Accounting for HYPOTHYROIDS

by The Saint Sat Jan 10, 2009 9:59 am

The Saint: Admin; Number of posts : 2444
Age : 51
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Post n°1

Accounting for HYPOTHYROIDS

by The Saint Sat Jan 10, 2009 9:59 am

What are the elements of an accounting system?

An accounting system is comprised of accounting records (checkbooks, journals, ledgers, etc.) and a series of processes and procedures assigned to staff, volunteers, and/or outside professionals. The goals of the accounting system are to ensure that financial data and economic transactions are properly entered into the accounting records and that financial reports necessary for management are prepared accurately and in a timely fashion.

Components of an Accounting System
Traditionally, the accounting system includes the following components:

Chart of Accounts
The chart of accounts is a list of each item which the accounting system tracks. Accounts are divided into five categories:
Assets, Liabilities, Net Assets or Fund Balances, Revenues, and Expenses. Each account is assigned an identifying number for use within the accounting system. (See Financial Management FAQ 6: What Should Our Chart of Accounts Include? for information on designing the chart of accounts and using it for reporting.)

General Ledger
The general ledger organizes information by account. The chart of accounts acts as the table of contents to the general ledger. In a manual system, summary totals from all of the journals are entered into the general ledger each month, which maintains a year-to-date balance for each account.
In a computerized system, data is typically entered into the system only once. Once the entry has been approved by the user, the software includes the information in all reports in which the relevant account number appears. Many software packages allow the user to produce a general ledger which shows each transaction included in the balance of each account. For example:
Acct. No. 5105 Account Name: Office Supplies
Beginning Balance @ April 30: $1,535.26
Ck. No. 1443 John''s Office Supplies 5/12 $347.40
Ck. No. 1451 Quality Paper Store 5/17 $32.89
Closing Balance @ May 31: $1,915.55

Journals and Subsidiary Journals
Journals, also called books of original entry, are used to systematically record all accounting transactions before they are entered into the general ledger. Journals organize information chronologically and by transaction type (receipts, disbursements, other). There are three primary journals:

The Cash Disbursement Journal is a chronological record of checks that are written, categorized using the chart of accounts.
The Cash Receipts Journal is a chronological record of all deposits that are made, categorized using the chart of accounts.
The General Journal is a record of all transactions which do not pass through the checkbook, including non-cash transactions (such as accrual entries and depreciation) and corrections to previous journal entries.

As organizations mature, and handle greater numbers of financial transactions, they may develop subsidiary journals to break out certain kinds of activity from the primary journals noted above. The most common examples of subsidiary journals include:

The Payroll Journal, which records all payroll-related transactions. This may be useful as the number of payroll transaction s grows and becomes too large to handle reasonably within the cash disbursements journal.
The Accounts Payable Journal and Accounts Receivable Journal track income and expense accruals. These are useful for grouping income and/or expense accruals which are too numerous to track effectively through the general journal. Some accounting packages require you to set up all bills as accounts payable and all revenue as accounts receivable, eliminating the cash disbursements and receipts journals altogether.

The process of transferring information from the journals to the general ledger is called posting. Computerized accounting systems often require users to post all income and expense transactions through the accounts receivable and payable journals. Other automated systems allow users to post to cash disbursements or receipts journals, but cannot produce detailed financial information from these journals (such as a list of checks written presented in numerical order.) See Financial Management FAQ 9: What Accounting Software Package Should We Buy? for further information.
Checkbook
In very small organizations, the checkbook may serve as a combined ledger and journal. Most financial transactions will pass through the checkbook, where receipts are deposited and from which disbursements are made. Smaller organizations receiving few or no restricted contributions find it easier to keep track of financial activity by running all of their financial transactions through a single checking account. Very small organizations, with few deposits and disbursements, may prepare reports directly from the checkbook after the balance has been reconciled with the bank balance.

Accounting Procedures Manual
The accounting procedures manual is a record of the policies and procedures for handling financial transactions. The manual can be a simple description of how financial functions are handled (e.g., paying bills, depositing cash and transferring money between funds) and who is responsible for what. The accounting procedures manual is also useful when there is a changeover in financial management staff. See Financial Management FAQ 24: What is an Internal Accounting Control System and How Can We Make Ours Effective? for further ideas of what to consider as part of an accounting procedures manual.

The Accounting Cycle
The accounting cycle may be represented schematically as follows:
financial transactions -> analyze transaction -> record transaction in journals -> post journal information to general ledger -> analyze general ledger account and make corrections -> prepare financial statements from general ledger information
The routine aspects of the accounting cycle (recording transactions, posting, etc.) are generally done by bookkeepers or data entry clerks. Accountants focus on the more analytical aspects of the accounting cycle (analyzing transactions, preparing financial statements.) Many small organizations rely on a single individual to perform all of these functions.

Maintaining the Integrity of an Accounting System
The key tasks for maintaining the integrity of an accounting system include the following:

Trial Balance
In a manual system all balances from the general ledger are tallied on a monthly basis to make sure that debit balances equal credit balances. Once debits equal credits, financial statements can be prepared using trial balance amounts. Computerized accounting systems almost always produce a trial balance as a built-in report. Many software packages will not allow you to post an entry to the general ledger until the debit and credit balances are equal.
Bank Reconciliation
Each month you will need to reconcile the balance in your checkbook with the balance in your account according to your bank. This process has three basic steps:
1. Compare deposits and checks as they are recorded in the checkbook with those reflected in the bank statement. Adjust any discrepancies.
2. Adjust for bank charges or interest earned into the checkbook balance.
3. Subtract uncashed checks from the bank''s balance and add in checks you have deposited which are not yet reflected in the bank''s balance.
See Financial Management FAQ 21: What Internal Controls are Needed for Cash Disbursements?, FAQ 23: What Internal Controls are Needed for Payroll?,and FAQ 24: What is an Internal Accounting Control System and How Can We Make Ours Effective? For additional information about the policies and procedures which will help you maintain the integrity of information entered into the accounting system.

Stages in the Development of an Accounting System
Your accounting system will change as your organization''s needs and resources change. A new, small organization may only need to keep an accurate record of activity in its checkbook. As the number of transactions grows, that organization will add manual cash disbursements and receipts journals, but may still prepare monthly reports using a summary sheet of income and expense items. Finally, as the organization acquires assets other than cash, accruals are added, and transactions become more complex, a full general ledger system will need to be incorporated.

As their volume and complexity grow, the financial management activities will also require increasingly sophisticated staffing, whether by paid or volunteer staff or a combination of staff and outside service providers. An accounting system is only as good as the staff''s ability to put it into practice, and should be designed with its users in mind.
What are the differences between nonprofit and for-profit accounting?
Anyone familiar with generally accepted accounting principles and practices will find most accounting for nonprofit activity to be very familiar. There are, however, some significant differences which include:
Accounting for Contributions
Capitalizing and Depreciating Assets
Use of Cash - and Modified Cash-Basis Accounting
Functional Expense Classification

Accounting for Contributions
Nonprofits which qualify for tax exempt status under section 501(c)(3) of the Internal Revenue Code are entitled to receive contributions that are tax deductible to the donor. Since this is unique to the nonprofit sector, there are no equivalent procedures for handling contributions in for-profit accounting. Special procedures have been established for handling the following types of contributions:

Pledges
(Promises to Give) In 1993, the Financial Accounting Standards Board (FASB) issued the Statement of Financial Accounting Standards No. 116, Accounting for Contributions Received and Contributions Made. This Statement sets down firm guidelines for pledge accounting, requiring that legally enforceable, unconditional pledges be recorded in the accounting records. An unconditional pledge is one which is not contingent on some uncertain future event, such as a matching grant from another donor.

Donated Materials and Services
(In-Kind Contributions) FASB Statement No. 116 guidelines also requires that nonprofits account for contributions of most goods (with the exception of works of art and other items held in museum collections). In addition, volunteer time must be included in the financial statements when either:
-The volunteer time results in the creation or enhancement of non-financial assets, such as volunteer labor to renovate a child care center; or
-The services volunteered are specialized skills, such as those provided by accountants, nurses, electricians, teachers, or other professionals and craftsmen.

Special Events and Membership Dues
People who pay to attend fundraisers (such as dinners, auctions, fashion shows, bake sales, etc.) often receive a tangible benefit in return (a meal, a performance, etc.) Similarly, membership dues may entitle individuals to use facilities, receive services, etc. The portion of the special event charge or membership dues which represents the fair market value of the benefit received is not tax deductible to the donor. Some minimal benefits are excluded from this rule.

In addition, the accounting profession has established guidelines for responsibly tracking monies which have been restricted by the donor for a specific use (e.g. buying a new building, starting a new program, adding to the endowment, etc.) How these monies are tracked and reported depends on the nature of the donor''s restriction, what conditions, if any, the donor has imposed on the organization before it can actually receive or use the money, when the restrictions are met, etc.

Capitalizing and Depreciating Assets
As in for-profit accounting, nonprofits are required to record the purchase of long-lasting, substantial property and equipment (such as computers, vans, buildings, etc.) as assets in the financial records, and to charge a portion of the cost of those items in each year in which they have a useful life. This process is called capitalizing and depreciating fixed assets. While all businesses, including nonprofits, are required to record depreciation of assets, some assets in the nonprofit sector receive special treatment. These include museum collections, historical buildings, library books, zoo animals, etc.

Donated items that are added to collections that are held for public exhibition, protected and kept unencumbered, and subject to the policy that, if sold, the proceeds are used to acquire equivalent replacements for the collection, do not have to be recorded as re venue and are not recognized as formal assets in the financial statements.

Use of Cash-and Modified Cash-Basis Accounting
Many small nonprofits use cash-basis rather than accrual-basis accounting to record expenses and revenues. This means that they only record revenue when the cash is received, and only record expenses when they are paid. Some nonprofits use a modified-cash basis of accounting. They will record payroll taxes withheld from employees or large revenue or expense items on an accrual basis. This means recording revenues when they are earned and expenses when obligations are incurred. Most businesses track all expenses and revenue s using accrual accounting.

Functional Expense Allocation
Nonprofits are required to report their expenses by what is known as their functional expense classifications. The two primary functional expense classifications are program services and supporting activities. Supporting activities typically include management and general activities, fundraising, and membership development. Practices vary widely from organization to organization in the nonprofit sector as to how expenses are categorized by functional areas.

Implications of the Differences between Nonprofit and For-Profit Accounting
Because of these few, but significant, differences between nonprofit and for-profit accounting, you will want to select your al personnel, financial advisor, or auditor carefully. The degree to which you receive contributions requiring special handling, or purchase property and equipment covered by special regulations will determine whether you need an accountant who specializes in nonprofit accounting.

In addition, it is important to remember that financial information for nonprofits is interpreted differently from for-profit financial statements. The following is quoted from What a Difference Nonprofits Make: A Guide to Accounting Procedures, 1990, Accountants for the Public Interest.

Meaningful evaluations and comparisons of nonprofit performance almost always prove difficult and complex. While the profitability of two businesses can easily be calculated, it is much harder to compare the effectiveness of two counseling centers to see which is doing a better job of helping the mentally ill. Without the standard of profitability, it is also difficult to compare the job performance of nonprofit staff and managers.

Since the beneficiaries of nonprofits often cannot afford to pay for services, organizations frequently lose money on every sale. As a result, an increase in the number of clients or customers may paradoxically increase the likelihood of a financial crisis. On the other hand, turning a profit may mean that a nonprofit agency has turned away clients, perhaps including the most needy. To determine a nonprofit''s success you must refer to its goals: these are the group''s self-determined replacement for the bottom line of profit-making. The board can measure (a nonprofit''s) success by comparing the results achieved with the results sought.

This points to the importance of a clear mission statement as well as regularly updated short and long-term goals that reflect the purpose of a volunteer agency. It also underscores the need to include service statistics in conjunction with financial statements. In this way, board members can begin to grapple with the complex issues of efficiency and effectiveness as their organization pursues its stated goals.

How Do We Develop Functional Expense Classification?

The Helpful Organization: A Sample Cost Allocation Methodology
Federal Form 990 and the Statement of Financial Accounting Standards No. 117 require nonprofits to report expenses by what is known as their functional classification. The two primary functional classifications are program services and supporting acitivities. Supporting activities are typically comprised of management and general activities, fundraising and membership development.
Statement No. 117, Paragraphs 27 and 28 defines these classifications as follows:

Program services are activities that result in goods and services being distributed to beneficiaries, customers, or members that fulfill the purposes or mission for which the organization exists. Supporting activities are all activities of a not-for-profit organization other than program services. Management and general activities include oversight, business management, general recordkeeping, budgeting, financing and related administrative activities, and all management and administration except for direct conduct of program services or fund-raising activities. Fund-raising activities include publicizing and conducting fund-raising campaigns; maintaining donor mailing lists; conducting special fund-raising events; preparing and distributing fund-raising manuals, instructions and other materials; and conducting other activities involved with soliciting contributions from individuals, foundations, government agencies and others. Membership development activities include soliciting for prospective members and membership dues, membership relations and similar activities.

According to Statement No.117, Paragraph 26, this classification system was developed "to help donors, creditors, and others in assessing an organization s service efforts, including the costs of its services and how it uses resources...". Since donors make contributions in order to further a nonprofit s mission, they and the government are concerned that charitable dollars are used to achieve the organization''s service goals efficiently.

To help donors and boards, agencies such as the National Charities Information Bureau (NCIB) and United Way have established certain standards for the amount of an organization''s budget that should be spent in each category. For example, NCIB recommends that at least 60 percent of annual expenses should be related to program services. In addition, many of the larger accounting firms have developed industry standards for the arts, libraries, human service organizations, and others to show what percent of expenses are commonly devoted to programmatic services and what percent to supporting services. (To obtain this information you might contact one of the national accounting firms who typically have teams specializing in nonprofits, or a local accounting firm that works extensively in the nonprofit sector.)

Different sources recommend differing practices and policies for allocating expenses among the functional expense categories. Therefore, expense allocation practices vary widely from organization to organization within the nonprofit sector. For example, time spent by the executive director developing and overseeing programs can legitimately be considered a program services expense, yet some nonprofits will place the entire director''s salary into the management and general activities function. Similarly, rent, utilities, insurance, supplies, and other expenses may be fairly divided among the various functional classifications and should not necessarily be considered exclusively management and general activities costs.

The lack of standard allocation practices makes functional accounting a somewhat unreliable measure of nonprofit efficiency and effectiveness. Given the lack of clear guidelines, you will want to define for your own organization which expenses are legitimately programmatic and which are supportive. As long as your internal guidelines are reasonable and justifiable they are likely to be accepted by auditors and donors.

Once you have established your own criteria for determining whether expenses are programmatic or supporting, you will need to develop a method for allocating costs among the functional areas. Some organizations use different allocation methods for different line items. For example, salaries may be allocated based on time and effort distribution summarized from periodic time sheets. Copier, postage and telephone activity can often be allocated directly to their specific uses as well (although doing so is often time consuming.) In other cases, organizations develop an indirect cost rate and allocate a percentage of expenses to each functional area. Refer to Financial Management FAQ 4: How Can We Allocate Indirect Costs to Programs?, for additional information.

Since the lack of standard practices in allocating functional expenses makes comparisons between nonprofits difficult, you may want to track trends within your own organization over time: Within the guidelines you have established internally, what is the relationship between programmatic and supportive expenses over time? If your administrative or fundraising expenses are growing in relation to your programmatic outlays, you should understand what is causing the change and consider how you might reverse the trend.

The Helpful Organization: A Sample Cost Allocation Methodology
The Helpful Organization has two programs: Counseling and Training. Their total expenses are:
Salaries and Fringe:
Executive Director $ 38,000
Program Directors $ 50,000
Secretary $ 27,000
Rent $ 12,000
Supplies $ 11,000
Telephone $ 3,300
Postage $ 2,500
Copying $ 2,950

Total Expenses: $146,750

by The Saint Sun Jan 09, 2011 4:33 pm

The Saint

The Saint: Admin; Number of posts : 2444
Age : 51
Location : In the Fifth Dimension
Job : Consultant in Paediatric Emergency Medicine, NHS, Kent, England, UK
Registration date : 2007-02-22

Post n°2

Re: Accounting for HYPOTHYROIDS

by The Saint Sun Jan 09, 2011 4:33 pm

The Helpful Organization uses the following methods for allocating its expenses into functional categories:
Salaries and Fringe: The program directors' salaries are allocated entirely to programs. The organization calculates hourly pay rates for the Executive Director and Secretary by dividing their salary and fringe benefits by the number of hours each works in a year. They track their hours using a time sheet and multiplying the number of hours spent on each functional area by the hourly rate to determine how to allocate their salaries to each benefitting functional area.

Rent: Rent is allocated based on the percent of staff time that serve each function (as determined by staff time sheets). Since 80 pecent of staff time supports the program function, 80 percent of the rent is charged to the program function, as well.

Supplies: Some supplies are clearly programmatic (training packets, markers and easels, etc.). These are charged directly to the benefitting programs. Other supplies are allocated using the indirect cost rate. (See FMFAQ No. 4 for additional information.)

Telephone: Telephone expenses are allocated using the indirect cost rate.

Postage: Bulk mailings which can be easily traced to the counseling and training programs are charged to those functions. The remaining postage expenses are distributed using the indirect cost rate.

Copying: Copying for big projects is done at the local copy center. Those bills are charged to program and fundraising activities. Other copying expenses are distributed using the indirect cost rate.

Based on these allocation methodologies, the distribution of expenses to functional activities is as follows:

Counseling Program -- Training Program -- Total Program -- Management & General -- Fundraising -- Total Supporting
Salaries and Fringe:
Executive Director $12,500 $12,500 $25,000 $7,000 $6,000 $13,000
Program Directors 25,000 25,000 50,000
Secretary 7,000 10,000 17,000 8,000 2,000 10,000
Rent 4,000 6,000 10,000 1,565 435 2,000
Supplies 2,500 4,500 7,000 3,000 1,000 4,000
Telephone 1,000 1,100 2,100 1,000 200 1,200
Postage 500 1,000 1,500 800 200 1,000
Copying 300 2,000 2,300 500 150 650

Total Expenses $52,800 $62,100 $114,900 $21,865 $9,985 $31,850
Total Program Costs $114,900
Total Supporting Costs $ 31,850
Total Costs $146,750

How can we allocate indirect costs to programs?
What are Indirect Costs?
In a multi-program organization, all costs can be divided into two different types: direct and indirect. Direct costs are those which are clearly and easily attributable to a specific program. For example, the cost of new basketballs is clearly related to the after-school athletics program. Similarly, it is easy to justify charging counselors salaries to the counseling program.

Indirect costs are those which are not easily identifiable with a specific program, but which are, nonetheless, necessary to the operation of the program. These costs are shared among programs and, in some cases, among functions (program, management and general, and fundraising). The executive director''s salary is a common example of an expense which benefits all programs and functions. Other indirect, or shared, costs may include rent, telephone, postage, printing and other expenses which benefit all programs and functions of an organization.

Why Allocate Indirect Costs to the Programs?
The full cost of a program rightfully includes a share of the overall costs of the organization. Knowing the full cost of a program sets a basis for financial analysis of the program, for pricing fee-based services, and for requesting reimbursement from funders for the full costs of providing services.

What Are the Methods for Allocating Indirect Costs?
There are several methods for allocating indirect costs. The two most common are case-by-case allocation and developing an indirect cost rate.

Case-by-Case Allocation
One method of allocating indirect costs is to determine a rate of actual usage for each program. For example, you may decide to keep track of long distance telephone calls and charge them to the appropriate program when you pay the phone bill each month. Similarly , some organizations use a counter or log to track copying expenses for each program and/or function. Time sheets may form the basis for allocation of salaries for the executive director, accountant, and staff whose work benefits more than one program or activity. A different method can be adopted for each line item or case.
The advantage of this method is that it seems to "make sense." A major disadvantage, however, is that it often requires a great deal of time consuming record keeping. Even if you keep the records needed to precisely allocate shared expenses among programs, not all expenses will be covered. If, for example, the rent is allocated by square feet, how should you allocate the hallway and rest rooms? What about the local phone calls which can not be tracked using a code?
For those shared expenses which cannot easily be divided directly into programs and functions, an indirect cost rate is useful.

Developing an Indirect Cost Rate
The first step in determining an indirect cost rate is to separate all costs into two groups: direct and indirect costs. The indirect costs are aggregated into an indirect cost "pool" and then allocated to the programs based on a set proportion or rate.
There are several measures used to determine the proportion of indirect costs to allocate (apply) to each program. The following simple example illustrates an indirect cost rate based on the relationship between total indirect costs and total direct costs:
Example 1-- The Tadpole League
The Tadpole League has a total budget of $3,300. The budget is distributed as follows:
Program A has direct costs of $1,000
Program B has direct costs of $2,000
Indirect costs to run the programs is budgeted at $300
Total costs are $3,300
Since Program A''s direct costs are one-third of the total direct costs of the agency ($1,000 out of $3,000), it should bear one-third of the indirect costs. Similarly, since Program B incurs two-thirds of the total direct costs of the agency, it should bear two-thirds of the indirect costs, as well.
The Tadpole League can create an indirect cost rate which will allow it to easily accomplish this allocation. An indirect cost rate (using direct costs as a base) is established by dividing the total indirect costs by the total direct costs. For the Tadpole League the indirect cost rate is:
Total Indirect Costs divided by Total Direct Costs = $300/$3,000 = 10 percent of total costs
Each program s share of indirect costs can be calculated as a proportion of its direct costs:
Program A Indirect Expenses: $1,000 x 10% = $100
Program B Indirect Expenses: $2,000 x 10% = $200
Total Indirect Expenses = $300
After the indirect costs have been allocated to the programs, the budget now reads as follows:
Program A has direct costs of $1,000, indirect costs of $100 = $1,100
Program B has direct costs of $2,000, indirect costs of $200 = $2,200
Total costs are $3,300
This illustrates that after Program A has picked up its fair share of indirect costs, the true cost of running Program A is $1,100. As you can see from this example, using direct costs as a basis for your indirect cost rate will result in larger programs being charged with more of the indirect costs than smaller programs.

Is There More Than One Way to Calculate an Indirect Cost Rate?
The Office of Management and Budget Circular A-122, Cost Principles for Nonprofit Organizations, describes the method of developing a federal indirect cost rate, using these same principles. However, even within these guidelines, indirect cost rates for the same organization may vary from federal agency to federal agency. Organizations may allocate indirect costs based on how many people are served in each of their programs, how large each of their sites is, or other logical methods.

What Is the Standard for Allowable Indirect Costs?
There is little agreement in the nonprofit or funding community about how to calculate the rate, what to include, and how much is fair. There are no across-the-board standards or maximum levels for indirect costs. Some foundations have informal, unwritten guidelines for a maximum level. Under federal guidelines, allowable indirect costs range from 3 percent to 70 percent, varying from agency to agency.

Final Comments
Because the presentation of financial information influences the way we assess an agency''s finances, the selection of indirect costing methods and accounting procedures has an important impact on decision-making. Several urgent and perhaps conflicting demands are made of the indirect costing process: to attribute indirect costs in the fairest way possible, to attribute the most indirect costs to the programs that can best afford them, to eliminate as many indirect costs as possible by having each program buy its own supplies, etc. Finding a balance among these demands that clears confusion and informs decision-makers is a responsibility of all participants in the nonprofit sector.
What is the difference between Cash Basis and Accrual Basis accounting?
Cash-basis and accrual-basis accounting use different criteria for determining when to recognize and record revenue and expenses in your financial records. On a cash-basis revenues are recognized when cash is received and deposited. Expenses are recorded in the accounting period when bills are paid. In accrual-basis accounting, income is realized in the accounting period in which it is earned (e.g., once contracted services are provided, grant provisions are met, etc.), regardless of when the cash from these fees and donations is received. Expenses are recorded as they are owed (e.g. when supplies are ordered, the printer finishes your brochure, employees actually perform the work, etc.), instead of when they are paid.

To illustrate, let's take a simple example. At the end of a summer camp's fiscal year, it has recorded the following deposits and expenditures (left hand statement) from its checkbook. A balance sheet has also been prepared to show the camp's assets, liabilities and fund balance.

Example of Cash-Basis Balance Sheet
SUMMER CAMP
September 1 - August 31, 19xx
INCOME STATEMENT BALANCE SHEET
INCOME ASSETS

Grants $ 3,000
Cash $ 127
Contributions $4,500
Property, Plant and Equipment $120,000
Fees from Campers $25,000 Less:
Accumulated Depreciation <100,000>
Total Income $32,500
Net Fixed Assets $20,000

TOTAL ASSETS $20,127

EXPENSES
Salaries $20,000

LIABILITIES
Food and Supplies $6,000
Loan from President $5,000
Insurance $4,200
Utilities $2,000

FUND BALANCE $15,127
Telephone $750
Printing and Postage $3,500
Total Expenses $36,450

LIABILITIES AND FUND BALANCE $20,127

Since the information was taken from activity in the checkbook, we know these statements were produced on a cash basis. However, some pertinent information has not been recorded. For example, a foundation has given the camp a grant of $10,000 to provide scholarships for low-income children. The children did attend the camp, but the foundation has not yet sent in the check.
Because cash is tight, the camp has not paid the final installment to their printer for this year's brochure. They owe her $1,500.
The insurance premium was paid in December, and covers the period December through November. So, it is good for another three months.
To take these three factors into consideration on the financial statements, revenues and expenses need to be recorded on an accrual basis. Several line items need to be added to the balance sheet in order to update the financial statements. These are: Accounts Receivable
Reports revenues which have been earned, but not yet received. For example, a payment from a government grant which has been vouchered, but not yet received is an account receivable. In this case, the camp has a grant receivable of $10,000, since the children have already attended the camp and the camp has therefore "earned" the scholarship money from the foundation.
IMPACT:
Increase grant income by $10,000 to $13,000
Increase grants receivable to $10,000
Accounts Payable
Reports expenses which are owed to others. The money owed to the printer for completing the brochure is a $1,500 account payable.
IMPACT:
Increase printing expenses by $1500 to $5000
Increase accounts payable to $1500
Prepaid Expenses
Reports expenses which have already been paid, but are for a future period. In this example, three months of insurance is considered a prepaid, rather than a current, expense.
IMPACT:
Decrease insurance expense by $1,050 ([$4,200/12 months] x 3 months) to $3,150
Increase prepaid expense to $1,050
Reported on an accrual basis, using the categories described above, the camp's financial statements now look as follows:

Example of Accrual-Basis Balance Sheet
SUMMER CAMP
September 1 - August 31, 19xx

INCOME STATEMENT BALANCE SHEET
INCOME ASSETS

Grants $ 13,000
Cash $ 127
Contributions $4,500
Accounts Receivable $10,000
Fees from Campers $25,000
Prepaid Expenses $1,050
Net Fixed Assets $20,000

Total Income $42,500

TOTAL ASSETS $31,177

EXPENSES
Salaries $20,000

LIABILITIES
Food and Supplies $6,000
Accounts Payable $1,500
Insurance $3,150
Loan from President $5,000
Utilities $2,000

FUND BALANCE $24,677

Telephone $750
Printing and Postage $5,000
Total Expenses $36,900

LIABILITIES AND FUND BALANCE $30,177
This example illustrates how preparing financial statements on an accrual basis, using these categories, will give a much more accurate and complete picture of an organization's financial condition. However, cash-basis accounting is easier to use on a day-to-day basis since there are fewer transactions to track. For this reason, many nonprofits, especially those with smaller budgets, choose to keep their books on a modified cash-basis. This means they do one or more of the following:
Keep the books on a cash basis and prepare reports on an accrual basis. One way to accomplish this is by making accrual adjustments for receivables, payables, etc. on a worksheet and incorporating this information into the financial statements, without formally entering it into the books.
Record small transactions (e.g., under $100) on a cash basis, but larger transactions and withheld payroll taxes are recorded on an accrual basis.
Record income on a cash basis and expenses on an accrual basis. This is the most conservative method for recording income and expenses, since you only report cash which has actually been received, but you include expenses whether or not they have been paid.
Many organizations do not have the resources or need to keep their books on an accrual basis. Factors to consider when deciding which basis your organization should use include:
The extent to which your organization has payables, receivables, etc. on an ongoing basis. If you have few unpaid bills or outstanding grants or fees throughout the year, cash-basis accounting will give essentially the same financial picture of your organization as accrual-basis, and will be easier to use.
The expertise and time constraints of your bookkeeping staff.
The cash flow position of your organization. If cash flow is an ongoing concern you will want to keep close track of accounts payable and receivable.
The size of your organization's budget. Many small or new nonprofits do not have many payables or receivables, nor do they have the ability to keep track of accruals on an ongoing basis. These organizations will use cash-basis accounting. On the other hand, as their budgets grow, and with them the number of financial transactions, it may become more important to keep track of all activity. They will then switch to using a modified cash or accrual system.
No matter which system you use throughout the year, financial reports must be prepared on an accrual basis according to generally accepted accounting principles.

by The Saint Sun Jan 09, 2011 4:35 pm

The Saint

The Saint: Admin; Number of posts : 2444
Age : 51
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Job : Consultant in Paediatric Emergency Medicine, NHS, Kent, England, UK
Registration date : 2007-02-22

Post n°3

Re: Accounting for HYPOTHYROIDS

by The Saint Sun Jan 09, 2011 4:35 pm

What should our Chart of Accounts include?
Your chart of accounts, which is a list of each account that the accounting system tracks, should be designed to capture the financial information you need to keep track of your financial information and make good financial decisions. Only information recorded with an account code from the chart of accounts will be recorded into the financial records, and from there into financial reports.
The chart is divided into five categories: assets, liabilities, net assets or fund balances, revenues, and expenses. Each account is assigned an identifying number for use within the accounting system. Aside from certain conventions regarding numbering and the order in which information is presented (see below), you can tailor your chart of accounts to your organization's specific needs.
In order to decide what to include in your chart of accounts you will want to consider each of the following questions:
What reports do you want to prepare?
What financial decisions, evaluations and assessments do you need to make on a regular basis?
What level of detail do you require?
What is your capacity for tracking financial information?
The best way to design a chart of accounts is to first consider what reports you want to prepare to satisfy external requirements and help you with internal management assessment and decision-making. You can then determine which categories to include in the reports you plan to produce. For example, your chart of accounts should correlate to the categories in your budget so you can easily prepare reports comparing budgeted with actual income and expenses. The Model Chart of Accounts, developed by the Nonprofit Management Group at Baruch College/CUNY, cross-references each account number to the corresponding line items required for reporting on Federal Form 990 (see the Sample Chart of Accounts provided at the end of this FAQ)

As you think about the different types of income your organization receives, you might want to consider what questions you will want to address in your financial reports: Will you need to distinguish between corporate and foundation grants so you can monitor your fundraising efforts? Are some contributions restricted? Do you earn fees for some of your services? If so, can all fees be combined into one account, or do you want information on fees from each type of activity?

You can ask yourself similar questions regarding your organization's expenses: What is the lowest level of detailed information that you would like from your financial records? How will you use the information if you record it? For example, most organizations want to keep track of office supplies in the aggregate rather than accounting separately for paper clips, pens, rubber bands, etc. A less obvious example might be in postage. Do you want to include in the postage expense category fees for messengers and express delivery, or do you want to report these separately? If you are worried about the amount being spent on express delivery you should create a separate expense category. If you do not plan to analyze this level of detail, however, it would be advisable to combine the two categories. You can always pull specific invoices related to express delivery to do a periodic analysis without tracking the information in your general ledger.

In addition to the types of income and expenses you want to keep track of there may be other factors to consider as you put together the chart of accounts. If you have more than one site, do you want to keep track of information separately for each site? Or, if you have more than one program, do you want to keep track of items such as supplies, postage, salaries, etc. for each program? And finally, under the new Financial Accounting Standards Board Statements No. 116 and 117, nonprofits will have to report revenues and expenses in three categories: unrestricted, temporarily restricted, and permanently restricted. It is important, therefore, that the chart of accounts supports these reporting requirements, as well.
The greater the level of detail you require, the greater the likelihood that you will need accounting software to keep track of your financial transactions. Accounting software often allows you to divide up transactions into many small pieces, and then determine what level of detail to use in your reports. Keeping track of very detailed information manually is time consuming, and few nonprofits have the staff to do so.

Of equal importance is the ability and availability of your bookkeeper to manage a complex number of variables. For example, your bookkeeper may need training to be able to support a more complex chart of accounts as your accounting systems becomes more complex.

A good rule of thumb is to keep the chart of accounts as simple as possible, and revise it as your need for information increases over time. Throughout the year, as you write checks or receive money, keep track of those times when it was unclear to you which account number to assign to the transaction. That can be an indicator that the chart of accounts needs to be revised or that the criteria for assigning account numbers need to be clarified.

What are the Features of a Simple Chart of Accounts?
The sample chart of accounts provided at the end of this FAQ illustrates how you might track income and expense items, along with conventions which are usually observed when assigning account numbers. This sample is intended to be a guide which you can use for developing your own chart of accounts. It is not comprehensive and some of the accounts included in the sample may not be useful to you. You should note to the following features of the sample chart of accounts:
Account categories are presented in a standard order, beginning with the accounts presented in the Statement of Position (Balance Sheet.) These are:
Assets
Assets are the tangible items an organization has as resources, including cash, accounts receivable, equipment and property. Assets are usually listed in descending order of liquidity. This means that cash and other assets which are easily converted to cash are listed first, and fixed assets such as property and equipment are listed last. Asset accounts usually start with the number "1."
Liabilities
Liabilities are obligations due to creditors, such as loans and accounts payable. Current liabilities, those obligations which fall due within the next year, are usually listed first, followed by long-term liabilities. Accounts payable and payroll taxes payable are usually listed before other payables. Deferred revenue and other liabilities are often further down on the list. Liabilities often begin with the number "2."
Net Assets (or Fund Balances)
Net assets, formerly referred to as the fund balance(s), reflect the financial worth of the organization. They represent the balance remaining after obligations are subtracted from an organization's assets. Accounting software designed with for-profits in mind may report net assets under the heading "equity." Organizations which only receive unrestricted gifts will have only one net asset account. Those with temporarily or permanently restricted net assets, such as endowments will have more than one net asset account. Net asset accounts begin with the number "3."
Income and Expense accounts follow the Statement of Position Accounts
You will notice that account numbers proceed from lowest to highest, with room between numbers in each category. This allows you to expand the level of detail presented in the chart of accounts as your activities grow.

Certain related accounts are grouped together with related numbers. For example, the general number for payroll taxes is 7310. However, each type of payroll tax expense has been assigned its own account number " F.I.C.A. expense is 7311, Unemployment Insurance is 7312, etc. Some computerized accounting software will allow you to prepare reports which aggregate all accounts with the code 731x into a single line item. Even manually, this type of expense grouping simplifies consolidating information for reports.

Please note, however, that typically you would not post information to account 7310. This account is considered the "heading" for all related expenses.

How can we Capture more Complex Financial Information?

If you need to keep track of separate funds (temporarily and permanently restricted), separate programs or departments, separate sites, etc., your chart of accounts can be designed to accommodate these needs using a "multi-tiered" chart of accounts. The sample chart of accounts shows a single tier. Adding a second section or tier to your account codes allows you to code line items into various categories.
As the chart of accounts becomes more complex, it can enable you to produce reports which are more and more detailed. Again, however, doing so depends on the time and ability of the financial staff and the sophistication of your financial systems since multi-tiered accounting is difficult to maintain without a computer.
What is Depreciation?
Nonprofits are required to record the purchase of long-lasting, substantial property and equipment (such as computers, vans, buildings, etc.) as assets in the financial records, and to charge a portion of the cost of those items to each year in which they have a useful life. This process is called capitalizing and depreciating fixed assets.
For example, suppose that on January 1st an organization acquires a computer with an estimated useful life of four years. The computer costs $2,500. When the purchase is recorded, the following journal entry is made:

Fixed Assets (increase by) $2,500
Cash (decreases by) $2,500
Explanation: To record the purchase of a computer for $2,500
At the end of each of the next four fiscal years, including the current year, the following journal entry will be made:

Depreciation Expense (increases by)
($2,500/4 years = $625 per year) $625
Accumulated Depreciation (increases by) $625
Explanation: To record depreciation expense for the year.
It is very important to remember that the cash for the computer was spent in the first year. However, one-fourth of the expense for the computer will appear on the Statement of Activity (Income Statement) for each of the four years it is deemed to have a useful life. Therefore, in the three years after the purchase a depreciation expense of $625 will appear on the financial statements even though no cash was expended during those years.
Accumulated depreciation, as the name implies, reports on the amount of depreciation which has accumulated over time. By the end of the first year, one-fourth of the computer will be depreciated. At the end of the second year, two-fourths (i.e., one-half) will be depreciated. By the end of the fourth year the computer will be fully depreciated. In other words, the full cost of the computer will have been recorded as an expense.

The fixed asset portion of the Statement of Position (Balance Sheet) will represent this accumulated depreciation for the computer as follows:
Year 1
Computer (cost) $2,500
Less: Accumulated Depreciation <625>
Net Fixed Assets $1,875

Year 2
Computer (cost) $2,500
Less: Accumulated Depreciation <1,250>
Net Fixed Assets $1,250

Over the remaining two years, accumulated depreciation will increase by $625 per year and net fixed assets will decrease by $625 per year, until accumulated depreciation is $2,500 and net fixed assets is zero. In this example, the organization determined that the useful life of the computer was four years, and that at the end of that time the computer would have no remaining value. Most nonprofits charge an equal amount of depreciation expense to each year of the asset useful life. This is called straight-line depreciation.

To calculate depreciation charges for each fixed asset, you must know how much the asset cost (including all costs necessary to make the asset operational), how long the asset can reasonably be expected to last before it needs to be replaced, and whether the item will have any salvage value at the end of its useful life. Since there are certain conventions for items such as computers, vehicles, furniture, buildings, and other fixed assets, you should consult with your accountant when estimating the useful life of a new capital purchase.

Since depreciation expense is a non-cash expense (that is, cash is usually paid out in the year the asset is acquired, but the expense is distributed over several years), it is important to plan for the replacement of fixed assets as they wear out or become obsolete. For example, some organizations set aside an amount of cash equal to the amount of their yearly depreciation expense so that money will be available to purchase a new asset once the current one is fully depreciated.

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Accounting for HYPOTHYROIDS

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