Examples would be the costs of attending workshops to improve fundraising techniques.

It is important to only use this category for fundraisers. As a volunteer Treasurer who may not be well versed in nonprofit reporting, the challenge is determining under which of the three categories (program, fundraising, or administrative) an activity belongs. As a rule of thumb first ask,

“Is this receipt or expense the reason we exist?”

If the answer is no, yet it generates cash receipts it is, in all likelihood, a fundraising item.

Contributions, Gifts and Grants

Direct contributions from the public, corporations, government entities or organization members should be recorded under this category.

Administrative

Management and general expenses are not identifiable with a specific program or fundraising activity, but are normally indispensable to the organization's continued existence. Examples would be office supplies or telephone expense.

Recording your transactions to the proper categories is important for many reasons. In order to properly determine the success of a fund raiser for instance it is crucial to have all checks and receipts properly recorded. Developing an accurate budget is dependent to a large degree on the integrity of your category postings of the previous year.

Finally as we have highlighted throughout Treasurers Briefcase the IRS and general public, including potential donors or grantors have the right to request and review your filed tax return. Proper category reporting could help you maintain your tax exempt status and be the difference between receiving funding or not.

See the Treasurers Briefcase Resource Center for some real life examples of activity and how they should be reported. You will find them at the end of the Understanding Categories write up.