Are Your Monthly Financial Statements Correct?

As part of your organization’s monthly process, your financial statements should be reviewed by the board.  Not only do these financial statements allow your board to review what has happened during the month, it gives them information to make decisions for moving forward.  In order to make good decisions, they must have good information.  This is why it is so important to properly report transactions in your internal financials.  Sometimes organizations will rely on their auditors to make adjustments during the year-end audit.  Because these items are not corrected until after year-end, the balances during the year that the board relies on to make decisions are incorrect. 

In order to make sure your board is getting an accurate representation of the organization’s activities, here are a few transactions that commonly get left out of monthly financial statements.

Contributions receivable

Donors often make pledges to organizations promising to make a contribution at a future date.  Accounting standards require that pledges be recorded in revenue and as a receivable when the pledge is made.  By not recording contributions receivable, the organization is missing out on showing future cash collections in their financial statements.

Accounts payable

When an item or service is purchased in one month but paid for in another month, it should be recorded as an expense and accounts payable in the month it was purchased.  Recording accounts payable, allows the board to see how much the organization owes at any point in time. 

Fixed asset additions 

When an organization purchases an asset over their capitalization policy (normally assets with a life of more than one year and a cost of over a set dollar amount such as $1,000), the amount should be capitalized and depreciated over the life of the asset instead of expensed.  This spreads the cost of the asset out over multiple years as an expense instead of all at once.  Sometimes organizations wait until year-end to move this purchase from an expense to an asset.  By doing this, the organization’s “bottom-line” is understated during the year because it has too much expense for the full cost of the asset. 

In-kind contributions

It is common for nonprofits to receive donated goods and services to support the organization’s cause.  Donated gifts that meet certain requirements (see our previous blog, In-Kind Contributions) should be recorded as revenue when received.  Often times in-kind contributions do not affect the organization’s “bottom-line” as the transaction is normally an increase in revenue and a corresponding increase in expenses but by not recording in-kind contributions, the organization is not tracking the true cost of providing its services.  If the organization had not received the donated gift, it would have had to have cash to purchase the good or service.

End of month transactions

Sometimes items purchased or contributions received at the end of the month do not get recorded in the proper month due to timing of the transaction.  Depending on the organization’s month-end close process, sometimes transactions that occurred in one month don’t get recorded until the following month.  This may be due to a delay in the organization receiving documentation or trying to close the month too soon.  In any case, it is important to make sure that all activity for the month is recorded by month end so that the financials can accurately portray all of the transactions that occurred during the month. 

*The first four items listed above are items recorded under the accrual method of accounting.  The accrual method provides a more complete picture of an organization’s entire activities compared to the cash basis or modified cash basis of accounting.  If an organization does not follow the accrual basis of accounting, these items would not be recorded.  The board of directors should be familiar with the method of accounting used by the organization and whether that method differs from the method used for the year-end audit.  Some organizations do follow the cash basis for internal purposes during the year but have an audit on the accrual basis to meet reporting or funding requirements.  If this is the case, the board should be familiar with the differences between the two and specifically how their internal financials will differ from the year-end audit. 

Posted by: Carrie Minnich, CPA