Understanding Financial Statements

Understanding Financial Statements

M O N E Y

M A N A G E M E N T

Keeping Tabs on Where the Money Goes at Your Nonprofit

Launched in 1982 by Jim and Patty Ro u s e ,

The Enterprise Foundation is a national,

nonprofit housing and community d e ve l o p-

ment organization dedicated to bringing lasting

i m p rove m e n t s to distressed communities.

COMMUNITY DEVELOPMENT LIBRARY™This book is part of the Enterprise CommunityDevelopment Library, an i n valuable re f e rence collectionfor nonprofit organizations dedicated to revitalizing andreconnecting neighborhoods to mainstream America.One of many resources available t h rough Enterprise, itoffers industry - p roven information in simple, easy-to-read formats. From planning to governance, fund rais-ing to money management, and program operations to communications, the Community De ve l o p m e n tL i b r a ry will help your organization succeed.

ADDITIONAL ENTERPRISE RESOURCESThe Enterprise Foundation provides nonprofit organizations with expert consultation and training as well as an extensive collection of print and onlinetools. For more information, please visit our Web siteat www.enterprisefoundation.org.

Copyright 1999, The Enterprise Foundation, Inc.All rights reserved.ISBN: 0-942901-54-1

No content from this publication may be reproduced ortransmitted in any form or by any means, electronic ormechanical, including photocopying, recording or any infor-mation storage and retrieval system, without permissionfrom the Communications department of The EnterpriseFoundation. However, you may photocopy any worksheets or sample pages that may be contained in this manual.

This publication is designed to provide accurate and authori-tative information on the subject covered. It is sold with theunderstanding that The Enterprise Foundation is not render-ing legal, accounting or other project-specific advice. Forexpert assistance, contact a competent professional.

Table of Contents

Chart of Accounts 2

Balance Sheets 11

Exercise #1 14

Exercise #2 16

Income Statements 18

Exercise #3 21

Exercise #4 24

Statements of Cash Flows 26

Exercise #5 28

Trial Balance: Connecting Balance Sheets With Income Statements 32

Exercise #6 37

Understanding Different Accounting Methods 43

Fund Accounting 46

Exercise #7 51

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About This Manual

What are financial statements?

Financial statements are numerical descriptions of fiscal activityand status required as part of an audit. Understanding the finan-cial statements of your organization will give you a different, andimportant, view of the nonprofit’s health and prospects.

Understanding Financial Statements is designed for the staffs and boardsof nonprofit organizations; city, county and state agencies; and techni-cal assistants and partners of nonprofit community development orga-nizations. This guide explains the elements of nonprofit organizationalfinancial statements, providing information on:

■ Standard formats of various financial statements and reports

■ Cash vs. accrual accounting

■ Restricted funds

Not intended as an in-depth text, Understanding Financial Statementsprovides examples and exercises written from the standpoint of a non-profit manager or board member who is not familiar with accountingor the details of financial management.

This manual is one of the books within the Money Management seriesof The Enterprise Foundation’s Community Development Library™.The series provides detailed information on:

■ Budgeting

■ Cash flow projections

■ Sound financial management

■ Assessing your organization’s finances

■ Accounting software

■ Federal rules of nonprofit money management

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The chart of accounts is a listing of the differentaccounts used to record the activities or transac-tions of your organization. A chart of accountsreflects your nonprofit’s particular nature andfunction while using standard accounting terms.For instance, everyone will have a cash account.But you may not have an inventory accountunless you are a retailer or wholesaler.

For community development organizations, thechart of accounts may include accounts relatedto single-family development such as construc-tion in progress.

Five major accounts are used in a chart of accounts:

■ Assets

■ Liabilities

■ Equity or Net Assets

■ Revenues

■ Expenses

Chart of Accounts

COMMON CLASSIFICATIONS

These five major accounts are larger categories that allow an organization to place its many differentaccounts and financial activities into an ordered, comprehensible structure. They help turn a confus-ing tangle of numbers into a clear narrative about your organization’s financial condition based onyour organization’s particular activities.

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Commonly used classifications

A s s e t s

L i a b i l i t i e s

Net Assets

R e v e n u e s

E x p e n s e s

Current Assets — cash, accounts receivable, prepaid expenses and other assets thatcan be readily converted to cash or consumed (within one year or accounting cycle).

Investments — typically stocks, bonds and other securities.

Fixed Assets — land and durable property and equipment held and used in normaloperations and depreciated over future periods.

Other Assets — accounts in this "catch-all" section vary between industries and orga-nizations but are typically any asset that does not fit into other categories, particu-larly noncurrent assets such as long-term notes receivable (loans to others). Also,nondepreciable fixed assets such as buildings purchased for renovation and resale(housing inventory for a housing development corporation).

Current Liabilities — obligations that are expected to be satisfied with current assetsor within one year: accounts payable, wages and other payroll liabilities; short-termnotes or current payments of longer-term obligations.

Long-Term Liabilities — obligations that are not expected to be satisfied within thecurrent period (one year) but rather will be paid in future periods: bonds, pensions,long-term notes (loans).

Equivalent to equity in a for-profit entity, the net assets account represents thecumulative effect of all transactions of the organization throughout its life. “Whatyou own minus what you owe equals your net assets.” Assets - Liabilities = Net Assets

Most nonprofit organizations classify revenues as either restricted or unrestricted.Restricted revenue refers to income that must be used for a specific purpose or pro-gram and comes from a special source. Unrestricted revenue refers to income thatcan be used at the nonprofit’s discretion for any activity (program or administrative).

Other classifications can be defined based on their relevance to the organization’sactivities. For example, some community development organizations may want a classification for revenue accounts related to federal contracts.

Expense accounts may be classified based on the type of organization and thenature of its activities. The classifications may also be determined by how the man-agement of the organization wants to see the information — the format of thefinancial statements.

The grouping of expenses may vary greatly between industries and companies. Manynonprofits classify their expenses as program and nonprogram — often called gen-eral and administrative, or G&A. Program expenses are those that are directly attrib-utable to a specific program. Nonprogram expenses refer to those costs that may notbe directly attributed to a program but are incurred in the operation of the organiza-tion (fund raising, for example). Other classifications — such as direct and indirectexpenses — may exist as well.

FOREVER HOMES CDC — CODES & ACCOUNTS

Let’s look at an example of a fictitious 501(c)(3)nonprofit organization, Forever Homes, that hasthree distinct business operations, all related tohousing.

■ Managing Pro p e rty Owned by Ot h e rNo n p rofits — In 1998 Fo re ver Homes managed400 units of affordable multifamily housing.

■ Developing Single-Family Homes for Saleto First-Time Low-Income Home Buyers —In 1998 Forever Homes developed six houses.

■ Providing Supportive Housing forHouseholds with Extensive Social ServiceNeeds — In 1998 Forever Homes owned andmanaged 15 units of supportive housing.

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Forever Homes’ activities are reflected inits chart of accounts. Here is a typical chartof accounts for this nonprofit. The codenumber stands for posting categories, andthe account name describes the activitythat takes place under each category.

Code Account

1010 Cash — Checking1015 Cash — HOME Funds1020 Cash — Savings1030 Cash — Petty Cash1200 Accounts Receivable1300 Prepaid Expenses1500 Land/Buildings1510 Construction in Progress1520 Salable Property1600 Long-Term Investments1800 Office Furniture & Equipment1801 Accumulated Depreciation —

Furniture & Equipment1900 Notes Receivable2000 Accounts Payable2100 Payroll Liabilities2120 Accrued Expenses2200 Purchaser’s Deposits 2300 Lease Payable2400 Notes Payable2500 HOME Funds Payable3000 Net Assets4010 Grants (unrestricted)4011 Grants (restricted)4050 Contributions4100 Fund-Raising Event4150 Program Fees

Code Account

4160 Training Fees4170 Consulting4200 Sale of Property4900 Interest Income5000 Cost of Property Sold6010 Salaries6020 Benefits6100 Program Supplies6150 Equipment Rental6200 Staff Training6250 Marketing/Advertising6300 Printing & Reproduction6350 Publications & Memberships6400 Travel7050 Fund-Raising & Event Costs7100 Rent7110 Utilities7120 Telephone7130 Insurance7140 Office Supplies7150 Postage & Delivery7160 Repairs & Maintenance7200 Legal Fees7210 Accounting & Auditing Fees7800 Miscellaneous7900 Interest8000 Depreciation

Codes & Accounts

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How transactions affect Forever Homes’ chart of accounts

Classifications Affected

$18,750 removed from Cash account $18,750 added to Salaries account

$5,000 added to Cash account$5,000 added to Fund-Raising Event account

$960 removed from Cash account$960 added to Interest account

$75 added to Cash account$75 added to Interest Income account

$4,000 removed from Cash account$4,000 added to Accounting & Auditing Fees account

Sample Transactions

Monthly payments of $18,750for salaries

Receipt of $5,000 from a fund-raising event

Payment of $960 in intereston a loan

Receipt of $75 for interest on bank deposits

Payment of $4,000 for an audit

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More sample transactions and the accounts they affect

Transaction

Received unrestricted operating grant anddeposited money in bank

Paid staff salaries

Purchased supplies on account (due in 30 days)

Borrowed money from bank for development(note due in five years)

Paid invoices from last month

Recorded renovation costs for single-familyhome (from contractor’s invoice)

Sold single-family home — transferring development loan to buyer

Accounts

CashGrants (unrestricted)

SalariesCash

SuppliesAccounts Payable

CashNotes Payable

Accounts PayableCash

Construction in ProgressAccounts Payable

Notes PayableSale of Property

Classification

Current AssetRevenue

ExpensesCurrent Asset

ExpensesCurrent Liability

Current AssetLong-Term Liability

Current LiabilityCurrent Asset

Housing InventoryCurrent Liability

Long-Term LiabilityRevenue

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Classifications of balance sheet accounts

Code Account Classification

1010 Cash — Checking Current Asset1015 Cash — HOME Funds Current Asset1020 Cash — Savings Current Asset1030 Cash — Petty Cash Current Asset1200 Accounts Receivable Current Asset1300 Prepaid Expenses Current Asset

1500 Land/Buildings Housing Inventory1510 Construction in Progress Housing Inventory1520 Salable Property Housing Inventory

1600 Long-Term Investments Investment

1800 Office Furniture & Equipment Fixed Asset1801 Accum. Depr. — Furn. & Equip. Fixed Asset

1900 Notes Receivable Other Asset

2000 Accounts Payable Current Liability2100 Payroll Liabilities Current Liability2120 Accrued Expenses Current Liability2200 Purchaser’s Deposits Current Liability

2300 Lease Payable Long-Term Liability2400 Notes Payable Long-Term Liability2500 HOME Funds Payable Long-Term Liability

3000 Net Assets Net Assets

Example of Chart of Accounts for Forever Homes CDC — Classifications of Balance Sheet Accounts

This chart builds on what you already have seen in prior examples. In addition to codes and accountnames, the chart includes a classification of accounts by type as described earlier. Please note that all ofthe accounts on this page are balance sheet accounts. (More about balance sheets later.)

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Classifications of income statement accounts

Code Account Classification

4010 Grants (unrestricted) Revenue4011 Grants (restricted) Revenue4050 Contributions Revenue4100 Fund-Raising Event Revenue4150 Program Fees Revenue4160 Training Fees Revenue4170 Consulting Revenue4200 Sale of Property Revenue4900 Interest Income Revenue

5000 Cost of Property Sold Cost of Property Sold

6010 Salaries Direct Expenses6020 Benefits Direct Expenses6100 Program Supplies Direct Expenses6150 Equipment Rental Direct Expenses6200 Staff Training Direct Expenses6250 Marketing/Advertising Direct Expenses6300 Printing & Reproduction Direct Expenses6350 Publications & Memberships Direct Expenses6400 Travel Direct Expenses

7050 Fund-Raising & Event Costs Indirect Expenses7100 Rent Indirect Expenses7110 Utilities Indirect Expenses7120 Telephone Indirect Expenses7130 Insurance Indirect Expenses7140 Office Supplies Indirect Expenses7150 Postage & Delivery Indirect Expenses7200 Legal Fees Indirect Expenses7210 Accounting & Auditing Fees Indirect Expenses7900 Interest Indirect Expenses

8000 Depreciation Indirect Expenses

Example of Chart of Accounts for Forever Homes CDC — Classifications of Income Statement Accounts

This chart is another example showing all three headers: codes, account names and classification bytype. The difference between this chart and the one shown just before is that all of the accounts onthis page are income statement accounts instead of balance sheet accounts. (More about incomestatements later.)

Code Account Classification Balance

1010 Cash — Checking Current Asset $4,0151015 Cash — HOME Funds Current Asset $34,0001020 Cash — Savings Current Asset $01030 Cash — Petty Cash Current Asset $2501200 Accounts Receivable Current Asset $1,0001300 Prepaid Expenses Current Asset $4501500 Land/Buildings Housing Inventory $30,0001510 Construction in Progress Housing Inventory $15,0001520 Salable Property Housing Inventory $56,0001600 Long-Term Investments Investment $01800 Office Furniture & Equipment Fixed Asset $30,0001801 Accum. Depr. — Furn. & Equip. Fixed Asset $13,5001900 Notes Receivable Other Asset $5,0002000 Accounts Payable Current Liability $3,2002100 Payroll Liabilities Current Liability $6,8002120 Accrued Expenses Current Liability $02200 Purchaser’s Deposits Current Liability $02300 Lease Payable Long-Term Liability $3,0002400 Notes Payable Long-Term Liability $02500 HOME Funds Payable Long-Term Liability $135,0003000 Net Assets Net Assets $04010 Grants (unrestricted) Revenue $75,0004011 Grants (restricted) Revenue $220,0004050 Contributions Revenue $25,0004100 Fund-Raising Event Revenue $5,0004150 Program Fees Revenue $04160 Training Fees Revenue $21,0004170 Consulting Revenue $20,0004200 Sale of Property Revenue $04900 Interest Income Revenue $755000 Cost of Property Sold Cost of Property Sold $06010 Salaries Direct Expenses $225,0006020 Benefits Direct Expenses $49,5006100 Program Supplies Direct Expenses $06150 Equipment Rental Direct Expenses $2,0006200 Staff Training Direct Expenses $2,0006250 Marketing/Advertising Direct Expenses $2,000

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Dollars assigned

Example of Chart of Accounts for Forever Homes CDC — Dollars Assigned

On prior charts you have already seen three columns with codes, account names and classification bytype headers. Now you can see the addition of a fourth column, which shows actual amounts specifiedfor each account under a new header called Balance.

chart continued on next page

LOOK AT YOUR ORGANIZATION’S CHART OF ACCOUNTS

Think about what you have just learned andcompare it to the way your nonprofit keeps itschart of accounts.

Notice the five account classifications:

A s s e t sL i a b i l i t i e sNet AssetsRe ve n u e sEx p e n s e s

Also look at the level of detail in your accounts:Forever Homes has one account for salaries.

Does your organization have one or more than one? Is the classification type listed next to each account?

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Code Account Classification Balance

6300 Printing & Reproduction Direct Expenses $2,4006350 Publications & Memberships Direct Expenses $1,5006400 Travel Direct Expenses $4,5007050 Fund-Raising & Event Costs Indirect Expenses $2,0007100 Rent Indirect Expenses $18,5007110 Utilities Indirect Expenses $2,1007120 Telephone Indirect Expenses $3,9007130 Insurance Indirect Expenses $5,0007140 Office Supplies Indirect Expenses $5,5007150 Postage & Delivery Indirect Expenses $3,5007160 Repairs & Maintenance Indirect Expenses $07200 Legal Fees Indirect Expenses $4,0007210 Accounting & Auditing Fees Indirect Expenses $4,0007800 Miscellaneous Indirect Expenses $07900 Interest Indirect Expenses $9608000 Depreciation Indirect Expenses $13,500

Assumptions

■ Line-item categories are the same as line items in the chart of accounts.■ Each consolidated category is broken out into line items.■ The basic accounting equation still holds: Assets = Liabilities + Net Assets

The balance sheet — known officially as aStatement of Financial Position — is a report of the financial position of an organization at one moment in time, providing a snapshot of your company’s financial health. The infor-mation contained in the balance sheet showsyour organization’s ability to meet present andfuture obligations with current resources, howmuch is owed and how much is owned by the organization.

STANDARD FORMAT

The balance sheet contains the first three of thefive major account types:

■ Assets

■ Liabilities

■ Net Assets

Assets comprise one section of the balancesheet while liabilities and net assets comprisethe other section. The “t o t a l s” of these two sections should balance.

The assets section shows what you own or whatresources you have available. The liabilities andnet assets section shows what you owe plus theorganization’s net account balance.

THE BASIC ACCOUNTING EQUATION

Assets – Liabilities = Net Assets

– or –

Assets = Liabilities + Net Assets

Again, the balance sheet reflects the financial sta-tus of your organization for one day or moment.A subsequent balance sheet the ve ry next day ormoment could show a ve ry different picture. T h enext examples illustrate this concept.

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Balance Sheets

Forever Homes CDC balance sheet — consolidated as of Dec. 31, 1998

BalanceASSETS Current Assets $ 39,715

Housing Inventory 101,000Investments 0Fixed Assets 16,500Other Assets 5,000

Total Assets $ 162,215

LIABILITIES Current Liabilities $ 10,000Long-Term Liabilities 138,000

Total Liabilities 148,000

NET ASSETS 14,215

TOTAL LIABILITIES & NET ASSETS $ 162,215

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Forever Homes CDC balance sheet — detailed as of Dec. 31, 1998

Balance Dec. 31

ASSETS CURRENT ASSETSCash — Checking $ 4,015Cash — HOME Funds 34,000Cash — Savings 0Cash — Petty Cash 250Accounts Receivable 1,000Prepaid Expenses 450

Total Current Assets 39,715

INVESTMENTSLand/Buildings 30,000Construction in Progress 15,000Salable Property 56,000Long-Term Investments 0

Total Investments 101,000

FIXED ASSETSOffice Furniture & Equipment 30,000Accum. Depr. — Furn. & Equip. (13,500)

Total Fixed Assets 16,500

OTHER ASSETSNotes Receivable 5,000

Total Other Assets 5,000

TOTAL ASSETS $ 162,215

LIABILITIES CURRENT LIABILITIESAccounts Payable $ 3,200Payroll Liabilities 6,800Accrued Expenses 0Purchaser’s Deposits 0

Total Current Liabilities 10,000

LONG-TERM LIABILITIESLease Payable 3,000Notes Payable 0HOME Funds Payable 135,000

Total Long-Term Liabilities 138,000

TOTAL LIABILITIES 148,000

NET ASSETS 14,215


How Balance Sheets Are Affected by Purchases

Notice:■ The increase in the

Office Furniture &Equipment line item— from $30,000 inthe December 31 bal-ance sheet to $32,500in the January 3 bal-ance sheet

■ C o r r e s p o n d i n gincreases in the summary line itemsTotal Fixed Assets and Total Assets

■ The increase in the liability line itemAccounts Payable

■ Correspondingincreases in the sum-mary line items TotalCurrent Liabilities,Total Liabilities, andTotal Liabilities andNet Assets

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Forever Homes CDC balance sheet — as of Jan. 3, 1999

Balance Jan. 3















NET ASSETS 14,215


On Jan. 3, 1999, Fo re ver Homes purchased a computer that cost $2,500. The organization agreed topay the computer store within 30 days. The balance sheet of Ja n u a ry 3 reflects this transaction.

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Forever Homes CDC balance sheet

as of Jan. 3 as of Jan. 15















NET ASSETS 14,215


On Jan. 15, 1999 Forever Homes purchased a single-family house for $30,000. Closing costs charged tothe purchaser were $2,200. HOME funds were already lent by the city to pay all costs of this purchase.Use this page to show how this transaction changes the balance sheet of Jan. 3, 1999.

Balance Sheets: Exercise #1

Balance Sheet Transaction Changes

© 1999, The Enterprise Foundation, Inc.

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Notice:■ The decrease in the

Cash—HOME Fundsline item — from$34,000 on Jan. 3 to$1,800 on Jan. 15

■ The correspondingdecrease in the sum-mary line item TotalCurrent Assets

■ The increase in theLand/Buildings lineitem — from $30,000on Jan. 3 to $62,200on Jan. 15

■ The correspondingincrease in the sum-mary line item TotalInvestments

■ No changes in TotalAssets, TotalLiabilities, Net Assets,or Total Liabilities andNet Assets

Forever Homes CDC balance sheet — as of Jan. 15, 1999

Balance















NET ASSETS 14,215


Answers to Exercise #1

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Look at your nonprofit’s most recent and next most recent balance sheets. If those are not available,take any two that were created at different times. Use this exercise to list the components of each balance sheet. Then answer the questions on the next page.

Balance Sheets of Your Organization: Exercise #2

ASSETS CURRENT ASSETSCash — CheckingCash — Savings

Total Current Assets

HOUSING INVENTORYLand/BuildingsConstruction in ProgressSalable Property

Total Housing Inventory

INVESTMENTSLong-Term Investments

Total Investments

FIXED ASSETSOffice Furniture & EquipmentAccum. Depr. — Furn. & Equip.

Total Fixed Assets

OTHER ASSETSNotes Receivable

Total Other Assets

TOTAL ASSETS

LIABILITIES CURRENT LIABILITIESAccounts PayablePayroll LiabilitiesAccrued Expenses

Total Current Liabilities

LONG-TERM LIABILITIESLease PayableNotes Payable

Total Long-Term Liabilities

TOTAL LIABILITIES

NET ASSETS

TOTAL LIABILITIES & NET ASSETS


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Balance Sheet Questions:

Have total assets increased or decreased?

Which categories of the assets caused the change?

Have total liabilities increased or decreased?

Which categories of the liabilities caused the change?

What has been the effect on net assets?


Assumptions

■ Revenues are listed at the top of the page■ Expenses are listed below revenues■ Net income is listed at the bottom■ Net income = total revenues – total expenses

The income statement — known officially as a Statement of Activity — is a re p o rt that mea-s u res the results of an organization’s activitiesover a period of time. Ve ry simply, the incomestatement re p o rts the organization’s re venues andexpenses for the given period — month, quart e r,ye a r, etc. — and the resulting difference: pro f i t(surplus) or loss (deficit). The income statementmay also be called a statement of re venue andexpenses or a profit and loss statement.

STANDARD FORMAT OF INCOME STATEMENTS

Income statements contain the last two of thefive major types of accounts:

■ Revenues

■ Expenses

Re venues re p resent re s o u rces flowing into theorganization for the period; expenses re p re s e n tuses of those re s o u rces flowing out of the organi-zation. The resulting difference is the net income— profit or loss. In the nonprofit world, it may

be more appropriate to refer to net income assurplus or deficit. You may also see it called thechange in net assets.

The standard format of an income statement issimple but can be as detailed as you want, withre venues and expenses grouped and subtotaledinto subtypes or classifications. W h e reas thebalance sheet shows the financial position ofthe organization for the re p o rt date, the incomestatement shows the financial performance ofthe organization for the re p o rting period.

REVENUES LESS EXPENSES EQUALS NET INCOME

An income statement may not necessarily reporton all incoming resources and outgoing uses.For example, a bank loan coming into the orga-nization and the payments of principal goingout will not be reflected (although interest owedand paid on that loan will be reflected in theincome statement). (See the Statement of CashFlow section for more information.)

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Income Statements

Forever Homes CDC income statement — Consolidated as of Dec. 29, 1998

Current period

REVENUES Restricted $ 220,000Unrestricted 131,075

Total Revenues 351,075

EXPENSES Personnel Expenses 248,500Direct Program Costs 14,400Indirect and Nonprogram Costs 62,460

Total Expenses 325,360

NET INCOME $ 25,715

Assumptions

■ Line-item categories are the same as the line items in the Chart of Accounts■ Each consolidated category is broken out into line items■ Net income = total revenues – total expenses

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Forever Homes CDC income statement — Detailed (not consolidated) as of Dec. 29, 1998

Current Period

REVENUES Grants (unrestricted) $ 60,000Grants (restricted) 220,000Contributions 25,000Fund-Raising Event 5,000Program Fees 0Training Fees 21,000Consulting 20,000Sale of Property 0Interest Income 75


EXPENSES PERSONNEL EXPENSESSalaries 203,000Benefits 45,500

Total Personnel Expenses 248,500

DIRECT PROGRAM COSTSProgram Supplies 0Equipment Rental 2,000Staff Training 2,000Marketing/Advertising 2,000Printing & Reproduction 2,400Publications & Memberships 1,500Travel 4,500

Total Direct Program Costs 14,400

INDIRECT AND NONPROGRAM COSTSFund-Raising & Event Costs 2,000Rent 18,500Utilities 2,100Telephone 3,900Insurance 5,000Office Supplies 5,000Postage & Delivery 3,500Repairs & Maintenance 0Legal Fees 4,000Accounting & Auditing Fees 4,000Miscellaneous 0Interest 960Depreciation 13,500

Total Indirect and Nonprogram Costs 62,460


NET INCOME $ 25,715

Notice:■ The increase in the

office supplies lineitem — from $5,000 in the December 29statement to $5,500 in the December 30statement

■ The corresponding$500 increase in thesummary line items,Total Indirect andNonprogram Costsand Total Expenses

■ The corresponding$500 decrease in thesummary line item Net Income

On Dec. 30, 1998, Forever Homes purchased office supplies that cost $500. This income statement up to December 30 reflects this transaction.

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Forever Homes CDC income statement — For the year-to-date ended Dec. 30, 1998

Current Period










NET INCOME $ 25,215

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On Dec. 31, 1998, Forever Homes received an unrestricted grant payment of $15,000 and paid monthlypayroll expenses of $22,000 in salaries and $4,000 in benefits.

Use the following page to show how these transactions change the income statement of Dec. 31, 1998.

Income Statements: Exercise #3


as of Dec. 30 as of Dec. 31










NET INCOME $ 25,215


Notice:■ The increase in Grants

(unrestricted) — from$60,000 on Dec. 30 to$75,000 on Dec. 31

■ A correspondingincrease in the summary line itemTotal Revenues

■ The increase in twoPersonnel Expensesline items — Salariesfrom $203,000 to$225,000, andBenefits from$45,500 to $49,500

■ Correspondingincreases in the sum-mary line items TotalPersonnel Expensesand Total Expenses

■ A correspondingdecrease in NetIncome — from$25,215 on Dec. 30 to $14,215 on Dec. 31

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Current Period










NET INCOME $ 14,215


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Notes

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Income Statements of Your Organization: Exercise #4

Look at your nonprofit’s most recent and next most recent income statement. If those are not avail-able, take any two that were created at different times. Use the following page to list the amountsin each category of each income statement. Then answer the questions that follow.

Your OrganizationStatement of Income

Earlier Period Later Period

REVENUES Grants (unrestricted) $60,000Grants (restricted) 220,000Contributions 25,000Fund-Raising Event 5,000Program Fees 0Training Fees 21,000Consulting 20,000Sale of Property 0Interest Income 75

Total Revenues $351,075

Cost of Property Sold 0

EXPENSES PERSONNEL EXPENSESSalaries $203,000Benefits 45,500

Total Personnel Expenses $248,500

DIRECT PROGRAM COSTSProgram Supplies $0Equipment Rental 2,000Staff Training 2,000Marketing/Advertising 2,000Printing & Reproduction 2,400Publications & Memberships 1,500Travel 4,500

Total Direct Program Costs $14,400

INDIRECT AND NONPROGRAM COSTSFund-Raising & Event Costs $2,000Rent 18,500Utilities 2,100Telephone 3,900Insurance 5,000Office Supplies 5,500Postage & Delivery 3,500Repairs & Maintenance 0Legal Fees 4,000Accounting & Auditing Fees 4,000Miscellaneous 0Interest 960Depreciation $13,500

Total Indirect and Nonprogram Costs $62,960

Total Expenses $325,860

NET INCOME $25,215


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Income Statement Questions

Have total revenues increased or decreased?

Which components of revenues caused the change?

Have total expenses increased or decreased?

Which components of expenses caused the change?

What has been the effect on net income?


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A statement of cash flows is a report of cashactivity. Its purpose is to illustrate how yourcash position has changed. The cash flow state-ment reports, by certain classifications, wherecash is derived and spent. It typically showswhat areas of the organization received cash andwhat areas spent cash.

STANDARD FORMAT OF CASH FLOW STATEMENTS

Cash flow statements are usually divided into three sections: operations, investing and financing.

Cash flows from operations:

Inflows

■ From grants, contributions and fund raising

■ From program, management and training fees

Outflows

■ To employees, suppliers and other vendors

■ To the Internal Revenue Service, lenders and donors

Cash flows from investing:

Inflows

■ From sale of property or equipment

■ From collection of principal on loans

Outflows

■ To purchase property or equipment

■ To make loans to other entities

Cash flows from financing:

Inflows

■ From loans or other financing

Outflows

■ To make a payment on a loan

THE ROLE OF CASH FLOW AT A NONPROFIT

Although a required part of nonprofit audits,the cash flow statement is used less often thanbalance sheets and income sheets as a routinefinancial management tool by many communitydevelopment organizations. It is most often pre-pared by the auditor or accountant for thereporting period.

STATEMENT OF CASH FLOWS VS. CASHFLOW PROJECTIONS

While the cash flow statement reports on activi-ties in the past, the cash flow projection detailsthe prediction of the timing of all funds in andout of the system for a period in the future. Thetwo may have similar names, but they look andfunction differently.

EFFECTS OF COMPARING CASH FLOWSTATEMENTS TO INCOME STATEMENTS

When compared to the income statement, thecash flow statement will point out differencesbetween net income and cash flow. While yourfinancial statements may report a positive netincome, they may also report a negative cashflow. For instance, a balloon payment on a loanat the end of the year may drain your availablecash but will not be reflected in your incomestatement (because the principal portion of theloan is not an expense). The cash flow statementserves as a reconciliation of accrual accountingto cash accounting. (See the section onUnderstanding Different Accounting Methodsfor a definition of accrual and cash accounting.)

Statements of Cash Flows

Beginning cash, 1/1 50Ending cash, 12/31 $ 45

Assumption

■ All revenues and expenses involve cash (no outstanding payables or depreciation)

Beginning cash, 1/1 50Ending cash, 12/31 $ 55

Assumptions

■ $10 of the program expenses have not yetbeen paid (accounts payable)

■ Depreciation expenses of $20 have been recorded

Notice how the operating cash flow reflects thepositive net income. However, because of theloan to an affiliate and the payment on a com-pleted project loan — activities that do not runthrough the income statement — a negativecash flow is reported.

Recording depreciation drives down the netincome. However, because depreciation doesnot involve cash, the net cash flow in this example is positive.

2 7

Income Statement

R E V E N U E S G r a n t s $ 100Program Fees 7 0

1 7 0

E X P E N S E S Program Expenses 1 2 0Other Expenses 4 0D e p r e c i a t i o n 2 0

1 8 0

NET INCOME $( 1 0 )

Statement of Cash Flows

O P E R A T I N G I n f l o w $ 170O u t f l o w 1 5 0Net cash provided from 2 0operating activities

I N V E S T I N G Inflow 4 5(payment on loan)Outflow 5 0(loan to affiliate)Net cash used in ( 5 )investing activities

F I N A N C I N G Inflow 1 0 0(new project loan)Outflow 1 1 0(old loan payment)Net cash used in ( 1 0 )financing activities

NET CASH FLOW $ 5

Income Statement

R E V E N U E S G r a n t s $ 100Program Fees 7 0

1 7 0

E X P E N S E S Program Expenses 1 2 0Other Expenses 4 0

1 6 0

NET INCOME $ 10

Statement of Cash Flows

O P E R A T I N G I n f l o w $ 170O u t f l o w 1 6 0Net cash provided from 1 0operating activities

I N V E S T I N G Inflow 4 5(payment on loan)Outflow 5 0(loan to affiliate)Net cash used in ( 5 )investing activities

F I N A N C I N G I n f l o w 1 0 0(new project loan)Outflow 1 1 0(old loan payment)Net cash used in ( 1 0 )financing activities

NET DECREASE IN CASH $ ( 5 )

2 8

How Transactions Affect Income Statements and Statements of Cash Flows

P a r t 1

Statements of Cash Flows: Exercise #5

For each transaction, circle the y(yes) or n(no) whether the income and/or cash flow statements areaffected in the current period. Assume each transaction is independent of other transactions.

Transaction Income Cash Flow Statement Statement

1. Received grant for housing services program y n y n

2. Purchased supplies on account for program workshop y n y n

3. Secured financing for housing development (installments will be received when construction begins next year) y n y n

4. Paid employees and consultants for services y n y n

5. Purchased four-unit rental property with existing grant y n y n

6. Made payment on construction loan: a. Principal portion y n y n

b. Interest portion y n y n

7. Sold rehabilitated single-family home — proceeds recognized y n y n

8. Made payment on program materials purchased last year y n y n

9. Disbursed loan to affiliated nonprofit y n y n

10. Purchased computer equipment for finance staff y n y n


2 9

P a r t 2

How is cash flow affected, if at all?

Look back at the 10 transactions listed in Part 1.

For each transaction that would affect the cash flow statement, write what section of the cash flowstatement would be affected.

T R A N S A C T I O N SECTION AFFECTED

1

2

3

4

5

6a

6b

7

8

9

10


3 0

How Transactions Affect Income Statements and Statements of Cash Flows

P a r t 1


The correct answers are circled below.

Transaction Income Cash Flow Statement Statement

1. Received grant for housing services program y n y n

2. Purchased supplies on account for program workshop y n y n

3. Secured financing for housing development (installments will be received when construction begins next year) y n y n

4. Paid employees and consultants for services y n y n

5. Purchased four-unit rental property with existing grant y n y n

6. Made payment on construction loan: a. Principal portion y n y n

b. Interest portion y n y n

7. Sold rehabilitated single-family home — proceeds recognized y n y n

8. Made payment on program materials purchased last year y n y n

9. Disbursed loan to affiliated nonprofit y n y n

10. Purchased computer equipment for finance staff y n y n


3 1

P a r t 2

The correct answers are shown below.

T R A N S A C T I O N SECTION AFFECTED

1 Operating

2 n/a

3 n/a

4 Operating

5 Investing

6a Financing

6b Financing

7 Operating

8 Operating

9 Investing or Operating

10 Investing


Please note: With respect to transaction #9, some activities such asdisbursing loans to affiliates may be considered by the managementof the organization as ordinary operations. Such transactions maybe classified in the appropriate section of the cash flow statement.

A trial balance is a report of all the accounts onthe books and their respective balances as of thedate of the report. The trial balance is producedto verify that your books are in balance, and it isfrom the trial balance that the other financialstatements are constructed.

STANDARD FORMAT

Each account has either a debit or credit bal-ance. Without getting into the details of thet h e o ry behind debit/credit and double entryaccounting, suffice it to say that with respect to the five major types of accounts, assets andexpenses typically have a debit balance, and lia-bilities, net assets and re venues typically have a credit balance.

If your trial balance is correct, the total debits andtotal credits will equal: They will be in balance.

LINKING BALANCE SHEETS AND INCOMES T A T E M E N T S

Balance sheet accounts (assets, liabilities and netassets) contain the cumulative effect of activitiesf rom the beginning of time (day one of the orga-n i z a t i o n’s life). Income statement accounts (re v-enues and expenses) contain transactions onlyf rom the current accounting cycle (fiscal ye a r ) .

At the end of the year, the net difference of rev-enues and expenses (net income) is rolled intothe net assets account, and the new fiscal yearbegins with zero balances for revenues andexpenses. This is why in the nonprofit world,net income is often referred to as change in netassets. Let’s look at the financial statements andtrial balance of Forever Homes on the next fewpages to see how this works.

3 2

Trial Balance: Connecting Balance Sheets With Income Statements

Accounts Debit Credit

Assets xx.xx

Liabilities xx.xx

Net Assets xx.xx

Revenues xx.xx

Expenses xx.xx

Totals xx.xx xx.xx


3 3

Forever Homes CDC trial balance — For Jan. 1 through Dec. 31, 1998

Code Account Debit Credit

1010 Cash — Checking $ 4,0151015 Cash — HOME Funds 34,0001020 Cash — Savings 01030 Cash — Petty Cash 2501200 Accounts Receivable 1,0001300 Prepaid Expenses 4501500 Land/Buildings 30,0001510 Construction in Progress 15,0001520 Salable Property 56,0001600 Long-Term Investments 01800 Office Furniture & Equipment 30,0001801 Accum. Depr. — Furn. & Equip. $ 13,5001900 Notes Receivable 5,0002000 Accounts Payable 3,2002100 Payroll Liabilities 6,8002120 Accrued Expenses 02200 Purchaser’s Deposits 02300 Lease Payable 3,0002400 Notes Payable 02500 HOME Funds Payable 135,0003000 Net Assets4010 Grants (unrestricted) 75,0004011 Grants (restricted) 220,0004050 Contributions 25,0004100 Fund-Raising Event 5,0004150 Program Fees 04160 Training Fees 21,0004170 Consulting 20,0004200 Sale of Property 04900 Interest Income 755000 Cost of Property Sold 06010 Salaries 225,0006020 Benefits 49,5006100 Program Supplies 06150 Equipment Rental 2,0006200 Staff Training 2,0006250 Marketing/Advertising 2,000


Exe rcise 3 showed how Fo re ver Ho m e s’ income statement would be affected by the receipt of an unre-stricted grant payment of $15,000 and payment of monthly payroll expenses of $22,000 in salaries and$4,000 in benefits. This chart shows a trial balance for the receipt of a grant and payment of payro l l .

Assumptions

■ Each line item in the trial balance comes from the chart of accounts.■ Each line item in the trial balance is represented once, and only once, in the

balance sheet or the income statement.

3 4

Forever Homes CDC trial balance — For Jan. 1 through Dec. 31, 1998


6300 Printing & Reproduction 2,4006350 Publications & Memberships 1,5006400 Travel 4,5007050 Fund-Raising & Event Costs 2,0007100 Rent 18,5007110 Utilities 2,1007120 Telephone 3,9007130 Insurance 5,0007140 Office Supplies 5,5007150 Postage & Delivery 3,5007160 Repairs & Maintenance 07200 Legal Fees 4,0007210 Accounting & Auditing Fees 4,0007800 Miscellaneous 07900 Interest 9608000 Depreciation 13,500

Total $ 527,575 $ 527,575

3 5

Forever Homes CDC corresponding balance sheet —For the year ended Dec. 31, 1998

Balance Dec. 31















NET ASSETS 14,215


3 6

Forever Homes CDC corresponding income statement —For the year ended Dec. 31, 1998

Current Period










NET INCOME $ 14,215

3 7

Forever Homes CDC trial balance — For Jan. 1 through Jan. 31, 1999


1010 Cash — Checking $ 7,4511015 Cash — HOME Funds 17,8001020 Cash — Savings 01030 Cash — Petty Cash 2501200 Accounts Receivable 6501300 Prepaid Expenses 01500 Land/Buildings 62,2001510 Construction in Progress 37,0001520 Salable Property 56,0001600 Long-Term Investments 01800 Office Furniture & Equipment 32,5001801 Accum. Depr. — Furn. & Equip. $ 13,5001900 Notes Receivable 5,0002000 Accounts Payable 26,3202100 Payroll Liabilities 6,8002120 Accrued Expenses 02200 Purchaser’s Deposits 02300 Lease Payable 3,0002400 Notes Payable 10,0002500 HOME Funds Payable 151,0003000 Net Assets 14,2154010 Grants (unrestricted) 12,0004011 Grants (restricted) 31,4064050 Contributions 8004100 Fund-Raising Event4150 Program Fees4160 Training Fees 6504170 Consulting4200 Sale of Property4900 Interest Income5000 Cost of Property Sold6010 Salaries 31,0006020 Benefits 7,7506100 Program Supplies 7256150 Equipment Rental 6200 Staff Training6250 Marketing/Advertising6300 Printing & Reproduction

Using the trial balance, construct a balance sheet and an income statement on the format pages thatfollow for Forever Homes for the period Jan. 1, 1999 through Jan. 31, 1999.

Trial Balance: Exercise #6

Connecting Balance Sheets With Income Statements


3 8

Forever Homes CDC trial balance — For Jan. 1 through Jan. 31, 1999


6350 Publications & Memberships 1506400 Travel 9257050 Fund-Raising & Event Costs7100 Rent 4,1007110 Utilities 2507120 Telephone 4457130 Insurance 4,4007140 Office Supplies 3507150 Postage & Delivery 2457160 Repairs & Maintenance7200 Legal Fees 5007210 Accounting & Auditing Fees7800 Miscellaneous7900 Interest8000 Depreciation

$ 269,691 $ 269,691


3 9

Forever Homes CDCBalance sheet format for you to fill in as of Jan. 31, 1999

Balance Jan. 31

ASSETS CURRENT ASSETSCash — CheckingCash — HOME FundsCash — SavingsCash — Petty CashAccounts ReceivablePrepaid Expenses

Total Current Assets

INVESTMENTSLand/BuildingsConstruction in ProgressSalable PropertyLong-Term Investments

Total Investments

FIXED ASSETSOffice Furniture & EquipmentAccum. Depr. — Furn. & Equip.

Total Fixed Assets

OTHER ASSETSNotes Receivable

Total Other Assets

TOTAL ASSETS

LIABILITIES CURRENT LIABILITIESAccounts PayablePayroll LiabilitiesAccrued ExpensesPurchaser’s Deposits

Total Current Liabilities

LONG-TERM LIABILITIESLease PayableNotes PayableHOME Funds Payable

Total Long-Term Liabilities

TOTAL LIABILITIES

NET ASSETS

TOTAL LIABILITIES & NET ASSETS


4 0

Forever Homes CDCIncome statement format for you to fill in for the year-to-date ended Jan. 31, 1999

Current Period

REVENUES Grants (unrestricted) $60,000Grants (restricted) 220,000Contributions 25,000Fund-Raising Event 5,000Program Fees 0Training Fees 21,000Consulting 20,000Sale of Property 0Interest Income 75

Total Revenues $351,075

EXPENSES PERSONNEL EXPENSESSalaries $203,000Benefits 45,500

Total Personnel Expenses $248,500

DIRECT PROGRAM COSTSProgram Supplies $0Equipment Rental 2,000Staff Training 2,000Marketing/Advertising 2,000Printing & Reproduction 2,400Publications & Memberships 1,500Travel 4,500

Total Direct Program Costs $14,400

INDIRECT AND NONPROGRAM COSTSFund-Raising & Event Costs $2,000Rent 18,500Utilities 2,100Telephone 3,900Insurance 5,000Office Supplies 5,500Postage & Delivery 3,500Repairs & Maintenance 0Legal Fees 4,000Accounting & Auditing Fees 4,000Miscellaneous 0Interest 960Depreciation $13,500

Total Indirect and Nonprogram Costs $62,960

Total Expenses $325,860

NET INCOME $25,215


4 1

Forever Homes CDC balance sheet

Balance Jan. 31

ASSETS CURRENT ASSETSCash — Checking $ 7,451Cash — HOME Funds 17,800Cash — Savings 0Cash — Petty Cash 250Accounts Receivable 650Prepaid Expenses 0










Total Current Liabilities 33,120LONG-TERM LIABILITIESLease Payable 3,000Notes Payable 10,000HOME Funds Payable 151,000



NET ASSETS 8,231



Trial balance: Connecting income statements with balance sheets

You have just done an exercise to show how the Forever Homes balance sheet as of Jan. 31, 1999 andincome statement for the period Jan. 1, 1999 through Jan. 31, 1999 go together. These charts showthe correct answers. How did you do?

4 2

Forever Homes CDC income statement —For the year-to-date ended Jan. 31, 1999

Current Period

REVENUES Grants (unrestricted) $ 12,000Grants (restricted) 31,406Contributions 800Fund-Raising Event 0Program Fees 0Training Fees 650Consulting 0Sale of Property 0Interest Income 0




DIRECT PROGRAM COSTSProgram Supplies 725Equipment Rental 0Staff Training 0Marketing/Advertising 0Printing & Reproduction 0Publications & Memberships 150Travel 925


INDIRECT AND NONPROGRAM COSTSFund-Raising & Event Costs 0Rent 4,100Utilities 250Telephone 445Insurance 4,400Office Supplies 350Postage & Delivery 245Repairs & Maintenance 0Legal Fees 500Accounting & Auditing Fees 0Miscellaneous 0Interest 0Depreciation 0



NET INCOME $ (5,984)

CASH VS. ACCRUAL ACCOUNTING

In practice, there are two methods of account-ing: cash and accrual. The difference between thetwo lies in when transactions are re c o rded.

Under the cash method, transactions arerecorded when cash is exchanged: Income is rec-ognized when it is received; expenses are recog-nized when they are paid.

Under the accrual method, transactions arere c o rded as they occur: Income is re c o g n i ze dwhen it is earned; expenses are re c o g n i ze dwhen they are incurre d .

According to the accounting profession, theaccrual method is more appropriate. Why? Withaccrual accounting, financial statements accu-rately reflect all of the organization’s assets andexpenses regardless of when they have beenpaid. So statements accurately reflect all of theorganization’s obligations (liabilities).

Key points you need to know about Cash vs. Accrual Accounting:

■ Ac c rual accounting gives a more accurate pic-t u re of the match between income and expense.

■ Ac c rual accounting is re q u i red under Ge n e r a l l yAccepted Accounting Principles (GAAP), thes t a n d a rds that must be followed if you wantyour financial statements to be accepted bymost independent third parties such as finan-cial institutions.

■ Cash accounting might not distort your pic-ture too much if there are only one or twomajor sources of income and if expenses areuniform and predictable.

■ If your organization uses a cash basis foraccounting, your auditor may translate thatmethod into an accrual method for the audit.If so, the audited financials will present a dif-ferent picture than the unaudited financials.

Consider the following: Your company hasunrestricted revenue received this year. Let’s sayoffice supplies were purchased on November 5and used, but the vendor invoice was not dueuntil January 15. Under the cash accountingmethod, there would be no accounts payablesince purchases would not be recorded until theitems are paid. So the expense for office supplieswould not “hit the books” until January 15. Yetthe actual expense was incurred in Novemberwhen the supplies were received and consumed.

This illustrates the driving concept behindaccrual accounting. In order for net income tobe reflected accurately, revenue and expensesshould be matched within the same fiscalperiod. Only then do the financial statementsgive a realistic picture of the performance of theorganization for a particular period.

EFFECTS OF THE TWO METHODS ON FINANCIAL STATEMENTS

Let’s see what happens on the balance sheets andincome statements when the same transactionsare recorded under the two different methods.

Assumptions

■ A $5,000 restricted grant was received onSeptember 1 to cover one month’s salaries, rentand office supplies.

■ Another $3,000 grant was received onSeptember 30 to cover the next month’s salaries.

■ Payroll is transacted on the 15th and 30th ofevery month and rent is due the first of eachmonth — monthly payroll is $3,000 and rent is $1,000.

■ Office supplies were purchased and received on September 10 for $500 — invoice due in 30 days.

4 3

Understanding Different Accounting Methods

Notice:■ The use of accounts payable

to record the purchase ofsupplies under the accrualmethod.

■ The revenue from the sec-ond grant is not recognizedbut rather deferred untilnext month so it can bematched with the relatedexpenses (deferred revenuesare classified in the liabili-ties and net assets section of the balance sheet).

4 4

Under the cash accounting method, here is howthe September financial statements appear.

Cash Method — September financial statements

Under the accrual accounting method, here ish ow the September financial statements appear.

Accrual Method — September financial statements

SEPTEMBER1 Received grant $5,000 deposit1 Paid rent 1,000 check

10 Ordered and received supplies 500 invoice

15 Payroll 1,500 check30 Payroll 1,500 check30 Received grant $3,000 deposit

OCTOBER1 Paid rent $1,000 check

10 Paid office supplies invoice 500 check

15 Payroll 1,500 check30 Payroll $1,500 check

Transactions

Balance — Sept. 30, 1999

ASSETS Cash $ 4,000Other 1,000

$ 5,000

LIABILITIES Accounts Payable $ 0Other 1,000

NET ASSETS 4,000$ 5,000

Income Statement — Sept. 30, 1999

REVENUE Grants $ 8,000

EXPENSES Salaries 3,000Rent 1,000Supplies 0

4,000

NET INCOME $ 4,000

Balance — Sept. 30, 1999

ASSETS Cash $ 4,000Other 1,000

$ 5,000

LIABILITIES Accounts Payable $ 500Other 1,000Deferred Revenue 3,000

NET ASSETS 500$ 5,000

Income Statement — Sept. 30, 1999



4,500

NET INCOME $ 500

WHAT HAPPENS A MONTH LATER?

We have seen what happens on the initial bal-ance sheets and income statements when thesame transactions are recorded under the twomethods. Now compare the different ways ofaccounting in October.

Cash Method — October financial statements Accrual Method — October financial statements

4 5

Balance — Oct. 31, 1999

ASSETS Cash $ (500)Other 1,000

$ 500


NET ASSETS (500)$ 500

Income Statement — Oct. 31, 1999

REVENUE Grants $ 0


4,500


Balance — Oct. 31, 1999

ASSETS Cash $ (500)Other 1,000

$ 500


NET ASSETS (500)$ 500

Income Statement — Oct. 31, 1999



4,000


Fund accounting is typically employed by gov-ernments and nonprofit organizations. Its usearises from a need to record and report theactivities of various and independent fundingsources and uses. For example, a block grantfrom the federal government is given to a CDCfor the specific purpose of running a day carecenter. Chances are good that the expendituresrelated to that grant will need to be tracked andreported back to the donors.

HOW DOES FUND ACCOUNTING WORK?

An easy way to understand fund accounting isto think of each fund as a separate and distinctpot of money with a self-contained and self-balanced set of records. Within the organiza-tion’s books, each fund is set up as a separateentity — with its own assets, liabilities and fundbalance (net assets).

Separate funds are generally established:

■ To help manage resources in accordance withcontractual agreements

■ To help senior staff plan for future activities byalerting them to reductions in funds

■ To report details on your organization’s use ofrestricted funds

WHAT ARE RESTRICTED FUNDS?

Restricted funds are monies that can be used onlyfor predefined purposes. Ty p i c a l l y, their use willbe defined in contracts between the donor andyour organization. In the case of gove r n m e n tfunds, the contracts may incorporate statutes and regulations that govern the use of funds.

Sources of restricted funds:

■ Government contracts

■ Foundation grants

■ Program income, earned through use of gov-ernment capital funds

■ Loan proceeds

■ Investments

Typical restrictions:

■ Using all funds for specific line items in devel-opment projects

■ Not using funds to pay for too high a percent-age of indirect (overhead) expenses

■ Using all funds for the direct benefit of personswho live in a specified neighborhood or whosehousehold incomes are below a set level

Example of a Restricted Fund

The block grant for the day care center is moneythat cannot be used for other programs oradministrative purposes. Other pots of moneythat have no limitations on their use are oftengrouped into one pot of unrestricted money.

4 6

Fund Accounting

A NOTE ON FUND ACCOUNTING SOFTWARE

Automated fund accounting systems havee vo l ved so much that the definition of fundaccounting — in today’s nonprofit world — hasb roadened. Now the term refers to the re c o rd i n gand re p o rting of activities not just by fundings o u rces (HOME, CDBG, etc.) but also by pro-gram or project (single-family deve l o p m e n t ,social services, etc.) This is because software isbecoming more flexible — allowing users totrack and re p o rt activities at various levels. Wi t hsome fund accounting systems, your nonpro f i tcan generate re p o rts (such as re venue and expen-d i t u re statements) by program or even functionwithin program (training). This is similar tore p o rting by cost centers in the for-profit sector.Refer to Im p roving Your Accounting Software ,another manual in the Money Management s e r i e s ,for further information.

With the increased flexibility and detail inreporting allowed by these software systems, it isimportant to make clear the distinction betweenfunds, programs and other levels of activities asdefined by your organization.

FUND ACCOUNTING EXAMPLES

Let’s review a trial balance, balance sheet andincome statement for Jan. 1 through Jan. 31,1999 for Forever Homes.

4 7

Assumptions

■ Received a block grant to fund its Supportive Housing Initiative ■ Secured a working capital loan from a local bank to start its new property management company■ All other administrative activities supported by unrestricted funds — grants, contributions and

training fees

4 8

Unrestricted Block Grant Loan Fund Total

Cash — Checking $ 2,965 $ 2,381 $ 2,875 $ 8,221Cash — Petty Cash 250 0 0 250Accounts Receivable 650 0 0 650Prepaid Expenses 0 0 0 0Long-Term Investments 0 0 0 0Office Furniture & Equipment 26,000 4,000 2,500 32,500Accum. Depr. — Furn. & Equip. (12,000) (1,500) 0 (13,500)Notes Receivable 5,000 0 0 5,000Accounts Payable (200) (1,200) (2,500) (3,900)Payroll Liabilities (2,300) (2,700) 0 (5,000)Lease Payable (3,000) 0 0 (3,000)Notes Payable 0 0 (10,000) (10,000)Fund Balance (Net Assets) (16,515) (2,800) 0 (19,315)Grants (unrestricted) (12,000) 0 0 (12,000)Grants (restricted) 0 (13,406) 0 (13,406)Contributions (800) 0 0 (800)Fund-Raising Event 0 0 0 0Program Fees 0 0 0 0Training Fees (650) 0 0 (650)Consulting 0 0 0 0Interest Income 0 0 0 0Salaries 9,000 9,300 2,700 21,000Benefits 2,250 2,325 675 5,250Program Supplies 0 525 0 525Equipment Rental 0 0 0 0Staff Training 0 0 0 0Marketing/Advertising 0 0 0 0Printing & Reproduction 0 0 0 0Publications & Memberships 150 0 0 150Travel 0 25 200 225Fund-Raising & Event Costs 0 0 0 0Rent 900 300 1,250 2,450Utilities 50 100 0 150Telephone 100 225 0 325Insurance 0 2,400 2,000 4,400Office Supplies 50 0 300 350Postage & Delivery 100 25 0 125Legal Fees 0 0 0 0Accounting & Auditing Fees 0 0 0 0Interest 0 0 0 0Depreciation 0 0 0 0

Balance $ 0 $ 0 $ 0 $ 0

Forever Homes CDC trial balance by fund accounting —For Jan. 1 through Jan. 31, 1999

4 9


CURRENT ASSETSCash — Checking $ 2,965 $ 2,381 $ 2,875 $ 8,221Cash — Petty Cash 250 0 0 250Accounts Receivable 650 0 0 650Prepaid Expenses 0 0 0 0

Total Current Assets 3,865 2,381 2,875 9,121

INVESTMENTS, PROPERTY & OTHER ASSETSLong-Term Investments 0 0 0 0Office Furniture & Equip. 26,000 4,000 2,500 32,500Accum. Depr. — Furn. Equip. (12,000) (1,500) 0 (13,500)Notes Receivable 5,000 0 0 5,000

Total Investments, Property & Other Assets 19,000 2,500 2,500 24,000

TOTAL ASSETS $ 22,865 $ 4,881 $ 5,375 $ 33,121

LIABILITIES & FUND BALANCE

CURRENT LIABILITIESAccounts Payable $ 200 $ 1,200 $ 2,500 $ 3,900Payroll Liabilities 2,300 2,700 0 5,000

Total Current Liabilities 2,500 3,900 2,500 8,900

LONG-TERM LIABILITIESLease Payable 3,000 0 0 3,000Notes Payable 0 0 10,000 10,000

Total Long-Term Liabilities 3,000 0 10,000 13,000

TOTAL LIABILITIES 5,500 3,900 12,500 21,900

FUND BALANCE (Net Assets) 17,365 981 (7,125) 11,221

TOTAL LIABILITIES & FUND BALANCE $ 22,865 $ 4,881 $ 5,375 $ 33,121

Forever Homes CDC balance sheet by fund accounting —For Jan. 31, 1999

5 0


REVENUESGrants (unrestricted) $ 12,000 $ 0 $ 0 $ 12,000Grants (restricted) 0 13,406 0 13,406Contributions 800 0 0 800Fund-Raising Event 0 0 0 0Program Fees 0 0 0 0Training Fees 650 0 0 650Consulting 0 0 0 0Interest Income 0 0 0 0

Total Revenues 13,450 13,406 0 26,856

EXPENSESSalaries 9,000 9,300 2,700 21,000Benefits 2,250 2,325 675 5,250Program Supplies 0 525 0 525Equipment Rental 0 0 0 0Staff Training 0 0 0 0Marketing/Advertising 0 0 0 0Printing & Reproduction 0 0 0 0Publications & Memberships 150 0 0 150Travel 0 25 200 225Fund-Raising & Event Costs 0 0 0 0Rent 900 300 1,250 2,450Utilities 50 100 0 150Telephone 100 225 0 325Insurance 0 2,400 2,000 4,400Office Supplies 50 0 300 350Postage & Delivery 100 25 0 125Legal Fees 0 0 0 0Accounting & Auditing Fees 0 0 0 0Interest 0 0 0 0Depreciation 0 0 0 0

Total Expenses 12,600 15,225 7,125 34,950

NET INCOME $ 850 $ (1,819) $ (7,125) $ (8,094)

Forever Homes CDC income statement by fund accounting —For the year-to-date ended Jan. 31, 1999

Assumptions

■ Received a block grant to fund its Supportive Housing Initiative ■ Secured a working capital loan from a local bank to start its new property management company■ All other administrative activities supported by unrestricted funds — grants, contributions and

training fees

5 1

Unrestricted Block Grant Loan Fund HOME

1. $8,000 Received donations fromfund-raising event to sup-port CDC activities

2. $300 Purchased supplies fortraining courses given bysupportive housing staff

3. $756 Paid monthly loan pay-ment to bank (workingcapital loan)

Paid salaries to staff:

4. $8,000 G&A

$8,500 Supportive housing

$2,500 Property management

5. $36,550 Received draw from HUDfor last month’s single-family rehab costs

6. $1,800 Cost to send supportivehousing director to con-ference in Seattle

7. $5,000 Purchased software fornew property manage-ment system

8. $12,000 Paid construction contrac-tor for rehab work ontwo single-family houses

9. $4,000 Paid for annual audit

Fund Accounting: Exercise #7

For each transaction listed, indicate which of the funds in the chart below should be charged by entering the amount.


5 2

Unrestricted Block Grant Loan Fund HOME

1. $8,000 Received donations fromfund-raising event to sup-port CDC activities

2. $300 Purchased supplies fortraining courses given bysupportive housing staff

3. $756 Paid monthly loan pay-ment to bank (workingcapital loan)

Paid salaries to staff:

4. $8,000 G&A

$8,500 Supportive housing

$2,500 Property management

5. $36,550 Received draw from HUDfor last month’s single-family rehab costs

6. $1,800 Cost to send supportivehousing director to con-ference in Seattle

7. $5,000 Purchased software fornew property manage-ment system

8. $12,000 Paid construction contrac-tor for rehab work ontwo single-family houses

9. $4,000 Paid for annual audit

$8,000

$300

$756

$8,000

$8,500

$2,500

$36,550

$1,800

$5,000

$12,000

$4,000


FUND ACCOUNTING

THE ENTERPRISE FOUNDATIONThe Foundation’s mission is to see that all low-income people in the United States have accessto fit and affordable housing and an opport u n i t yto move out of poverty and into the mainstreamof American life. To achieve that mission, westrive to:

■ Build a national community revitalizationmovement.

■ Demonstrate what is possible in low-incomecommunities.

■ Communicate and advocate what works in community development.

As the nation’s leader in community d e ve l o p m e n t ,Enterprise cultivates, collects and disseminatesexpertise and re s o u rces to help communitiesa c ross America successfully improve the qualityof life for low-income people.

A C K N O W L E D G M E N T SAuthors: David Crowley, CPA and consultant;Bill Batko, The Enterprise FoundationContributors: Carter Cosgrove + Company, Ben Hecht, Catherine Hyde, Jane Usero,Benjamin Warnke

SPECIAL THANKSResearch and development of this manual wasmade possible by the National CommunityDevelopment Initiative, which is a consortiumof 15 major national corporations and founda-tions and the U.S. De p a rtment of Housing andUrban De velopment, and score s of public andprivate organizations. NCDI was created to sup-port and sustain the efforts of community devel-opment organizations.

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tel: 410.964.1230fax: 410.964.1918email: [email protected]

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