ACCOUNTING WORKSHOP-2010 Objectives of this Workshop

ACCOUNTING WORKSHOP-2010ACCOUNTING WORKSHOP-2010

Objectives of this WorkshopObjectives of this Workshop

• Obtain a basic understanding of the accounting process

• Obtain general understanding of financial statements and related financial reporting process

• Obtain overview of the audit process

Table of ContentsTable of Contents

• Basic Accounting Concepts• Types of Accounting/Accounting systems• Accounting Methods• Financial Statements• Key Accounting Concepts• Accounting Workflow• Audit Preparation• Glossary of Commonly Used Terms

ACCOUNTINGACCOUNTING

Basic Accounting ConceptsWhat is Accounting?

Basic Accounting ConceptsWhat is Accounting?

Accounting is defined as:

The systematic recording, reporting and analysis of the financial transactions of a business.

• Accounting is often called the “language of business”– People who perform accounting procedures speak the

language of debits and credits.

• The process of accounting provides useful information that describe specific things about a company’s financial position.

Basic Accounting ConceptsAccounting Systems

Basic Accounting ConceptsAccounting Systems

An Accounting System (Accounting Cycle) is a series of processes that connects a business transaction from its source to the financial statements. Best described by the following picture:

The basic accounting cycle includes:

1. Recording business transactions

2. Posting debits and credits to a general ledger

3. Making Adjustments to the general ledger

4. Closing the books and preparing the trial balance

5. Preparing the Financial Statements

Business Transaction

(source document)

Journal Entry

General Ledger

Trial Balance

Financial Statements

(Balance Sheet & Income Statement)

1 2 3 4 5

Basic Accounting ConceptsThe Accounting Cycle (cont’d)

Basic Accounting ConceptsThe Accounting Cycle (cont’d)

What are the Characteristics of a good accounting system?

• Accurate and timely information

• Fulfillment of management’s requirements for financial reporting and analysis

• User Friendly

Business Transaction

(source document)

Journal Entry

General Ledger

Trial Balance

Financial Statements

(Balance Sheet & Income Statement)

1 2 3 4 5

Basic Accounting ConceptsThe Accounting Equation

Basic Accounting ConceptsThe Accounting Equation

The basic foundation of the accounting cycle is the accounting equation:

Assets = Liabilities + Stockholder’s Equity (of Fund Balance)

At any point in time, the above equation must be proven

Transactions recorded in accordance with the accounting equation follows the debit/credit rules listed below:Assets Liabilities Fund Balance= +

AssetsDr.

+

Cr.

-

Liabilities

Dr.

+

Cr.

-

Dr.

-

Cr.

+

Net Income/Loss

Dr.

+

Cr.

-

Opening Balance Equity

Dr.

-

Cr.

+

Fund Balance

Dr.

-

Cr.

+

TYPES OF ACCOUNTING

TYPES OF ACCOUNTING

Types of AccountingTypes of AccountingTwo types:

1. Fund (not-for-profit) Ex: GoodCity, United Way

2. Commercial (for-profit) Ex: Microsoft, IBM

Non Profit (Fund) Accounting For-Profit Accounting

Emphasis on controlling funds and showing sources and uses

Emphasis on Profit determination

Multiple accounting/business entities in form of “funds”

One accounting/business entity

Encumbrances are used Encumbrances are not used

Information is segregated Information can be aggregated

Differences:

Procedures

Management Objectives

Reporting Requirements

"A fund is defined as a fiscal and accounting entity with a self-balancing set of accounts recording cash and other financial resources, together with all related liabilities and residual equities or balances, and changes therein, which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions or limitations."

FUND ACCOUNTINGWhat is it?


What does this mean???

In other words … fund accounting uses:• Separate funds based on regulations, restrictions and

limitations.

Funds MUST:• Be treated as separate entities• Have their own general ledger• Provide individual Revenue, Expense, Income and

Statement of Financial Position reports• Be reported on in-total for the entire organization



Budgeting is the process whereby the plans of an institution are translated into an itemized, authorized, and systematic plan of operation, expressed in dollars, for a given period. Budgets are the blueprints for the orderly execution of program plans; they serve as control mechanisms to match anticipated and actual revenues and expenditures

• Can be a time-intensive project due to the large number of accounts

• Budgets typically executed at the line item level

• Fund accounting systems offer tools to apply mass changes to categories quickly.

• Salaries, travel, utility expenses can be adjusted for all funds & departments with minimum effort

• Routine line items quickly handled so you can concentrate on more complex budget issues

FUND ACCOUNTINGFUND ACCOUNTINGBudgeting

Fund accounting systems offer tools to apply mass changes to categories quickly.

Salaries, travel, utility expenses can be adjusted for all funds & departments with minimum effort

Routine line items quickly handled so you can concentrate on more complex budget issues

Accounts Payable in fund accounting allows you to mix items from multiple funds for payment with a single check

Fund accounting software will automatically handle the offset postings

FUND ACCOUNTINGSystem Benefits

FUND ACCOUNTINGSystem Benefits

• Most government agencies operate on budgets established by law

• Administrators not permitted to exceed budget limits without legislated budget amendments

• Limits for vendors cannot be exceeded without a formal bid or special approval

• Fund accounting provides mechanisms to monitor these requirements– Tests applied during data entry– Reports indicate when limits exceeded– Can tailor controls to specific needs– Controls do not exist in commercial systems

FUND ACCOUNTINGGovernment Impact

FUND ACCOUNTINGGovernment Impact

Commercial accounting systems usually have restrictive account

numbering schemes which do not accommodate most fund

accounting requirements.

For Fund Accounting, one needs account numbers with total

flexibility. The accounting basis needs to be selectable by fund,

Cash or Accrual.

• Commercial systems do not provide this feature.

COMMERCIAL ACCOUNTINGCOMMERCIAL ACCOUNTING

Differences to Fund Accounting

Commercial Accounting systems include:

• Separate chart-of-accounts for each fund

• Maintain separate revenue and expense accounts

• Can mix Statement of Financial Position accounts• Not permitted in fund accounting.

• Other functions like encumbrance processing, grant tracking and budget controls often required




Requires both current and to-date financial performance

• Activity for the period, year and to-date since grant

was received

• Lacking in most commercial systems

Grant reporting


CHART OF ACCOUNTSCHART OF ACCOUNTSStatement of Financial Position Accounts1011 – Checking Account1010 - Harris Trust and Saving Bank1200 - Accounts Receivable1400 - Prepaid Expense1500 - Fixed Assets1505 - Furniture & Fixture1510 - Computer Equipment1515 - Vehicle1600 - Accumulated Depreciation2000 - Accounts Payable2100 - Payroll Liabilities3000 - Opening Balance Equity3100 - Fund Balance

Income Accounts:4000 - Revenue4010 - Individuals4020 - Board Members4030 - Foundations/Corporations

4050 - Restricted4060 - Gifts In Kinds4070 - Unrestricted4080 - Campaign Income4090 - Membership Dues4110 - Grants4150 - Miscellaneous Income4170 - Program Fees4190 - Reimburse Expenses

Expense Accounts5000 - Personnel Expenses5060 - Gifts N Kind6030 - Amortization Expenses6110 - Automobile Expenses6140 - Contributions6150 - Depreciation Expense6160 - Dues and Subscriptions6170 - Equipment Rental6180 - Insurance6200 - Interest Expense6230 - Licenses and Permits6240 - Miscellaneous6250 - Postage and Delivery6260 - Printing and Reproduction6270 - Professional Fees6290 - Rent6300 - Repairs6340 - Telephone6345 - Advertising/Fundraising6350 - Travel & Entertainment6390 - Utilities6550 - Office Supplies6645 - Audit6670 - Program Expense

ACCOUNTINGMETHODS

ACCOUNTINGMETHODS

ACCOUNTING METHODSACCOUNTING METHODS

Two basic methods to record transactions

Cash basis – simpler, used by…• Service businesses that don’t maintain inventory• Startup businesses that don’t offer credit.

Accrual basis – more complex, used by…• Businesses that provide for credit sales • Businesses that maintain an inventory.

Once your method of accounting has been determined you must obtain approval from the IRS to change.

CASH BASIS ACCOUNTINGCASH BASIS ACCOUNTING

• Record expenses when they are actually paid

• Record sales or income when cash is received

• Accounts receivable are not recorded until they are

collected.

• Much like maintaining a checkbook

Example: Jack’s Lighting Company installs a light system in your office

on October 10 and hands you an invoice for $100. You write a check for

$100 on October 13 and mail it to Jack.

Under cash basis accounting, you record an expense for lighting on

October 13, the date that you pay the expense.

ACCRUAL BASIS ACCOUNTING

ACCRUAL BASIS ACCOUNTING

• Record income when it is earned (rather than when received)

• Record expenses when they are incurred (rather than when

paid)

• Record credit sales as accounts receivable that have not yet

been collected.

Example: Jack’s Lighting Company installs a light system in your office

on October 10 hands you an invoice for $100. You write a check for

$100 on October 13 and mail it to Jack.

Under accrual basis accounting, you record an expense for lighting on

October 10, the date the you incur the expense.

FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

FINANCIAL STATEMENTSFINANCIAL STATEMENTS

Financial Statements are a set of documents that summarize all the financial activity of a business for a certain period.

• Statements can be prepared for any period: monthly, quarterly or annually, for example

Internal Users External Users

Managers External Auditors

Analysts/Internal Auditors Creditors/Lenders/Investors

Business owners Donors/Foundations

Government/IRS

Two types of financial statement users:

FINANCIAL STATEMENTSFINANCIAL STATEMENTSFinancial Statements provide important information about the condition (healthy or unhealthy) of a business.

Provide answers to the following questions:• Is the business financially healthy?• Has the business improved or declined over the

period?• How does this business compare to other similar

businesses?• Can the business repay the debt it takes on?

Components of the Financial Statements:

1. Balance Sheet

2. Income Statement

3. Statement of Cash Flows

4. Statement of Retained Earnings


Goodcity Financial Statements

Agency

Each month, Goodcity produces two financial statement documents:

1. Statement of Financial Position

Tells your current financial position

2. Statement of Financial Position

Tells what happened during the period

Both statements are drawn from the General Ledger

• Information for each journal entry comes from original source documents, such as, sales slips, cash register tapes, check stubs, purchase invoices, etc

• May need to create subsidiary journals for frequently occurring transactions, like sales and expenses

JOURNALSJOURNALS


GENERAL LEDGER

Statement of Financial

Position

Statement of Activities

General ledger accrues balances that make up line items on the reports shows all transactions

• Core of company’s financial records

• Central “books” of your system

• Every transaction flows through the general ledger

• Remains a permanent record of the history of all financial transactions

• Summary book that records transactions & balances of individual accounts

• Order of numerical balances are determined by chart of accounts

GENERAL LEDGERWhat is it?


The General Ledger contains Five classes of individual accounts

1. Assets - items the business owns. Assets will generate future benefits.

2. Liabilities - debts the business owes. Liabilities will generate future expenses.

3. Capital - ownership or equity

4. Sales - income earned for a specific period

5. Expenses - expenditures incurred during a given period



Creates an audit trail:

• If called to have an audit, well-maintained general ledger is essential

• Need internal trail of transactions to trace discrepancies (double billing, unrecorded payments)

• Must be able to find the origin of any transaction to verify its accuracy

Creates the source for the trial balance:

• At end of the fiscal year or accounting period, the individual accounts in the general ledger are totaled and closed

• Balances of the individual accounts are summarized in the financial statements

GENERAL LEDGERCharacteristics

GENERAL LEDGERCharacteristics


GENERAL LEDGER


Position


• Snapshot of a business’ financial condition at a specific moment in time

– Usually at end of an accounting period.

• Contains 3 groups:

• Assets

• Liabilities

• Owners’ (or stockholders’) equity

• In fund accounting “Fund Balance” replaces owners’ or stockholders’ equity.

• Remember, that the Statement of Financial Position must “balance” Assets = Liabilities + Fund Balance

Statement of Financial PositionWhat is it?

Statement of Financial PositionWhat is it?

• Helps a business quickly assess the financial strength and capabilities of the business

• Can identify and analyze trends, in the area of receivables and payables

• Answers questions like:– Is the business in a position to expand?– Can the business handle the financial flows of revenues

and expenses?– Should the business take steps to bolster cash

reserves?

• Provides useful information to:– Vendors considering how much credit to grant the

company – Banks– Investors

Statement of Financial PositionWhy is it important?

Statement of Financial PositionWhy is it important?

Assets: (items that have monetary value) • Current Assets (items easily converted in one year or

less)– Cash (most liquid) - bank accounts, etc– Accounts Receivable - money owed by others for

services– Notes Receivables - money owed within one year

for loans made• Long-term assets (harder to convert)

– Fixed Assets-Buildings, Machinery, Vehicles, etc

Liabilities: claims of creditors against your organization• Accounts Payable - all short-term obligations owed

to creditors, suppliers, and other vendors. Includes supplies and materials acquired on credit.

Statement of Financial PositionWhat’s included in it?

Statement of Financial PositionWhat’s included in it?

XYZ Organization Statement of Financial PositionMar 31, 2010

ASSETSCurrent Assets

Cash 19,860.00 Total Current Assets 19,860.00 Total Assets 19,860.00

LIABILITIES & CAPITALLiabilities

Current LiabilitiesPayroll Liabilities (1,025.44)Due To/From Goodcity 5,061.33

Total Other Current Liabilities 4,035.89 Total Current Liabilities 4,035.89 Total Liabilities 4,035.89

Fund BalanceFund Balance 18,371.11 Net Income (2,547.00)

Total Fund Balance 15,824.11 Total Liabilities and Capital 19,860.00


GENERAL LEDGER


Position


• Summary of a company’s profit or loss during any one given period of time, such as a month, three months, or one year

• Records all revenues and operating expenses for a business during this given period

• Also known as a profit and loss statement

• Used to find out what areas of their business are over budget or under budget

• Can also be used to determine income tax liability

STATEMENT OF ACTIVITIESWhat is it?

STATEMENT OF ACTIVITIESWhat is it?

Income Current Month YTD

Contribution Income 25,880.00 26,165.00

Miscellaneous Income 0.00 641.00

Program Fees 0.00 300.00

Reimbursed Expenses 0.00 0.00

Total Income 25,880.00 27,106.00

Expense

Personnel Expenses 2,108.14 6,324.42

Insurance 388.74 388.74

Interest Expense 0.00 0.00

Miscellaneous 0.00 0.00

Postage and Delivery 251.46 377.97

Professional Fees 0.00 0.00

Rent 2,000.00 5,000.00

Repairs and Maintenance 996.95 1,046.95

Telephone 347.27 439.48

Advertising/Fundraising 0.00 0.00

Travel and Entertainment 859.77 859.77

Utilities 968.37 1,706.16

Office Supplies 164.47 847.30

Audit 0.00 0.00

Program Expense 1,056.73 1,947.04

Production Projects/Equip. 0.00 0.00

Total Expenses 9,141.90 18,937.83

NET ORDINARY INCOME 16,738.10 8,168.17

Other Income

Total Other Income 0.00 0.00

Other Expenses 26.00 26.00

Total Other Expense 26.00 26.00

NET OTHER INCOME (26.00) (26.00)

NET INCOME 16,712.10 8,142.17


IMPORTANTACCOUNTING

CONCEPTS

IMPORTANTACCOUNTING

CONCEPTS

Depreciation is the process of measuring the loss of value of an asset.

• If you purchase a van for $20,000 for your program:

– it loses value the minute you drive it out of the dealership

– it is considered an operational asset

• Every year the van loses some value, until it finally stops running and has no value at all!

• Depreciation methods are a way for your accounting records to show the decline in value of your van.

DEPRECIATIONWhat it is?

DEPRECIATIONWhat it is?

• Listed on income statements under expenses

• You can depreciate automobiles, office furniture, office equipment, buildings you own, and machinery

• Land is not considered an expense, nor can it be depreciated because it does not wear out like vehicles or equipment.

• Two commonly used depreciation methods:

1. Straight-line methods

2. Accelerated methods

DEPRECIATIONWhat is it? (cont’d)

DEPRECIATIONWhat is it? (cont’d)

STRAIGHT LINE METHOD:1. Find the initial cost of the asset (what did you pay for it)2. Determine how many years the asset will retain value

(estimated life) (can use general accounting rules as guide)3. Divide the initial cost by the useful life4. Report this amount on your income statement under

operation expenses

DEPRECIATIONCalculating Straight Line

Depreciation

DEPRECIATIONCalculating Straight Line

Depreciation

VAN EXAMPLE:

Step 1. Initial Cost - You purchase a van for $20,000.

Step 2. Estimated life - You determine that your assets useful life is 10 years.

Step 3. Divide - $20,000/10 years

Step 4. Record expense - $2,000 per year charged to depreciation

ACCELERATED METHOD:

• More complex

• Used by accountants to record larger amounts of depreciation in the early years

DEPRECIATIONDEPRECIATION

Amortization is the process of measuring the loss of value on intangible assets.

Intangible assets are “non-visible” assets such as contracts, prepaid expenses, insurance premiums, etc.

• Intangible assets: contribute to the revenue growth of your business

• Can be expensed against future revenues.

• Example: liability insurance is purchased for a specified time period, this is a prepaid expense and is amortized over the period of the insurance policy.

AMORTIZATIONAMORTIZATION

AMORTIZATIONCalculation

AMORTIZATIONCalculation

LIKE STRAIGHT LINE METHOD:1. Find the initial cost of the asset2. Determine how many years the asset will retain value

(estimated life)3. Divide the initial cost by the useful life4. Reported as a deduction under amortized assets

INSURANCE EXAMPLE:

You purchase a 1 year insurance policy and pay the entire premium of $5000 upon purchase.

Step 1. Initial Cost - $5000 policy premium

Step 2. Determine estimated life – 12 months --> contract length

Step 3. Divide - $5000/12 months

Step 4. Record expense - $416.66 per month as a deduction

ACCOUNTINGWORKFLOW

ACCOUNTINGWORKFLOW

ACCOUNTING WORKFLOWACCOUNTING WORKFLOW

Daily Work

1. Processing Account Payables

2. Inputting Accounts Receivables

3. Posting of all cash received

4. The balance of cash on hand

Daily Reports

1. Bank balance

2. Daily summaries of sales and cash receipts

3. Any errors or problems that occurred in collections

4. A record of monies paid out by cash and check

ACCOUNTING WORKFLOWACCOUNTING WORKFLOW

Weekly Tasks

1. Review Accounts Receivable - (check for slow paying accounts)

2. Accounts Payable - (be aware of the discount period)

3. Payroll - (check for hours accumulation and payroll liability).

4. Taxes - (check for tax items due and reports required by the government)

ACCOUNTING WORKFLOWACCOUNTING WORKFLOWMonthly Tasks

1. Give records of receipts, disbursements, bank accounts & journals to your accounting firm

– Lets firm maintain good records and for you to review them and make decisions

2. Prepare income statements

– Within 15 days of month closing

3. Review Statements of Financial Position

4. Reconcile your bank account to spot variations and make adjustments

5. Balance the petty cash account to avoid bigger problems down the road

6. Review federal tax requirements and make deposits

7. Review and age accounts receivable to spot bad accounts

GOODCITYFORMS

GOODCITYFORMS


Deposit Form

Date______________ Received From:_____________________

Address: __________________________

__________________________

Check #: ______________ Date on Check___________ Amount $:________

Program Name: ______________Fund #_ _ _ _ Funder # _ _ _ _ GL# _ _ _ _ Notes:

____________________________________________________________ Attach Deposit Slip/Copy Approval:________________________


Request for Payment

Date______________ Invoice #_____________________ Pay to the Order of:___________________________________________ Amount: $ _____________ Address: __________________________

__________________________

Program Name: ______________Fund. #_ _ _ _ Funder # _ _ _ _ GL# _ _ _ _ Notes:

____________________________________________________________ Attach Bill or Invoice__________ Approved by: _________________


Request for Reimbursement

Date______________ Invoice #_____________________ Pay to the Order of:___________________________________________ Amount: $ _____________ Address: __________________________

__________________________Program Name: __________________________________Fund #_ _ _ _ Funder # _ _ _ _ GL# _ _ _ _ $___________Fund #_ _ _ _ Funder # _ _ _ _ GL# _ _ _ _ $___________Fund #_ _ _ _ Funder # _ _ _ _ GL# _ _ _ _ $___________

Notes: ____________________________________________________________

Attach Bill or Invoice__________ Approved by: _________________

Audit PreparationAudit Preparation

What is an Audit?What is an Audit?An audit is an examination and verification of a company's financial and accounting records and supporting documents by an independent professional, such as a Certified Public Accountant.

Three common types of Audits:

1. Financial Statement Audit – examination of whether overall financial statements are presented in accordance with specific criteria (e.g. GAAP)

2. Operational Audit – examination of whether an organizations operating procedures are effective and efficient.

3. Compliance Audit – examination that business is following specific rules, procedures or regulations as defined by a higher authority.

Many businesses are required to have a financial statement audit.

What happens in an Audit?What happens in an Audit?There are several key phases of an audit:

1. The auditor will plan and design the audit approach• They will obtain background information on your business and

perform preliminary analysis of your financial statements to determine what accounts they will test in detail

• They might conduct interviews with you to understand “how” and “when” you perform certain accounting procedures

• They may also review last year’s financial statements to understand the condition of your business a the beginning of the year.

2. Auditor will perform tests of controls and transactions• They will review certain procedures to test that they are

working effectively (ex: review bank reconciliations, checking for proper authorizations of purchases or sales)

• They may also look at journal entries to see that items were posted to the general ledger correctly (ex: review the transaction to record your van purchase or insurance policy).

What happens in an Audit? (cont’d)

What happens in an Audit? (cont’d)

There are several key phases of an audit:

3. The auditor will perform detailed tests of balances• The goal is to obtain enough evidence that the balances in the

financial statements are fairly stated• The auditor may ask for specific invoices to verify the balance

(ex: invoices to support the accounts payable balance; or a listing of fixed assets in order to calculate depreciation expense)

4. The auditor will complete the audit and issue a report• If there are significant errors found in the audit, the auditor

may recommend that adjustments be made. • Once the above phases are complete, the auditor will issue a

report summarizing the procedures performed as well as giving assurance that the financial statements are fairly stated

• The auditor may also make recommendations on ways to improve the accounting and financial reporting process

How can you prepare for your audit?

How can you prepare for your audit?

Preparing for the audit is a continuous process. It is best to develop good recordkeeping and financial reporting procedures and maintain those throughout the year.

1. Be diligent in performing your daily, weekly and monthly tasks

2. Investigate any unusual items or discrepancies in your reports as soon as possible

3. Keep all transaction records, receipts, purchase orders, bank statements, etc. organized and in a safe place

4. To the extent possible, keep open communication with your auditors regarding questions or concerns you have about the accounting process.

QUESTIONS?QUESTIONS?

Neighborhoods. Dreams. Reality.

Documents

ACCOUNTING WORKSHOP-2010 Objectives of this Workshop