NGO / NPO Book-Keeping
NGOs play a crucial role in our society in raising funds, planning social welfare programs, providing support to the needy and fighting for a good cause. NGO’s also arrange charity events to raise funds, receive and send cash to carry out operations and offer assistance to many social welfare related transactions daily. Everything follows a systemic path to maintain transparency and one has to abide by the law of the state. There is a series of processes that have to be performed to make it happen. They go through a particular process to maintain records and keep track of every transaction. This maintenance of records is best known as bookkeeping. Let's check out the chain of steps to complete the process of accounting.
Steps of accounting:
Now let's come to the steps that are followed regardless of the method or source of
accounting.
1. Accounting method
The first and foremost thing to be done by any organisation is to choose a basis of
accounting which is either the accrual basis or cash basis.
Cash basis of accounting involves bookkeeping on receipt basis i.e. a revenue is
booked when cash flows in and expense is booked when cash flows out whereas accrual
basis of accounting involves booking of transaction at the time it actually takes
place irrespective of cash through the double entry system i.e. debit and credit.
2. Bookkeeping
Journals, best known as books of original entry are used to put entries of all the
transactions. They may be a paper register or an excel sheet in a computer software.
Entries in a journal are made twice, one for debit and other for credit in a
chronological order.
It is essential to maintain books for every organisation in order to keep records
of every happening transaction. In case of NGO’s specially, that are entirely based
on donations, it is crucial to put effective controls at the cash register as well
as bookkeeping to ensure that no embezzlement takes place during the process.
3. Financial statement
Every organisation either for-profit or not-for-profit is required by the state to
prepare its annual financial statements. In fact, the entire bookkeeping process is
performed throughout the year to finally balance off your accounts on the financial
statement.
As compared to the financial statements prepared by the for-profit organisations
(income statement, balance sheet, cash flow statement), not-for-profit organisations
are required to prepare statement of financial position (balance sheet), statement of
activities (income statement) and statement of cash flow.
The balance sheet for a non-profit is based on the following equation instead of the
basic accounting equation i.e. Assets = Liabilities + Equity:
Assets = Liabilities + Net Assets
The NPO’s balance sheet replaces shareholder’s equity with net assets which can be defined as the donations collected by your organization and can be classified into the following two categories:
- With donor restrictions: The donations have been given for a specific purpose
- Without donor restrictions: The contributions by donors that have no restrictions on the usage and are used for the expenditures incurred by the entity.
Similarly, the statement of activities or the income statement reports all the revenues
earned and all the expenses incurred by the entity during a particular period of time.
However, just like the balance sheet, it separately reports the donations with
restrictions and donations without restrictions.
Lastly, the cash flow statement of an NPO reports the net cash flow of the entity
throughout the fiscal period in question, like all other for-profit organizations. It
reports all the cash that have entered or left the business and can be classified into
three main categories as follows:
- Cash flow from operating activities
- Cash flow from investing activities
- Cash flow from financing activities
A negative cash flow indicates more cash outflow than cash inflow and vice versa.
