I see a lot of ways clients have chosen to record data in QuickBooks. Some of the methods I like and absorb the knowledge to transfer to other clients. Some methods make me cry and I want to change them. I worked on a non-profit client’s books to fix some specific issues and saw a method that made me cringe and thought of a way I would have done it differently to preserve the accounting trail.
Restricted Funds – in the non-profit world, as opposed to the for profit accounting world, you will hear words such as restricted and unrestricted funds. Restricted funds are money (or other assets) that are supposed to be used for a particular purpose. Unrestricted funds are monies (or other assets) that you can spend on anything you want. On the Balance Sheet a non-profit is supposed to show the amount of assets that are Unrestricted, Temporarily restricted, and Permanently restricted.
The Client’s Method of Recording a Temporarily Restricted Grant – the goal was to record a grant received and earmark certain amounts of that grant for specific programs. Here is how the activity is recorded:
Deposit the money into the checking account (unrestricted funds). Transfer the grant money into a fake bank account to represent temporarily restricted funds. Transfer the grant money to fake sub-accounts (also bank accounts) to earmark the funds to be spent on a particular program. Record the revenue as the money is spent and also record the amounts being spent out of the fake bank accounts.
The Issues – from an accounting perspective, I saw the creation of fake bank accounts as messy and difficult to reconcile. First, you have to record the initial deposit going into the checking account or else the bank account cannot be reconciled. Second, the client reduces the checking account to move money to be “Restricted”. However, this amount never literally came out of the checking account so the withdrawal will always float in the bank reconciliation screen as appearing outstanding. Third, after reconciling the checking account, you have to look at the balance sheet to make sure the sum of the checking and fake bank accounts matches the register balance in the reconciliation report.
Then when the money is spent, the money would get transferred from the fake sub-account bank account to make it “Unrestricted” and then a check would be written out of the account to pay for the expense. The last step would be to move the amount spent out of deferred revenue and into donation income. Not until the full grant amount is spent can the floating outstanding amounts in the bank reconciliation be cleared out, which may be months or span over a year. So the reconciliation report looks like junk.
In accounting lingo, the initial transaction sounds like: debit checking, credit unearned revenue; debit fake grant bank account, credit checking; debit fake specific program sub-bank account, credit fake grant bank account. When the money is spent the transaction sounds like: debit checking account, credit fake specific program sub-bank account; debit expense, credit checking account; debit unearned revenue, credit donation income.
I think this client used that methodology because class tracking was already used for a different purpose. However, my idea seems much easier and tracks the flow of information properly so reconciliations can be completed without fake floating transactions.
Open a Second Bank Account – for any money that is restricted for a particular purpose, deposit the money into a bank account that is used only for restricted funds. When the money is allowed to be spent, transfer it into the checking account and spend it.
Use Jobs to Track Money Spent in a Grant – for each grant that you receive that has to be spent on specific projects, create a new customer and then set-up jobs. For example, if you receive a $ 50,000 grant from Duke in 2012 to be spent on Education, Transportation, and Childcare, create a customer called Duke 2012. Create jobs under Duke 2012 called Education, Transportation, and Childcare.
Set-Up Budgets – create a budget for each job. This would represent the maximum amount that could be spent. As money becomes “Unrestricted”, transfer it from the second bank account into the checking account and write the check for the expense, tagging it to the appropriate job. To see if there is money left to spend, generate a Budget vs. Actual report. For example, if you earmarked $ 3,000 to Childcare and spent $ 300, the report would show an available balance of $ 2,700.
Profit & Loss by Job Report – after writing the check, record the revenue using a journal entry and tag it to the appropriate job. Then generate a Profit & Loss by Job report and the net income for that job should be zero.
By using my recommendation, the bank statement will properly be reconciled and any outstanding items should be valid and not fake. The Budget vs. Actual report will alert you if you have spent all the money that was allocated to the job. The Profit & Loss by Job report will alert you if you forgot to record the revenue associated with the expense.
Doesn’t that sound much easier and less painful?
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