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Financial Documentation

Introduction

Financial Management (FM) is an integral part of NGO management. Financial resources are nothing but the fuel which is required to stay the organization alive. FM can be broadly divided in to two different parts such as (1) Fund Raising (Refer separate module of fund raising) (2) Preparing Financial Statements. Financial statements are nothing but the mirror effects of the financial situation of the organization. Financial statements of the organization include Budget, Expenditure statement of funds and Balance sheet of the organization. These financial statements excluding budget should be duly certified by Charter Accountant every year and should be submitted to concerned Charity Commissioner’s office in your region.

Now a days every NGO requires the services of a finance manager in order to take care of all the things mentioned above. Finance Manger of organization should be involved in preparing budget, preparing daily accounts statements and preparing final accounting statements.

Accounting Processes for NGOs:

1. Petty Cash Book:

Petty Cash book is an accounting book which is maintained on the basis of daily expenditure. Petty Cash (daily available cash) is the amount which is used for daily certain & uncertain expenses which requires cash to be given to another party from NGO. The expenses of Tea / coffee, Xerox, Printouts, Train Reservations, Local transport expenditure, Courier and postage expenses are the expenses which are generally incurred on daily basis. Therefore, cash required for these transactions are spent out of Petty Cash available with the person who handles daily expenses. This accounting book is maintained on daily basis. Every day it is opened newly with available balance and closed on evening of same day. It is maintained by separate person who is called Petty Cashier.

In Petty Cash Book, Different heads of expenditure are mentioned and daily expenses held are put under these different heads accordingly. E.g. Courier expenses will go under the heading of “postage”, telephone expenses will go under the heading of “communication”, expenses regard to xerox & printouts will go under the heading of “Printing”.

Benefits:

· It saves your time
· You can easily export data to MS Excel for further analysis and presentation
· Voucher Printing reduces writing work and keeps the records in a uniform way
This service offers you the minimum investment

Template of Petty Cash Book is as below:

Petty Cash Book

2. Cash Book

A Cash Book is a journal in which all of a ‘club’ receipts and payments are recorded. Cash includes actual money, credit card slips, cheques and money orders. Cash book can be maintained in a notebook or on computer also. A simple cash book is prepared like any other ordinary account. The receipts are recorded in the Debit Side and the payments are recorded in the Credit Side of the cash book. In cash basis, a transaction is recorded only when actual cash has been received or spent. Basically, only the movement of cash can constitute a transaction. Under this basis of accounting, funds are recognized as receipts for the period if these are actually received within that current year. Expenses actually paid for in the current year are recognized for that current period.

Balancing the Cash Book:

The Cash book is balanced like any other account. Generally, the receipts column total will be more than the payments column total. The difference will be written on the Cr. Side as “By Bal c/d”. This shows the profit inured in that particular period

The specimen Performa of a simple cash book is given as below:

Simple Cash Book

Example 1
Enter the following transactions in a simple cash Book.

3. Bank Reconciliation Statement (BRS)

The cash Book and Pass Book are prepared separately. The Businessman prepares the Cash Book and the Pass Book is prepared by the Bank (here by cash book we mean three column cash Book). But as both the books are related to one person and same transactions are recorded in both the books so the balance of both the books should match i.e. the balance as per Pass Book should match to balance at bank as per cash book. But many a times these two balances do not agree then, it becomes necessary to reconcile them by preparing a statement which is called Bank Reconciliation Statement. A BANK RECONCILIATION STATEMENT may be defined as a statement showing the items of differences between the cash Brook balance and the pass book balance, prepared on any day for reconciling the two balances.

Causes for differences:

A transaction relating to bank has to be recorded in both the books i.e. Cash Book and Pass Book but sometimes it happens that a bank transaction is recorded only in one book and not recorded simultaneously in other book this causes difference in the two balances. The causes for difference may be illustrated in detail as below:

Procedure for preparation of BRS:

Bank reconciliation statement is prepared to reconcile the two balances of Cash Book and Pass Book. So, when you will prepare bank reconciliation statement you will start it with one balance make adjustments and then you will reach to the other balance. This way both the balances will agree. The way the adjustments should be made may be illustrated as follows:

Note: If you start the question with balance as per pass book all the adjustments will be reversed.

Example:

From the following, prepare a bank reconciliation statement on 31st March 2005.

Solution:
Bank Reconciliation Statement
As on March 31, 2005

4. Trial Balance

Trial Balance means trying to see whether the debit and credit amounts are balanced. Debit balance must be equal to credit balance. Trial Balance is the statement of ledger account balances at a particular period. Generally it is made quarterly, half yearly or at the end of each financial year. It consists of ledger balances of all expenses, revenues, profits and owners accounts. It is prepared based on following principal

Debit: All expenses, losses and assets
Credit: All incomes, gains and liabilities

Lok Jagran Manch
Periodic Trial Balance for 01.04.2008 to 31.03.2009

5. Income & Expenditure Account or Receipt & Payments Account

Income & Expenditure accounts are prepared by accountant to know how much income is earned by the organization during the particular accounting period. NGO is set up not to earn profits only but to implement developmental schemes and provide services to people who are poor. Therefore this account could be titled as “Receipts & Payments Account” instead of income and expenditure account. Template for Receipts and Payments Account is as follows.

ABC Trust
Receipts and Payments Account for the year ended 31st March 2010

Some additional templates are given in Annexure.

6. Balance Sheet

Introduction:

This statement presents the financial position of the organization at a certain date. It may be used as a tool to evaluate the resource controlled, solvency, liquidity and stability of the organization’s financial standing. Balance Sheet is final statement of available financial resources with an organization. This statement is derived by considering assets and liabilities of NGO. Balance Sheet is prepared at the end of each financial year and certified by Chartered Accountant. This financial statement reports on the sum all support & revenue received and expenses disbursed for a given period.

Assets & Liabilities:

For NGOs, Assets are the physical or non-physical things which are owned by NGO. It may include land, building, computers, machinery which is utilized for producing NGO products, FDs, Bank balance, cash balance in hand etc. It may also includes the amount invested in Mutual Fund and Shares. Grants received are also assets of NGOs. If NGO acquires a loan from some bank, it will stand as liability of NGO.

Model Balance Sheets are given as an annexure.

BUDGETING

Budgeting is a process that consists of designing, preparing, implementing and operating the budget. A budget may be defined as short term financial plan which can be used as a guide to achieve targets. A budget is a financial statement prepared in advance in a given period referring to the policies of the organization which will ultimately help the organization to achieve its objectives. A budget is therefore a collation of forecasts and plans expressed in financial terms.

Importance of Budgeting

The budget is an important management tool and is related to the process of organizational control. Budget is the key document which is presented at the time of requesting for funds to any foundation or individual donor. Donor / funder can think of giving a specific component mentioned in the Budget. For new emerging NGOs, Budget could be prepared by very simple and easy way as given below.

The most significant point about budgeting is that it helps in establishing responsibilities at different levels and of different departments in terms of targets. It works as a feedback as well as control device.

Key elements of a comprehensive budget:

Cash Budget Which is a statement of cash receipts and cash disbursements which the organization commits and which are expected to arise during the budget period.

Format of the Cash Budget
Month 1 Month 2…………

Cash Receipts
Sale of products
Corporate donations
Individual donations
Interest on deposits
Any other
------------------------------------------------------------
Total Cash receipts
------------------------------------------------------------

Less :Cash Payments
Salaries
Project disbursals
Other Costs
------------------------------------------------------------
Total Cash payments
------------------------------------------------------------
Net cash Flows
Add : Opening Cash Balance
= Closing Cash Balance

Projected Financial Statements
(Tools for Financial Planning)

The Projected Financial Statements are another type of financial budgets which may be used by an organization. The Projected Financial Statements are compiled form the projections made particularly in the Operating Budgets. The PFS represent what the income statement and the Balance Sheet of the organization would look like at the end of the budget period, if all the budget estimates are achieved. The PFS bring together all the budged financial information (cash & accrued) and present in the form of statements of results and position. The PFS of an organization would include The Projected Income Statements, Projected Balance Sheet.

Your organization’s treasurer needs to make sure this report is written. The report should say:
§ How much money the organization has.
§ How much was spent in the last month and what it was spent on.
§ How much money came into your organization
§ How the finances are looking for the months ahead.

A full financial report with an explanation must be written for the organization’s annual general meeting so everyone knows how money has been spent.

The bookkeeping tasks that need to be done annually are:

q Prepare a financial statement, giving a complete picture of the income, expenditure and balance for that year. (it includes Petty Cash Book, Journal entries, Ledger Accounts, BRS etc) (format given below)
q Organise an independent audit with certified Chartered Accountant (see the section on The Audit)
q Prepare a balance sheet. (format given below)

Source Documents
Source documents are prepared to provide evidence of each transaction. The basic rule here is “a document is prepared for every transaction at the time the transaction occurs”.

Following are various financial instruments which helps NGO to keep evidences for various financial transactions.

1. Regular Voucher
2. Advance Voucher
3. Receipt for the income received
4. Bills for NGO products sold