Ii financial statements65Section II: Financial StatementsFinancial statements are of many kinds: the ones we ha discussed here are annual financialstatements.These are prepared once a year, on the basis of account books maintained bythe organisation.There are three main statements that a non-profit normally prepares: Receipts and PaymentsAccount, Income and Expenditure Account, and the Balance Sheet.These are then checkedby the auditors, who issue a report.This is called an audit report.The Receipts and Payments account is similar to a cash flow statement.Most NGOs followcash basis of accounting.Therefore, in most of the cases, this is virtually the same as theIncome and Expenditure Account.Both these statements show the activity during the year,and are, in a way, parallel to a narrative program report.The Balance Sheet, on the other hand, shows the financial status of the organisation on aparticular day.Mostly, this day now is 31st March each year, when the Government of Indiacloses its financial year.
You are free to choose another date for closing the accounts -- solong as you close them on 31st March also!The audit report is an important document.
It can, and often does, give important informationabout the organisations financial health.
Unfortunately, it is not written like a juicy news-story;most people, therefore, do not read it.The importance of audit report and the role of auditorsis also discussed in this section.Going through this section will not make you a financial wizard or analyst.
However, it will givea basic understanding of the annual financial statements, and how to use these in your work.Receipts and Payments Account67Income and Expenditure Account72Balance Sheet77NGO Auditors826667The PeacemakerPayment is a noun.It comes from the verbpay.And where does pay come from? Its beenused in English for more than 800 years.It seems that the original root of pay was theLatin word pax means peace (as in Pax).One of the Latin forms of pax waspacare, which meant pacify.The idea was thatyou could pacify an angry creditor by payinghim!The French changed pacare to payer.Fromthere, it reached English in the 12th centuryas pay.It was often used in the sense ofpacifying people till the 16th century.
Afterthat, this meaning died out.For the last 500years, payment has been used only to meanthe act of giving money.Receipts and Payments AccountWhat is a Receipts and PaymentsAccount?NGOs are required each year to prepare asummary of their cashbook.
This summaryshows all the money that they receivedduring the year.It also shows the paymentsthat were made.This is called the Receiptsand Payments Account.UtilitySome people think that the Receipts andPayments Account is a leftover from thetime of cash accounting.This is not quitecorrect.
The Receipts and PaymentsAccount has several advantages.This ismore so in the case of non-profit sector:1.Trustees and other laypersons find theReceipts and Payments Accounteasier to understand.2.This Account discloses all loantransactions, even those which havebeen squared-off during the year.3.Some accountants do not discloserevenue Grants in the Income andExpenditure Account.In such cases,the true Income of the Non-profit canbe known only from the Receipts andPayments Account.4.Manipulation of financial statements has become very common these days.It is, however,not easy to manipulate the Receipts and Payments Account1 and the Income and ExpenditureAccount together.Receipts vs.IncomeAll receipts are not income.For example money received from sale of fixed assets, loans taken,advances from customers, etc.
is not income.Similarly, all income may not be received during the year.This happens if the organisationfollows accrual accounting2.For example, money for credit sales may be received in the nextyear.
Interest earned on fixed deposits.Payments vs.ExpenditureUsing the same logic, all payments are not expenditure.For example, money paid for purchaseof fixed assets, loans repaid or given to others, advances to contractors, etc.
are not expenditure.1 In recognition of this fact, corporate reporting requirements have now changed to include cash flowstatements also.2 See Basis of Accounting under chapter Commonly Confused Terms on page 95.68In some cases, an expense may occur but may be paid later.For example, you may haveorganized a mela in Feb 02, but the bill of the tent house may be paid later in April 02.In this case, if you are following accrual accounting, then this will be shown as an expense in2001-02, and as a payment in 2002-03.Common issuesBefore discussing the methods of making a Receipts and Payments Account, let us deal withsome commonly confused issues:Loan transactionsThe Receipts and Payments Account should show all cash and bank transactions.This includesloans given or received.It even includes those loans that were given out and received backduring the same year.Unfortunately, many accountants simply prepare the Receipts and Payments Account from theBalance Sheet and the Income and Expenditure Account.
As a result, transactions settledduring the year do not show up at all.This is not a good practice and should be avoided3Advances for expensesDuring the year many staff members may be given advances for expenses.For example, peopleare given advance for traveling, for organising events, for purchasing stationery, etc.Should allthese be shown in the Receipts and Payments Account?This is a difficult question.
If we do not show these advances then some people may feel thatwe are suppressing information.
But if we show these, then the Receipts and PaymentsAccount will become hopelessly cluttered.There are two ways to deal with this.One is to take a decision that all routine advances settledduring the year will not be shown in the Receipts and Payments Account
.This can also bedisclosed in th
FinancemngPolicy & Procedures ManualSecure the Future NGO Financial Management Pocket GuideSecure the Future NGO Financial Management Pocket GuideWeinterpret this as going beyond the technical skills ofproviding HIV/AIDS services but also to building strongEarly on the Bristol-Myers Squibb Foundation teamed withPricewaterhouseCoopers to help us in strengthening thewhich we were partnering.Our collective lessons,learned inSouthern and Eastern Africa,led us to compile this PocketGuide.It also reflects what we have learnt from our partnerIt is not a bible,or the ultimate answer,but we hope it providesa guide that can literally be kept in ones pocket for quickreference to proper financial policies.We hope you find it useful.Director:Bristol-Myers Squibb FoundationCommunity Outreach and Education Fund,Secure the FuturePlease note that all the terms that arein boldare explained in the GlossaryofTerms onpageSecure the Future NGO Financial Management Pocket GuideSecure the Future NGO Financial Management Pocket GuideAccounting policies and procedures manual1.1Accounting policy and procedure manualOne of the initial steps of a non-profit organisationprocedure manual.An accounting policy and proceduremanual documents the policies and procedures anorganisation should use to record and monitor of accounting policies andprocedures is important because it provides clarityregarding internal processes.In addition,it can be helpfulto newcomers of a NPO while improving their financialmanagement skills.Its purpose is to help NPOs:Record all financial transactionsMonitor and control expendituresSatisfy statutory reporting requirementsEnsure timely and accurate financial and managementreporting to donors and grant-makersIn general,this manual should outline the areas coveredin the following section (1.2).An effort has been made tosimplify these procedures to make it easier for you todevelop your own accounting policies and proceduresmaunual.As your organisation grows in terms of level ofactivity and number of donors,it will be necessary toupdate your procedure manual accordingly.1.2Overview of procedures availableThis Pocket Guide contains the following policies andprocedures which should be part of your organisationsprocedures manual:Pocket Policies3.Summary of Procedures4.General Ledger5.Cash Management and Disbursements6.Budgeting and Budgetary Control7.Fixed Assets8.Travel9.Procurement of Goods and Services10.Reporting Requirements11.Payroll12.Branch Accounting13.Corporate Governance14.Computer Information Systems (CIS)the currency of the grant or as agreed by the grant-maker.For example,Bristol-Myers Squibb Foundation makes grantpayments in the currency of the donors recorded contract(ie,the currency of the country where the grant will becarried out).2.6Main office/local officesWhere the grant recipient has multiple projects or fieldoffices as part of one grant,local bank accounts shouldbe introduced.The main office should bear overallresponsibility for distribution of funds to local offices orprojects.The transfer of funds to the local office shouldbe made according to the programme budget,projectmilestones and should be sufficient to meet the projectrequirements.This is necessary to avoid large amountsofcurrency in local office bank accounts.The mainofficeshould monitor and ensure proper expenditureaccountability by the local office.In addition,the mainoffice should also consolidate expenses incurred at thelocal office level for reporting purposes.Secure the Future NGO Financial Management Pocket Guide7Secure the Future NGO Financial Management Pocket Guide2.1Accounting conventionThe accounts of the grant recipient should be preparedunder the historical cost convention.The day-to-daytransactions should be recorded at the monetary valueof the goods or services or fair market value of thedonated services.2.2IncomeIncome represents grants from donor,memberssubscriptions and interest received from bank depositsand on investments.Grants,cash donations and interestreceived from bank deposits and investments are recognisedas income in the period in which they are represents expenses incurred directly forprogramme activities.These are recognised when paymentsare made (ie,when cheque or cash is disbursed or paid).2.4TaxationNo provision is made for taxation payable as it is expectedthat the grant recipient will be properly registered,andtherefore,be exempted from any taxation.2.5Currency of accountThe accounts of the grant recipient should be created toreflect the budget line items of the approved programmebudget.In addition,the accounts should be recorded inPurpose and objectives of the accounting systemThe objectives of the grant recipients accounting system are:To record and classify all transactions accurately and completelyTo maintain a complete record of to third partiesTo report to donors on all required financial informationProcess descriptionsGeneral ledgerPost monthly transactions of on project activityand other transactionsrelating to assets andPreparation of accounts.Record transactions on the grant recipientbank accounts and record receipts ofcash from the bank and petty cashexpenditure.Budget and Record budget and actual expenditurebyexpenditurebudget code on a monthly and cumulativeFixed assetsMaintain manual records of all assets.TravelRecord transactions relating to travel.ProcurementRecord transactions relating to procurementof goods and services.PayrollRecord transactions relating to compen-sation of employees (eg,salaries,gratuitiesand incentives).ReportingPrepare monthly,quarterly and/or annualreports.Secure the Future NGO Financial Management Pocket Guide9Summary of ProceduresSecure the Future NGO Financial Management Pocket GuideGeneral LedgerSecure the Future NGO Financial Management Pocket GuideSecure the Future NGO Financial Management Pocket Guide10PROGRAMME FUNDINGGOODS AND SERVICESCASH DISBURSEMENTSUPDATING THECASHBOOKProgramme budget approvedbydonorGrant recipient updatescashbookGrant