Like you maybe, I am currently in the process of preparing annual accounts for different nonprofits. So, I am fully immersed in excel, accounting software, the fiscal year 2020 and … paperwork. I do admit it’s digital paperwork. But it’s good old-fashioned paperwork: I am looking at photographs of supermarket receipts and scans of invoices and expense claims. Pictures and scans that have been e-mailed to me with no clarification or sent to me on WhatsApp. So why I am spending my time looking at that? And what documentation do you need for your annual accounts?
In your annual accounts you present the financial state of affairs of your organization for the past book year. In my case, that’s the calendar year 2020, as that is also the fiscal year 2020. Key part of your annual accounts are:
- your balance sheet
- a statement of income & expenditure
- notes to the balance sheet and to the statement of income & expenditure
- accounting principles
- a board report explaining the numbers and the perspective for next year
Statement of Income & Expenditure
The Statement of Income & Expenditure is probably the most intuitive part, as it relates the amounts that have come in and the amounts spent in the year. And it shows how well you have been able to work within available budgets in the year. You need of course to be sure that you actually have all expenses recorded properly. And that you can prove them to the satisfaction of your auditor.
Documentation of expenditure
So you need to be sure you have all expense claims, invoices, tickets, receipts, etc. that pertain to the year according to your accounting principles. (basically: whether you apply cash-based or accrual-based accounting) For starters, you need to have legible documents. They need to be clear, so that the expenses can be classified properly by cost type and project. And so that this can be checked. (and they need to be signed off by the authorized person)
Documentation of income
You need to have all information about the conditions and requirements of your donors. Do you have a grant that refers to a specific period? A specific activity? Are certain costs considered ineligible? This information is often hidden in general conditions or guidelines that are annexed to a grant agreement. These conditions impact on your expenditure presentation as well. Because you cannot present certain costs under a certain project if they are not in line with the donor’s conditions.
Notes to the Statement of Income & Expenditure
One of the most important, and well-read, notes to the statement of income & expenditure is the note showing details of your personnel costs. Here you present total gross salary costs, total taxes, total social insurance, total pension costs and total other staff costs. And you disclose the number of full-time equivalents that worked for you in the reporting year.
To present this information properly, you need to have all payroll documentation for the year, all tax calculations, all social insurance calculations, etc. as prepared by the payroll agency. You also need to have all monthly invoices for the pension scheme. You need to check all the payroll data against your accounting system data and the monthly pay slips for staff. And you will need to be able to show proof of payment plus the required authorizations for all of these payments .In addition, you need to have a record of all changes you made in staffing and staff salaries in the year. This includes contracts, extensions, letters of resignation and the like.
Your balance sheet is perhaps the most important part of your annual accounts, and at the same time the least intuitive. It visualizes the robustness of your organization. The balance sheet presents the possessions of the nonprofit (assets), such as equipment, bank balances, and incoming payments to which the organization is entitled. But it also shows your debts (liabilities) and the (financial impact of the) risks you foresee. As well as the reserves the organization has been able to build up in previous years of operations.
You need to have documentation on expenses that were not paid in the reporting year. (preferably a bank statement showing they were paid in the first month of the next year). And you need to have all documentation about the equipment you present as fixed asset even if was purchased a few years ago. In addition, you need all your bank statements (plus the first ones for the next year). And you need to have documentation about payments you are entitled to receive. As well as about risks for which you have made a financial provision. You must be able to show board decisions underlying such provisions. And you also need to have documentation about the board’s decision regarding the reserves.
My 3 Tips
You can see now, how I am buried in paperwork these days? Here are my tips for you:
- Save all your expense documentation by consecutive numbers during the year, so that you can just do a missing number check when preparing your annual accounts. (in fact, best to do that monthly or at least quarterly)
- Start telling your team and external service providers from early December (weekly) that you need all their invoices, expense claims, etc. for the year by mid-January of the next year. (if your reporting year corresponds to the calendar year)
- Keep your balance accounts clean with a monthly check and action list. (you would be surprised to learn how many organizations leave items pending for years…)
Want to know more and ask questions?
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