FINANCIAL RECORDS
The financial records of a NPO must allow Revenu Québec (RQ) and the Canada Revenue Agency (CRA) to verify all expenses and revenues, including any donations received. Records must be supported by documentary evidence (i.e., invoices, receipts, debited checks, employment contracts, expense reports, purchase orders, etc.) that enable the verification of records made. Records must be maintained in either French or English.
BANK ACCOUNT
Your NPO must have a bank account and all money received must be deposited into it. Choose an account for which you will receive a statement and a return of checks each month.
Your BOD must pass a motion to authorize the opening of a bank account and to designate authorized signatories, often the president, treasurer and/or general manager. Most banks provide an example of such a motion.
Authorized signatories are the only people who can sign checks. It is a good idea to have checks signed by two signatories, and since not all signatories are available at all times, it is strongly recommended that you designate more than two.
BALANCE YOUR BANK ACCOUNT
All your transactions are recorded in your books of accounts and in your bank’s records, but they are often recorded at different times, which can produce a difference in their balances. It is by balancing your accounts that you can ensure that everything is in order and that your correct balance appears in your books.
Specifically, your bank may make errors when it sends your monthly account statements. Analysis of these statements, which show your deposits and withdrawals according to their records, and the balancing of your bank account will reveal these errors. The balancing should be done on a monthly basis, as most banks do not allow their records to be challenged after a certain period of time. This should be done by someone other than the person issuing the checks and/or cashing the cash deposits.
DEPOSIT RECORDS
Your bank will provide you with deposit statements to use when depositing the money, you receive into your account. You complete one statement per deposit and submit it to your bank with the various items to be deposited.
MEMBERSHIP DUES AND GOVERNMENT GRANTS RECORDS
DUES
Membership fees or dues can be a very frequent source of funding for your NPO and you must keep records of all your contributing members. These records should contain the following information:
- Amounts paid
- Payment dates
- Membership categories (if applicable)
- Name, address and contact information of your members
- Membership expiry date (if time limited)
GOVERNMENT GRANTS
Your NPO may also receive funds from government grants. A government grant requires that you track all your expenses that it funds, with great accuracy. Your expenses may be tracked and summarized differently depending on the terms of the specific grant. Generally, this task can be performed by your NPO as part of the general ledger, but the legitimacy of each general ledger expense must be supported by documentation.
BILLING FOR GOODS OR SERVICES
Your NPO may charge membership fees and dues to your members or, bill your clients for your products and services. You must keep a record of all invoices issued and note all amounts collected.
RECORD EXPENSES
Payments can be made by check or cash. Cash payments, called petty cash, should be very small. Large or repeated payments should always be made by check.
It is essential to keep a record of each petty cash disbursement, usually in a separate spreadsheet. Be sure to keep all documentation necessary to support the cash disbursements (i.e., invoice, expense slip or cash receipt). Your petty cash disbursement records should be balanced monthly.
SPENDING RECORDS
Detailed records of all your payments should be kept in a cash disbursement journal or in an electronic accounting program. Also, if you issue checks manually, remember to fill out the stub of each check completely.
GENERAL LEDGER
The general ledger is the central book of your NPO’s accounting system, with every transaction (i.e. purchase, payment, donation, cash transaction) being entered into it.
SETTING UP A CHART OF ACCOUNTS
Setting up a general ledger always starts with setting up a chart of accounts (i.e., a list of all the accounts in the general ledger). There are many methods of setting up a chart of accounts, but it is important that your NPO choose the one that will work best for your situation. The chart of accounts should be flexible enough to be developed later, yet easy to use and understand.
SETTING UP & UPDATING THE GENERAL LEDGER
Your general ledger should be updated once a month. This involves recording all relevant accounting activity for each account on the corresponding page of the general ledger. All your cash receipts for an account are taken from your cash receipts journal and all your expenses for an account are taken from your cash disbursements journal.
GENERAL LEDGER SUMMARY
Your general ledger contains the information used to prepare your financial reports. For ease of use and to verify the accuracy of your general ledger, this information is summarized in a trial balance, which summarizes the ending balance of each general ledger account. The mathematical accuracy of your general ledger is confirmed by totaling this information in two columns and verifying that their totals are equal.
If they do not, it is essential to go back to the general ledger and find the error that caused the imbalance. When the general ledger is in balance, the information contained in the trial balance is summarized in the financial statements and other reports.
FINANCIAL STATEMENTS
The term financial statement is normally used to refer to the following documents
- Cash-flow statement
- Notes accompanying the financial statement
- Statement of financial position (or balance sheet)
- Statement of revenues and expenses (or income statement)
This is a very brief presentation of the financial statements, so seek the assistance of a professional chartered accountant to help your NPO set up these statements. Rigorous accounting and internal controls are so important. In addition, the quality of the financial statements depends on the quality of the information collected throughout the year.
EARNINGS STATEMENT
Sometimes called the earnings statement or the statement of revenues and expenditures, this report shows the amount of revenue earned during a typical year and the amount of expenses incurred during the same period. The difference between these two amounts is the surplus (i.e. profit) or deficit (i.e. loss) for that period.
BALANCE SHEET
This report shows all your NPO’s assets, liabilities, and equity at a given point in time, usually at the end of a month or fiscal year.
- Assets are what your NPO owns or is owed. It is divided into current assets, which are expected to be converted to cash or used within one year, and long-term assets, which will be converted to cash or used in more than one year.
- Liabilities are the amount your NPO owes to other organizations or individuals. Current liabilities or current payables are the amount of debt that is due in one year. Long-term liabilities are those that your NPO will repay in more than one year.
- Net assets are what remains after subtracting liabilities from assets.
CASH-FLOW STATEMENT
The cash-flow statement shows your NPO’s cash inflows and outflows during the fiscal year. It shows your NPO’s receipts, expenditures and other cash inflows and outflows. You do not have to prepare a cash-flow statement if the same information is already clearly shown elsewhere in the financial statements.
SETTING UP FINANCIAL STATEMENTS
Your NPO should set up financial statements and categorize the information in its financial statements in a way that will show the most useful information to the recipients of the financial statements. Your NPO should:
- Prepare financial statements that follow generally accepted accounting principles
- Classify the information in the financial statements into relevant categories
- Ensure that each important amount is classified in a separate category
- Use plain language and avoid jargon