Updated to include additional topics and to cover all versions of the software, this guide provides the most vital information on using QuickBooks to track financial data in nonprofit organizations. Management of donors, grants, and pledges, and topics such as allocating expenses to programs, handling donor restrictions, and generating the reports needed for donors and tax returns are covered in detail. In addition to easy-to-follow instructions and many tips and workarounds, information on using QuickBooks for fundraising is provided. With detailed explanations of transaction entries, report customization, and other accounting requirements, this handbook is a must-have for nonprofit board members, accountants, and bookkeepers.
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About the Author
Kathy Ivens is the senior contributing editor for Windows IT Pro magazine and she writes regularly about computer and small business topics for a variety of periodicals. She is the author of more than 50 books, including Home Networking for Dummies, Quickbooks: The Official Guide, and Running Quickbooks 2010 Premier Editions. She lives in Philadelphia.
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Running QuickBooks in Nonprofits
By Kathy Ivens
CPA911 Publishing, LLCCopyright © 2011 CPA911 Publishing, LLC
All rights reserved.
QuickBooks Limitations for Nonprofits
Chart of accounts limitations
The way QuickBooks is designed and programmed presents some limitations in the features that are needed by nonprofit organizations. This is true for all editions of QuickBooks, including the QuickBooks Premier Nonprofit Edition, and the QuickBooks Enterprise Solutions Nonprofit Edition. However, there are ways to set up and use QuickBooks that ease the impediments these limits impose. Those workarounds and adaptations are a large part of this book.
If you've been using QuickBooks for a while, you're probably aware of most of the limitations (which are discussed in this chapter). However, I've found that users, and even bookkeepers, aren't aware of the severity of some of these confines, because they haven't been exposed to other more expensive and more powerful nonprofit accounting software programs.
If you're new to QuickBooks, it's important to understand the limitations, so you can plan the way you're going to use the software with those restrictions in mind. QuickBooks is a basic, no-frills software application. You're probably using QuickBooks for your nonprofit organization for one (or more) of the following reasons:
It's easy to use
Your bookkeeper is familiar with it.
An accounting professional connected to your organization is comfortable with it, and recommended it
These, and other, reasons for using QuickBooks are all valid, but you must remember that the software isn't designed for nonprofit accounting, even though you can adapt it for that purpose. As is true for the application of many "adaptive" technologies, you won't end up with everything you need or want.
As a result, some nonprofits that use QuickBooks spend more money on accounting services than nonprofits using full-featured nonprofit accounting applications. Those accounting tasks are necessary to overcome the limitations in QuickBooks when it's time to file reports with the government, funding agencies, or the nonprofit's board members.
However, that extra expense is not necessarily a negative; it's balanced by the advantages QuickBooks offers. QuickBooks costs less to run and maintain than many nonprofit accounting applications, and it's not difficult to find users who are very comfortable with QuickBooks.
QuickBooks can be adapted to work reasonably well for small nonprofit organizations that obtain the majority of their funding from unrestricted sources. "Small" is, of course, a relative term, and I don't have a firm definition to offer. However, I don't think I'd try to use QuickBooks for a nonprofit organization with restricted funding that's well over a million dollars.
Your Nonprofit Can Be Its Own Worst Enemy
Nonprofit accounting is more complicated than the accounting required for most small businesses. Because QuickBooks needs workarounds to function properly for nonprofits, a rather comprehensive understanding of the way QuickBooks works is required.
Almost half of the small nonprofits who ask me for help have turned their accounting chores over to a user with a minimal understanding of QuickBooks, almost no understanding of basic bookkeeping conventions, and no knowledge of accounting rules.
Many of these nonprofits use volunteers to keep their books, and the problems that accrue provide a living testament to the adage, "You get what you pay for." Accounting bills are high, the cost of the required outside audit for nonprofits that file Form 990 is enormous, and detailed information desired by board members and funding agencies is impossible to get (requiring the additional expense of even more accounting services).
A QuickBooks expert who understands how to set up and use classes effectively is the minimal requirement for your bookkeeper, and whatever you have to pay that person is much less than you'll have to pay accountants to examine every single transaction in order to provide the information you need.
It is always a conflict of interest for the Treasurer of the Board of Directors to be the bookkeeper. In many states it's not illegal for one person to do both jobs, but it is an inherent conflict of interest. The Treasurer is an "oversight" role, representing the board's interests by examining the work performed by the bookkeeper.
Chart of Accounts Limitations
The chart of accounts is limited in QuickBooks, and its principal weakness is the inability to create a divisional chart of accounts, which is the traditional way to track finances for a nonprofit organization. The flat design of the QuickBooks chart of accounts means you can't divide the chart of accounts by location, program, fund types (restricted, temporarily restricted, unrestricted) or any other design factor.
That constrict can be overcome to some extent by using classes, but there's one part of a divisionalized chart of accounts that no adaptive technique can make up for: The inability to automate the way totals are posted to equity accounts.
No Divisionalized Chart of Accounts
Many accounting software applications offer features that make a divisional chart of accounts possible. There are important advantages in divisionalization for both nonprofit organizations and for-profit businesses.
It's important to understand what a divisional chart of accounts is, and how it works, if you want to use a workaround for this important feature. For QuickBooks users, the workaround is the use of the Class feature. You can configure and use classes productively to provide some of the features available in a divisionalized accounting system, but you have to have a good understanding of the way the Class feature works. (Read Chapter 5 to learn how to set up classes.)
A divisionalized chart of accounts has two important ingredients: Numbered accounts, and a numbering system that is designed in sections. For example, you may have a numbering system that follows the format XXXX-YY. The numbers you use for the XXXX section represent accounts. The numbers you use for the YY section represent a division, a department, or a program. For-profit companies usually divide the chart of accounts by division and/or department. Nonprofit organizations are more likely to separate the chart of accounts by program.
For example, you can assign the YY section of the chart of accounts to programs, where 01 is education, 02 is senior citizen services, and 03 is health services. (A for-profit company might use this section of the chart of accounts for departments, such as Research, Sales, and Service).
With such a scheme, you can track revenue and expenses by assigning the appropriate amounts to the YY division. For example, if account number 5000 is Payroll, your chart of accounts has the following four accounts:
On the other hand, you could use the YY section of the chart of accounts to track locations, perhaps making 01 the main building, 02 the senior center, and 03 the day camp.
In a software program with divisionalized accounts, you can even combine two types of "tracking," such as program and location (or division and department in a for-profit company). In that case, you'd have a chart of accounts with the format XXXX-YY-ZZ. For instance the YY section can track the programs, and the ZZ section can track the location. In that case, your Payroll accounts might resemble the following listings:
5000-01-00 (payroll for all education programs)
5000-01-01 (payroll for education programs at the main building)
5000-01-02 (payroll for education programs at the senior center)
5000-02-02 (payroll for senior citizen programs at the senior center)
You can also use three divisions in the divisionalized chart of accounts to track program types along with related subprograms. For example, in the YY section you could assign the program type (e.g. Education or Health Services) and in the ZZ section you can assign the subprogram or specific program type (such as well baby care, or senior citizen health services). In that case, you might have an account 5000-01-02, which is Payroll for health services programs, specifically the well baby care program.
One common paradigm in nonprofits is to use the Y section to separate funds (restricted, temporarily restricted, and nonrestricted) and the Z section to separate programs. In this case, you only need 1 digit in the Y section, freeing up more digits for the Z section.
You can create reports on each division of a divisionalized chart of accounts. A for-profit business could create a Profit & Loss Statement for each division. For instance, a company with three branch offices (divisions), each of which has two departments (sales and service) could produce a P & L statement for the sales department of the Chicago division. A nonprofit could produce a statement of revenue and expenses for any program.
When you translate this into classes in your QuickBooks software, you can accomplish a lot of the same transaction tracking by creating all the classes you need (representing the YY sections described here), and use subclasses for more specific tracking (the ZZ sections described here). QuickBooks produces many types of reports that are based on a class, so you can see the income and expenses for any program type, or subtype.
Note that you do not use classes to track specific grants, even for grants that are for specific programs. Grants are Jobs in QuickBooks (the granting agency is a Customer), and you learn how to set up customers and jobs in Chapter 5.
No Automatic Allocation
Another missing ingredient in QuickBooks is the ability to automate the allocation of expenses. Allocation is the transfer of organization-wide (overhead) funds into specific programs. In a divisionalized chart of accounts, automatic allocation lets you set a percentage or dollar figure for each parent (organization-wide) account, and then automatically allocate amounts to that account's divisions. You can perform this task monthly, quarterly, or yearly.
Automatic allocation is important when you have grants or contracts that permit you to use some of the money for certain types of expenses (usually administrative expenses). For example, you may have a grant or contract that permits you to use some of the proceeds for 20% of the education director's salary (because the RFP, and/or the conditions of the grant recognize the fact that about 20% of that person's time will be spent on administration of the grant). Some grants and contracts let you allocate percentages of other types of expenses, such as utilities, or vehicle maintenance.
The lack of automatic allocation in QuickBooks is a side effect of the inability to divisionalize the chart of accounts. In QuickBooks, you have to perform those tasks manually, using journal entries. I provide easy-to-follow directions for creating journal entries throughout this book. You can find specific coverage of allocation journal entries in Chapter 7.
In many ways, accounting is about totals, and the differences between totals. If you have more revenue than expenses, you have a profit in the for-profit world, and you have a positive net asset balance in the nonprofit world. (We don't use the word "profit" to describe this situation, because it sounds contradictory to say that a nonprofit has a profit.)
That net figure is the organization's equity (true for both profit and nonprofit organizations), which is a positive number if revenue exceeds expenses, and a negative number if it's the other way around.
The fact is, accounting principles differ little between for-profit and nonprofit organizations. Transactions are posted in equal and opposite entries (called double-entry bookkeeping), and have an effect on the income statement, balance sheet or both. While the basic principles (as well as the methods employed in entering transactions), are the same, there is a difference in the terminology:
For-profit organizations track income and expenses in a report named Income Statement, or Profit & Loss Statement.
Nonprofit organizations track income and expenses in a report named Statement of Activities.
For-profit organizations track their accumulated net wealth (assets, liabilities and equity) in a report named Balance Sheet.
Nonprofit organizations track their accumulated net wealth in a report named Statement of Financial Position.
Tracking Net Assets
Beyond the language variations for accounting terms, the real difference between for-profit and nonprofit accounting is in the part of the balance sheet that tracks the accumulated wealth (or loss) of the organization.
A for-profit organization calls this figure equity, and it represents the net worth of a business.
A nonprofit organization calls this figure net assets, and it represents the accumulated surpluses and deficits.
Most nonprofits have to track different types of net assets, because they have to track restricted funds separately from unrestricted funds. You must create the net asset funds you need (called Equity accounts in QuickBooks). The Statement of Financial Position includes the following totals:
Equity, divided as follows
Total unrestricted net assets
Total temporarily restricted net assets
Total permanently restricted net assets
QuickBooks only recognizes one equity account for posting net amounts, the Retained Earnings account, which is installed automatically when you create a company file.
You cannot configure QuickBooks to post net earnings to multiple equity accounts (another nifty side-effect of a divisionalized chart of accounts that lets you configure each division to calculate and post net amounts to a net asset account you select).
As a result, you'll have to create the net asset equity accounts you need, and use journal entries to move net asset balances from Retained Earnings to those accounts. Instructions for those tasks are found throughout this book.
In nonprofit accounting parlance, a fund is defined as a discrete accounting entity with a self-balancing set of accounts, recording cash and related liabilities, obligations, reserves, and equities. Each fund is segregated for the purpose of tracking specific activities in accordance with any limitations or restrictions attached to the fund.
Until the mid 1990's, fund accounting was de rigueur for nonprofit organizations, because it provided important information to funding sources and donors. Today, pure fund accounting has been replaced by the Statement of Financial Accounting Standards (SFAS) Numbers 116 & 117, which describe the way non-governmental nonprofits should account for contributions, and provide financial statements.
The impact of the SFAS financial statement reporting is now on "net asset" classification (as discussed in the previous section), rather than on tracking each fund. In other words, the net asset you track can combine all funds with similar restrictions, and you no longer have to track each fund and its specific net asset.
Most nonprofits don't open separate bank accounts for each restricted grant in order to keep the money separated from unrestricted funds. However, because most of the association's money is in a single bank account, many nonprofits find they inadvertently write checks from bank accounts where the unrestricted funds aren't sufficient to cover the checks (although the bank balance is sufficient).
QuickBooks, through its ability to track bank accounts in separate subaccounts, can help you keep an eye on your bank balance, to differentiate restricted funds from unrestricted funds. You learn how to set up your bank accounts for this purpose in Chapter 3.
Using the steps, tricks, and workarounds you'll learn in this book, you can expect to be able to track every financial transaction that occurs. You'll be able to find the details of transactions so you can build reports.
Unfortunately, QuickBooks isn't designed to produce all the reports for nonprofit organizations that adhere to the standards of Generally Accepted Accounting Principles (GAAP) or comply with the principles of the Financial Accounting Standards Board (FASB).
However, you can easily export any report to Excel, and then let an accounting professional use Excel to tweak your reports so they're acceptable to government agencies and grant providers. In fact, if you're using QuickBooks in a nonprofit it's almost impossible to provide full financial reports and tax returns without using a spreadsheet application.
Other (Minor) Annoyances
There may be a couple of features or functions you need that you can't get from QuickBooks.
Excerpted from Running QuickBooks in Nonprofits by Kathy Ivens. Copyright © 2011 CPA911 Publishing, LLC. Excerpted by permission of CPA911 Publishing, LLC.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
Table of Contents
ContentsChapter 1: QuickBooks Limitations for Nonprofits,
Chapter 2: Getting Started,
Chapter 3: Chart of Accounts,
Chapter 4: Configuring Preferences,
Chapter 5: Configuring Classes and Lists,
Chapter 6: Managing Revenue,
Chapter 7: Managing Expenses,
Chapter 8: Managing Bank Accounts and Cash,
Chapter 9: Budgets and Projections,
Chapter 10: Producing Reports,
Chapter 11: Year End Activities,
Chapter 12: Audits,
Chapter 13: Managing QuickBooks Files,
Chapter 14: Managing Users and Security,
Chapter 15: QuickBooks Fundraising Tools,
Chapter 16: In-Kind (Non-Cash) Revenue,
Appendix A: Nonprofit Accounting Issues,
Most Helpful Customer Reviews
Quickbooks is an Incredibly good soffware program which has been tweeked to work for Non profits and charities. The Canadian version does the CRA tax return.ivens has written an excellent guide to using it, especially good since so many of the poeple keeping the books in small groups are voluteers, not just running the program but general, good advise on policy and procedures for charities. My only beef is she uses the American version. But both payroll and the CRA return are easier than the American version.
Kathy Ivens delivers clear, consise, and well-written "how-to" instructions. More importantly, she also discusses the "why-we-do-this", putting recent changes in nonprofit accounting into an historical context. Thank you, Kathy!
Content on how to use QuickBooks in a Nonprofit organization is excellent! I have learned a lot about how QuickBooks does things and how to modify things for nonprofit use. However, the page numbering is way off. The print book has 512 pages and the Index references pages 400+, but the ebook is only 250 pages. Selecting page 422 in the Index takes you to page 227 in the book. The topic found seems to be O.K. but it makes one wonder if all of the content is there. The Index is not listed in the Table of Contents, but it seems to start at p.233 and goes to p.250.