Not for profit budgeting and financial management 4e

NOT-FOR-PROFIT
BUDGETING AND
FINANCIAL
MANAGEMENT
Fourth Edition


NOT-FOR-PROFIT
BUDGETING AND
FINANCIAL
MANAGEMENT
Fourth Edition
EDWARD J. MCMILLAN, CPA, CAE

John Wiley & Sons, Inc.


Copyright © 2010 by John Wiley & Sons, Inc. All rights reserved.
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Library of Congress Cataloging-in-Publication Data:
McMillan, Edward J., 1949Not-for-profit budgeting and financial management / Edward J. McMillan. — 2nd ed.
p. cm.
Includes index.
ISBN 978-0-470-57541-3 (pbk.)
1. Nonprofit organizations—Finance. 2. Nonprofit organizations—Accounting. 3. Corporations—Finance.
4. Corporations—Accounting. 5. Budget in business. I. Title.
HG4027.65.M364 2010
658.15'4—dc22
2010003131
ISBN-13 978-0-470-57541-3
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1


To my lovely wife, Nancy


About the Author

Edward J. McMillan, CPA, CAE, has spent his entire career in not-for-profit financial
management. He has served as the controller of the national office of the Associated
Builders and Contractors and as the finance and membership director of the

American Correctional Association. In 1993, McMillan was appointed faculty chair
for finance for the United States Chamber of Commerce’s Institutes for Organization
Management program.
McMillan has written several books on not-for-profit financial management. His
publishers include the American Society of Association Executives, McGraw-Hill, the
U.S. Chamber of Commerce, and the American Chamber of Commerce Executives.
McMillan now concentrates solely on speaking, writing, and consulting on financial management topics for associations and chambers of commerce. He lives near
Baltimore, Maryland. In his free time, he enjoys coaching youth sports and motocross
racing. You may contact McMillan at P.O. Box 771, Forest Hill, MD 21050; phone/
fax: (410) 893-2308; e-mail: Also see his Web site at www.
nonprofitguru.com.

vii


Contents

Preface xiii
Disclaimer xv

Chapter 1
Budgeting and Financial Operation 1

Chapter 2
Cash vs. Accrual Accounting 13

Chapter 3
Basic Accounting and Financial Operations 45

Chapter 4

Effective Use of Footnotes and Financial Ratio Calculations for the Statement
of Financial Position 51

Chapter 5
Controllable and Uncontrollable Expenses 57

Chapter 6
Controllable, Semi-Controllable, and Fixed Expenses 61

Chapter 7
Noncash Expenses 65

ix


x

Contents

Chapter 8
Effective Footnotes for the Statement of Activity 69

Chapter 9
Natural and Functional Statements of Activity 77

Chapter 10
Internal Financial Statements 81

Chapter 11
Converting Accrual-Method Financial Statements to Cash-Method

Financial Statements 89

Chapter 12
Budgeting Philosophy 99

Chapter 13
Continuous Budgeting System Overview 101

Chapter 14
The Executive and the Budget Process 105

Chapter 15
Executive Summary 109

Chapter 16
Comparative Financial Statements 113

Chapter 17
Expense Reduction Plans 117

Chapter 18
The Monthly Budgeting Process 121

Chapter 19
The Cash Flow Budget 135

Chapter 20
Getting the Budget Approved 139

Contents

Chapter 21
Suggested Format of Budget Documents for an Approving Body 141

Chapter 22
The Role of the Budget Coordinator 157

Chapter 23
Accounting and Budgeting for Fringe Benefits 161

Chapter 24
The Capital Budget and Depreciation 163

Chapter 25
Inventory Purchases and Calculation of Cost of Goods Sold 167

Chapter 26
Accounting and Budgeting for Dues 169

Chapter 27
Capital Assets: Lease-or-Buy Decisions 175

Chapter 28
The Long-Range Plan 177

Chapter 29
Financial Ratios 179

Chapter 30

Zero-Based Budgeting 183

Chapter 31
Putting It All Together 185

Glossary 203
Index 207

xi


Preface

Typically, not-for-profit organizations view the budget process as an annual exercise
in drudgery, tying up valuable staff time that could be spent on other activities. It
doesn’t have to be that way!
This handbook provides you with a new concept in budgeting that is easy to
implement and monitor, and that significantly reduces staff time spent on budgeting,
while ensuring true fiscal accountability. The method is called continuous budgeting.
You should review this handbook in its entirety before you implement your
financial management system. The processes and forms herein are interdependent
and must be understood by management before the advantages of this system can
be realized. This handbook is a guide to help managers customize the forms and
procedures described herein for use in their own organizations—it is not a reference
manual on taxes, depreciation, capitalization procedures, and other technical areas.
There are other sources for that information. Here you will find a discussion and
format that is both nontechnical and understandable. The program that this handbook teaches allows management to direct and control the organization, not be
controlled by an outdated, cumbersome, and often inaccurate budget and financial
management system.
Edward J. McMillan, CPA, CAE

June 2010

xiii


Disclaimer

The contents of this book should not be construed as legal advice, and in that respect
the publisher and author assume no liability or responsibility accordingly.
Before implementation, the internal controls, accounting standards, policies, and
forms suggested in this book should be reviewed by a competent attorney and independent CPA to assure compliance with federal, state, and local laws.

xv


CHAPTER

1

Not-for-Profit Budgeting and Financial Management, Fourth Edition
by Edward J. McMillan
Copyright © 2010 John Wiley & Sons, Inc.

Budgeting and
Financial Operation

Important Terminology and Standards
TO PREPARE A BUDGET THAT IS REASONABLE, accurate, and understandable, a working
knowledge of terminology and accounting standards is vital. The following list
briefly explains this terminology accordingly.

Terminology
501(c)(3) Organizations
These kinds of not-for-profit organizations are typically organized for charitable,
educational, scientific, or religious purposes.
Advantages:
➢ Charitable contributions are deductible on the tax returns of the donors
➢ Grant eligibility
➢ Favorable postal rates
➢ Exemption from Federal Unemployment Tax
➢ Employees can participate in 403(b) plans
➢ Often benefit from state programs such as exemption from sales taxes
Disadvantages:
➢ Severe restrictions regarding lobbying
➢ Lobbying for legislation must be “unsubstantial,” while lobbying regarding
elections is prohibited

1


2

Not-for-Profit Budgeting and Financial Management
501(c)(6) Organizations
501(c)(6) organizations are typically organized for business purposes such as chambers of commerce and trade associations.
Advantages:
➢ Unlimited lobbying
Disadvantages:
➢ Contributions are not tax deductible
➢ Lack of grant eligibility

➢ Full postage rates
➢ Not exempted from federal unemployment tax
➢ Employees cannot participate in 403(b) plans
➢ Generally don’t benefit from state programs

Accounting Periods
Accounting periods for not-for-profit organizations include:
➢ Calendar year. When a not-for-profit organizations year begins on January 1 and
ends on December 31.
Fiscal year. Not-for-profit organizations that are not on a calendar year when their
accounting year does not begin on January 1st and does not end on December 31st.
➢ Short period. A not-for-profit organization uses this accounting period because it
started later than January 1 and changes its accounting year or terminates.
In the case of an accounting period change, the not-for-profit organization
must file Form 3115.

Accounts Receivable
Monies owed to the organization are treated as an asset on the Statement of Financial
Position. Most auditors feel that outstanding dues should not be accorded Accounts
Receivable status as the dues outstanding rarely are legally binding. Most auditing
CPAs feel that, unless there is a legal obligation to pay, the amounts should not be
listed with Accounts Receivable.

Accounts Payable
Monies owed by the organization to other entities should be classified as Accounts
Payable; that is, assuming the organization has a legal obligation to pay.


Budgeting and Financial Operation

3

Accumulated Depreciation
The journal entries crediting Accumulated Depreciation are cumulative, and over
time the cost of the asset less Accumulated Depreciation will result in a book value
equaling scrap value or zero.

American Institute of Certified Public Accountants (AICPA)
The AICPA is a professional association whose members are mainly CPAs.

Amortization
Amortization is similar to depreciation but typically applies to leasehold improvements or reduction of value of goodwill expenditures, such as copyrights purchased
and the like.
Typically leasehold improvements are amortized over the remaining time left in
the lease and nonfinancial assets are amortized over the shelf-life of the asset.

Board-Designated Funds
There is a lot of confusion concerning such accounts. While the Board of Directors
can allocate the use of funds for a specific purpose, these funds are subject to creditor
action. However, most accountants agree that properly recorded restricted funds are
protected. A term that should be avoided is a Board restricted fund because it implies
the asset was contributed. Also, generally stated, the organization is usually powerless to remove the restriction(s) from a restricted transaction.

Building and Land
When an organization purchases real property, a distinction of the value of the building and the land should be computed. The value of the building is capitalized as well
as the value of the land. Only the value of the building will be depreciated (typically
over 30 years) and the value of the land will not be depreciated, the theory being that
the land will always exist.
It is also important to note that the building must be presented at its historical
cost (plus improvements) on the Statement of Financial Position, even if it is increasing in value.

Capitalization
Capitalization is treating a cash outlay as creating or increasing the value of an asset
on the Statement of Financial Position rather than classifying the cash outlay as an
expense on the Statement of Activity.
Every not-for-profit organization should have a policy whereby purchases of
items greater than the capitalization cut-off amount are capitalized and depreciated.


4

Not-for-Profit Budgeting and Financial Management
Capitalization Cut-Off Point
This is the dollar amount under which a cash outlay will be treated as an expense and
over which it will be treated as creating or enhancing the value of an asset.

Certified Public Accountant (CPA)
A designation granted to individuals who have met the education requirements,
passed the CPA examination, and have followed the continuing education credits
requirements.

Conflict of Interest Policy
A not-for-profit organization filing Form 990 is required to have a Conflict of Interest
Policy. A Conflict of Interest Policy must be imposed on officers, directors, and managers who are in a position to benefit financially due to a decision. See also Disqualified Person and Intermediate Sanctions.

Convention Cancellation Insurance
It is very common for not-for-profit organizations to have a substantial financial
interest relating to their convention, festivals, and the like. If this is the case, contact
your insurance agent and request a Convention Cancellation Insurance application.
Typically this insurance will make the organization whole in the event that a labor

strike, act of God, and the like affects the organization’s meeting.

Credits
A credit increases liabilities and decreases assets on the Statement of Financial
Position.
A credit increases revenues and decreases expenses on the Statement of Activity.

Debits
A debit increases the value of assets and decreases liabilities on the Statement of
Financial Position.
A debit increases expenses and reduces revenues on the Statement of Activity.

Deferred Compensation
Deferred compensation is compensation that has been earned or accrued that is
deferred to a later year.

Deferred Income
Deferred income is a liability account on the Statement of Financial Position. It
includes monies that the organization receives for which it owes a future service.
After the service has been provided, the amount will be taken out of deferred income


Budgeting and Financial Operation

5

and reclassified as a revenue on the Statement of Activity. Common examples
include dues and deposits received for exhibit booth deposits in advance.
Note: On first exposure, it may appear that amounts classified as deferred income
should be treated as an asset rather than a liability. However, the future cannot be

predicted and there is no guarantee that the event will take place. For example, what
if a fire resulted in canceling the event? Generally, the deposits from exhibitors would
have to be refunded, and that is why it is treated as a liability.

Depreciation
Reducing the value of an asset over time and according to established policy.
For example, “an organization might utilize the Straight Line Method over the
following time periods:
Buildings
Furniture
Electronic Equip.

30 years
10 years
3 years

Typically depreciation is accounted for by a journal entry as follows:
Debit
Credit

Depreciation Expense
Accumulated Depreciation

Please note that this is a hypothetical scenario.

Direct Expenses
Direct expense are expenses that can be allocated to a specific activity or project.
For example, the purchase of a single computer that will be specifically used by
one activity or project would be a direct expense.

Disclosure of Information Policies
This is a not-for-profit organization’s policy on what federal and state forms are open
for inspection by the general public, members, or contributors.

Disqualified Person
A disqualified person is any person in a position to exercise substantial influence
over the affairs of the not-for-profit organization. See also Intermediate Sanctions.

Dues
There is a disagreement among accountants whether or not uncollected dues qualify
as accounts receivable, as there is rarely a legal obligation for the member to pay. It has
been the author’s experience that recording outstanding dues as accounts receivable


6

Not-for-Profit Budgeting and Financial Management
is the most common reason not-for-profit organizations experience financial difficulties. It is the author’s suggestion not to classify outstanding dues among legitimate
accounts receivable but rather detail this amount on the Executive Summary.

Excess Benefit Transactions
See Disqualified Person and Intermediate Sanctions.

Executive Summary
An Executive Summary is a written explanation accompanying the internal financial
statements that explains items in the statements that a reader could not pull out of
the numbers. For example, consider a dollar amount for rent in the financial statements. This may be explained in the Executive Summary as to how much square feet
is leased, the current rent per square feet, lease escalation clauses, and maturity date.

Form 990

Form 990 is an information IRS filing. It is open to public inspection.

Form 990-EZ
Form 990-EZ is a shortened version of the Form 990 that is suitable for smaller not-forprofit-organizations. It is also open to public inspection.

Form 990-N
Form 990-N is an electronic information IRS filing for very small not-for-profit organizations that do not regularly have gross receipts over $25,000.

Form 990-PF
Form 990-PF is an information return filed by private foundations.

Form 990 Schedules
There are 16 possible schedules (Schedules A thru O) that may be required to file
Form 990. However, only Schedules A, B, C, E, G, L, and N apply to Form 990-EZ.

Form 990-T
This is required to report an unrelated business income tax (UBIT) that must be filed
if the not-for-profit organization has $1,000 or more from an unrelated source, even if
it resulted in a loss.

Form 5500
Form 5500 is an Annual Return/Report of Employee Benefit Plan. An organization’s
pension, deferred compensation, or profit sharing must be listed.


Budgeting and Financial Operation

7

Foundations

Typically a 501(c)(3) organization formed by a 501(c)(6) organization to be eligible for
contribution deductibility, grant eligibility, and the like. See also 501(c)(3), advantages and disadvantages.

Functional Accounting
When certain revenues and expenses are credited to or charged by policy to various
departments, functions, or units, the resulting statements are based on functional
accounting. Most not-for-profit organizations have numerous functions. For reporting purposes, the organization must have two functions: administration and program services. (Program services are the total of all departments with the exception
of administration.)
Finally, many not-for-profit organizations that are involved in raising funds must
have a third function entitled “Fund Raising.”

Fund-Raising Activities
Fund-raising activities are activities undertaken to induce potential donors to contribute money, securities, services, materials, facilities, or other assets or time.
Fund-raising activities are required to be accounted for and listed on Form 990.
Fund-raising expenses do not include program service expenses or management/
general expenses.

Generally Accepted Accounting Principles (GAAP)
GAAP are accounting principles promulgated by the Financial Accounting Standards Board (FASB) and the AICPA that guide the work of auditing CPAs.

Generally Accepted Auditing Standards (GAAS)
GAAS are rules that auditing CPAs must follow when auditing an organization.

Group Returns
A central, parent, or similar not-for-profit organization can file a group return for two
or more subordinate organizations that are:
1. Affiliated with the central organization
2. Subject to the central organization’s supervision or control
3. Included in a Group Exemption Letter that is still in effect
4. Using the same accounting period as the central organization

High-Compensation Employees
High-compensation employees are those who earn $100,000 or more per year. Typically, they are the top five employees listed on Form 990.


8

Not-for-Profit Budgeting and Financial Management
Independent Contractors
An independent contractor is a person who is compensated by the not-for-profit
organization but who is not an employee and for whom payroll taxes are withheld.
As of this writing, if an individual is paid $600 or more, a Form 1099 must be issued.
The top five independent contractors making $100,000 or higher must be reported
on Form 990 and include the following:
1. Professional fund raisers
2. Law and accounting firms
3. Publishing companies
4. Management companies
5. Investment companies

Indirect Expenses
These are expenses that are allocated to organization activities or projects that are
shared by other activities or projects.
For example, purchase of computer software that is used by more than one activity or project would be an indirect expense.

Intermediate Sanctions
Intermediate sanctions apply if a disqualified person receives unreasonable benefits,
also called “private enurement,” due to their position of influence. If a disqualified
person receives an excessive benefit, the excessive benefit must be returned to the
organization and a penalty of up to 25 percent of the excessive benefit may be

imposed.

IRS Web Site
Any person can go directly to the IRS web site to download forms, schedules, and
instructions, which is at www.irs.ustreas.gov/.

Journal Entry
A journal entry is an accounting transaction not triggered by making a deposit or
writing a check. Common transactions requiring journal entries include bank service
fees, depreciation, amortization, and the like.

Key Employee
Responsibility Tests:
1. The employee has responsibilities, powers, or influence over the organization
similar to officers, directors, or trustees.


Budgeting and Financial Operation

9

2. Manages a segment of the organization of 10 percent or more of the organization’s activities, assets, income or expenses.
Note: key employee’s compensation is reported on Form 990 if the employee’s
compensation is $150,000 or more.

Leasehold Improvements
When an organization expends money to improve property over the capitalization
cut-off point that they do not own, the outlay—the leashold improvement—will be
capitalized and classified as an asset on the Statement of Financial Position.
The reason behind this is that improvements of non-owned property stay with

the property after the lease expires. Common examples are wall-to-wall carpeting,
electrical improvements, and the like.

Long-Range Plan
A long-range plan is a budget that is prepared five or more years in advance.

Management/General Expenses
These are expenses that affect more than one activity and must be accounted for separately and listed on Form 990. Management/general expenses do not include program service expenses or fund-raising expenses.

Mission Statement
A not-for-profit organization filing Form 990 should have a mission statement that is
included on Form 990 and communicated to officers, directors, managers, key
employees, and the like.

Ogden, UT
The IRS service center, located in Ogden, Utah, is where forms 990, 990-EZ, and 990-N
are filed for domestic not-for-profit organizations.

Optional Proxy Tax
The optional proxy tax is a tax imposed on not-for-profit organizations that spend
greater than $2,000 on lobbying. The tax is recorded on Form 990-T.

Permanently Restricted Net Assets
This account is used if an organization receives a contribution that has been permanently restricted by the donor, meaning that the organization cannot use these funds
and they hold the contribution in perpetuity. The use of the earnings of a permanently restricted net asset is dictated by the donor. The earnings may be unrestricted or
temporarily restricted. It is prudent not to comingle a permanently restricted net


10

Not-for-Profit Budgeting and Financial Management
asset cash with unrestricted cash and these assets should be shown in proximity with
fixed assets on the Statement of Financial Position. Permanently restricted net assets
are usually cash, equity securities, debt securities, or real estate.

Prepaid Expenses
Prepaid expenses are monies that the organization expended for which it will receive
a future benefit and treated as an asset on the Statement of Financial Position. A common example is a deposit made to a hotel for an event to be held in the future. After
the event is concluded, this amount is taken out of the prepaid expense asset account
and reclassified as hotel expense in the Statement of Activity.

Private Enurement
See Disqualified Person and Intermediate Sanctions.

Program Service Expenses
These are expenses directly involved in benefitting members, contributors, and the
like. Program service expenses must be accounted for separately and are recorded
separately on Form 990. Program services expenses do not include fund-raising or
management/general expenses.

Records Retention and Destruction Policy
A not-for-profit organization filing Form 990 is required to research federal, state,
and local regulations affecting how long records must be kept before destroying. A
log should be maintained when records are disposed.

Statement of Activity
As part of Statement of Financial Accounting Standards No. 117, the terminology for
many statements has been changed. The Statement of Activity is the new term for the
Income Statement or Profit and Loss Statement.

Statement of Financial Position
As a part of Statement of Financial Accounting Standards No. 117, the terminology
for many statements has been changed. The Statement of Financial Position is the
new terminology for the Balance Sheet.

Temporarily Restricted Net Assets
This account is used if an organization receives contributions for a specific purpose
that will eventually be spent. A common temporarily restricted contribution is a contribution to a scholarship fund.
As in the case of permanently restricted net assets, it is prudent not to comingle
temporarily restricted cash with unrestricted cash.


Budgeting and Financial Operation

11

Unrestricted Net Assets
Unrestricted net assets are comparable to the retain earnings of a commercial
organization in that it is the cumulative profit or loss since the organization was
formed.
This account is also the book value net worth of the organization and has almost
nothing to do with available unrestricted cash.

Whistle Blowers Protection Policy
A not-for-profit organization filing Form 990 is required to have a Whistle Blower
Protection Policy, which prevents retaliation to employees reporting illegal actions,
unethical actions, and the like.

Wholly Owned Taxable Subsidiaries
Generally, a wholly owned taxable subsidiary is a stock corporation owned by the

not-for-profit organization and formed to reduce unrelated business income tax or to
protect tax-exempt status.

Zero-Based Budgeting
This term is commonly used, but rarely are zero-based budgeting principles applied.
The essence of zero-based budgeting is that prior transactions are not referred to
when compiling a new budget. The vast majority of not-for-profit organizations have
expenditures that will continue into a subsequent year and prior history must be
referred to. Examples include member newsletters, magazines, insurance, program
services, and the like.

Auditing and Financial Standards
Statement of Auditing Standard No. 99 (SAS 99)
SAS 99 directs auditing CPAs on how to consider fraud in a Financial Statement Audit.
Highlights:
➢ Requires audit team to have a brainstorming among audit team members before
the audit commences
➢ Requires a better understanding of the client’s business
➢ Requires inquiries of key personnel
➢ Requires analytical procedures based on professional skepticism
➢ Requires documentation of information gathering
Note: For a detailed explanation of this statement, review Preventing Fraud in NotFor-Profit Organizations, published by John Wiley & Sons.


12

Not-for-Profit Budgeting and Financial Management
Statement of Financial Accounting Standards No. 116 (SFAS 116)
SFAS 116 directs auditing CPA on how the accounting for contributions received and
made are to be handled.

Highlights:
➢ When and how to recognize contributions in the financial statements
➢ Rules on classifying contributions are unrestricted, temporarily restricted, and
permanently restricted
➢ Rules for the recognition of contributed services into the financial statements

Statement of Financial Accounting Standards No. 117 (SFAS 117)
SFAS 117 directs auditing CPAs in the way to prepare financial statements for notfor-profit organizations.
Highlights:
➢ Terminology changes
➢ What a complete set of financial statements includes
➢ Explanation of net assets in the Statement of Financial Position

Statement of Financial Accounting Standards No. 124 (SFAS 124)
SFAS 124 directs auditing CPAs on how to account for certain investments held by
not-for-profit organizations.
Highlights:
➢ Investments include equity securities with determinable fair value.
➢ Investments include debt securities with determinable fair values.
➢ This statement does not apply to equity securities accounted for under the equity
method or to investments in consolidated subsidiaries.

Statement of Financial Accounting Standards No. 136 (SFAS 136)
SFAS directs auditing CPAs on how to account for transfer of assets to a not-for-profit
organization or charitable trust that raises or holds contributions for others.
Highlights:
➢ Accounting for transactions between a not-for-profit organization or charitable
trust and another entity
➢ Contributions that are not technically contributions
➢ Disclosure of fund-raising expenses

➢ Guidance on situations where one organization has “variance power” over another
Note: For a detailed explanation of this statement, review Preventing Fraud in NotFor-Profit Organizations, published by John Wiley & Sons.


CHAPTER

2

Not-for-Profit Budgeting and Financial Management, Fourth Edition
by Edward J. McMillan
Copyright © 2010 John Wiley & Sons, Inc.

Cash Accounting vs.
Accrual Accounting
BEFORE A WORKABLE BUDGET CAN BE IMPLEMENTED, a basic understanding of the
two primary accounting methods, cash and accrual, is necessary.

Cash Basis
Cash-based accounting revenues are recognized in the financial statements only if
the money has actually been received, and expenses are recognized only if the
expense has actually been paid. In other words, unless money “comes in the door” or
goes “out the door” the transactions are ignored.
Also, monies owed to the organization and expenses owed by the organization
are not recorded until the money is received or expended.
We will do a simple accounting exercise of transactions that face not-for-profit
organizations on either the cash or accrual method, do the accounting, complete the
financial statements, and compare the two methods.

Cash Method
In this example, the new not-for-profit organization has received an IRS determination that it is a 501(c)(3) organization on December 31 and opened its doors on January 1. The following transactions occurred during January, and we will prepare the

financial statements for the one-month period ended January 31, ignoring holidays:
1. The Executive Director recruited 50 founding members at $1,000 each. 36 paid
during January.
The Executive Director opened a bank account and deposited the $36,000 into
an Unrestricted Cash Account.

13


14

Not-for-Profit Budgeting and Financial Management
Accounting
Treat the $36,000 deposit as an increase in cash available in the Unrestricted Cash
Account (see Worksheet #1 in Exhibit 2.1) and the $36,000 will be treated as dues
revenue on the Statement of Activity.
The $14,000 in unpaid dues is ignored on the cash basis of accounting.
2. The Executive Director’s salary is $52,000 per year and the Staff Assistant’s salary
is $26,000 per year. Ignore payroll taxes. Paydays are biweekly on Fridays.
Each employee received two checks. The four checks total $6,000.
Accounting
Reduce Unrestricted Cash by $6,000 and record $6,000 as salary expense on the
Statement of Activity.
3. The bill for the January newsletter was received in the amount of $2,000 on January 20 but not paid until February 20.
Accounting
Ignore in cash accounting, as no money went “out the door” until February.
4. The following bills were received in January:
Office Supplies

$250 Paid in January

Rent

$1,000 Paid in February

Postage

$500 Paid in January

Utilities

$250 Paid in February

Accounting
➢ Supplies: Reduce unrestricted cash by $250 and record $250 office supply expense.
➢ Rent: Ignore as no money went “out the door” until February.
➢ Postage: Reduce unrestricted cash by $500 and record a $500 postage expense on
the Statement of Activity.
➢ Utilities: Ignore as no money went “out the door” until February.
5. The organization’s annual meeting will be held in June. The following transactions occurred in January:
➢ It paid a $1,000 deposit to the facility.
➢ It received $15,000 in exhibitor deposits.
Accounting
➢ $1,000 deposit. Reduce unrestricted cash by $1,000 and record $1,000 in the hotel
deposit expense account on the Statement of Activity.


Cash Accounting vs. Accrual Accounting

15

➢ $15,000 exhibitor deposits. Increase unrestricted cash by $15,000 and record a
$15,000 exhibitor deposit revenue on the Statement of Activity.
6. The organization ordered $5,000 worth of office furniture. The invoice was paid
in January.
Most accountants agree that purchasing furniture would be treated as the
purchase of fixed assets and recorded as capital assets, furniture on the Statement
of Financial Position.
Furniture is typically depreciated over 10 years (120 months). See Worksheet #2
(Exhibit 2.2), Depreciation Calculations.
Accounting
➢ Purchase of furniture. Reduce unrestricted cash by $5,000 and capitalize the $5,000
on the Statement of Financial Position.
➢ Create a journal entry charging $42 to depreciation expense on the Statement of
Activity and record accumulated depreciation of $42 on the Statement of Financial Position.
Note: The original cost of $5,000 is reduced by $42. The difference, $4,958, is
known as Net Capitalized Assets on the Statement of Financial Position.
7. The office insurance premium bill of $2,500 was received and paid in January.
Accounting
Decrease unrestricted cash by $1,200 and record a $1,200 insurance expense on
the Statement of Activity.
8. The organization ordered a supply of a book that cost the organization $10,000
for 1,000 books. The following transactions were experienced in January:
➢ It paid the $10,000 in January.
➢ 35 orders of the books were received in January for a selling price of $25 per book.
The books were sent out with invoices in January.
➢ It received payment for 10 of the invoices in the amount of $250 in January, and
this was deposited.
Accounting
➢ When the books were paid for in January, reduce unrestricted cash by $10,000

and record a $10,000 book purchase expense on the Statement of Activity.
➢ Ignore the fact that 35 orders were received in January because, at this point, no
money “came in the door.”
➢ Increase unrestricted cash by $250 when the money was received in January and
record a $250 publications sale revenue on the Statement of Activity.