Non profit accounting system development is necessary so that your nonprofit can classify, record, summarize, analyze and report its financial activities. The objective of a good non profit accounting system is to provide management with reliable financial data that can assist them in the planning, measurement, control and evaluation of your Nonprofit’s program operations. Your Nonprofit should maintain a double entry accounting system (transactions are recorded in the form of “debits” and “credits”) utilizing a Chart of Accounts, General Journal, Cash Receipts Journal, Cash Disbursements Journal, Payroll Ledger, and a General Ledger. Each of these components is detailed as follows:
Non Profit Accounting System Components
Chart of Accounts
An important element of a good non profit accounting system is the development of the Chart of Accounts. The Chart of Accounts is a list of all the accounts an organization uses to post their financial transactions. The accounts in this list are comprised of five main categories: assets (things that are owned), liabilities (things that are owed), net assets (assets minus liabilities; net worth), revenues (assets received from goods and/or services) and expenses (the costs for goods or services). Each account within the Chart of Accounts should be assigned a code number for tracking and identification purposes. The numbering and ordering of the Chart of Accounts depends on the size and complexity of your organization; and it should be tailored to your organization’s specific needs.
Non Profit Accounting System – Journals
A General Journal is a book of original entry with a chronological listing of an organization’s financial transactions such as recording: adjusting entries, closing entries, reversing entries, and any other entry not normally recorded in the Cash Receipts or Cash Disbursements Journals. In a proper accounting system, journal entries are recorded as “debits” or “credits”, and include transaction amounts and the accounts that are affected by the transaction. When recording a transaction, asset and expense accounts are increased by a debit; and revenue, liability and equity accounts are increased by a credit. General Journal entries should always be supported with explanatory notes and/or sufficient back-up documentation.
Cash Receipts Journal
Your Organization should maintain a Cash Receipts Journal, within their accounting system, to record donations, client fees, grants, and any other income received. At minimum, the entries in this journal should contain: a date, receipt number, description of the source of receipt, and a post reference (a number assigned to identify the transaction for referencing and tracking).
Cash Disbursements Journal
A Cash Disbursements Journal is another essential tool in a good non profit accounting system. Your Organization should utilize this journal for chronologically recording checks written to pay for assets or expenses. At minimum, entries in the Cash Disbursements Journal should include the date, the check number, a post reference, and a description of the purpose for the disbursement.
A Payroll Journal is a subsidiary (provides more detailed and complete information) to the Cash Disbursement Journal. Although a Payroll Journal may not be essential for a good non profit accounting system; it become useful as the number of payroll transactions in your organization grow and become too numerous for the Cash Disbursements Journal. Entries in this journal should at least include the beginning and ending dates of the pay period, the employee’s name and social security number, gross earnings, itemized deductions, and net pay.
Financial statements are developed from the information contained in the General Ledger; therefore, it is necessary for your organization to maintain one as part of your non profit accounting system. Entries recorded in the journals should be posted to the General Ledger at least monthly. Your General Ledger should have accounts for all assets, liabilities, net assets, expenditures, and revenues. If you are a multi-funded organization, then separate accounts should be maintained for each fund/program.
In summary, a good non profit accounting system is an important instrument for managerial decisions. Therefore, in addition to maintaining sufficient financial records, a good accounting system should be integrated with adequate internal controls to: ensure that financial information is accurate and reliable; promote the efficiency of operations; and to safeguard assets from misuse or misappropriation.