Practice 6A Annual Budget

By Greg Jenkins,2014-05-17 18:59
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Practice 6A Annual Budget

Land Trust Standards and Practices 2004 Standard 6: Financial and Asset Management

    Practice 6B: Financial Records

? The land trust keeps accurate financial records, in a form appropriate to its scale of

    operations and in accordance with Generally Accepted Accounting Principles (GAAP)

    or alternative reporting method acceptable to a qualified financial advisor.

The purpose of financial records is to provide the information necessary for financial

    reports. The reports are used by the board to guide and ensure the health of the

    organization, by staff to monitor operations, and by external parties to assess the stability

    and management of the organization and how wisely it uses its funds. Good

    recordkeeping, as the foundation for the organization’s financial management, is essential.

    For financial records to be clear and credible, they should conform to Generally Accepted

    Accounting Principles (GAAP) set forth by the Federal Accounting Standards Advisory Board. In the event a small organization does not follow the GAAP standards, it should

    seek the counsel of an experienced financial advisor for the format of its financial reports.

Clear Records: Generally Accepted Accounting Principles

For financial records to be clear and credible, they should conform to generally accepted

    accounting principles. “Generally accepted accounting principles” (GAAP) is the term

    for the standards agreed upon for proper financial record keeping. Use of this system

    assures that knowledgeable people can accurately interpret information presented in an

    organization’s financial reports. Certified Public Accountants (CPAs) use the term in

    financial audit reports to indicate whether the organization has prepared its financial

    statements in an acceptable manner.

Land trust personnel should rely on knowledgeable accountants to ensure their systems

    comply with GAAP. Sources describing these standards include the Statements of

    Financial Accounting Concepts and Statements of Financial Accounting Standards issued

    by the Financial Accounting Standards Board (FASB) and found at, and

    audit guides, and the Statement of Position, issued by the American Institute of Certified Public Accountants (AICPA), found at The two FASB standards that apply most to nonprofit accounting are 116 and 117.

New organizations with small budgets, and who are not required to have a financial audit

    by a CPA, may not immediately need to follow all the concepts in generally accepted

    accounting principles but should be guided by a financial manager in establishing their

    financial systems. However, following GAAP should be a goal toward which all

    organizations strive and that larger organizations should be sure to meet.

? Copyright 2004 Land Trust Alliance

Land Trust Standards and Practices 2004 Standard 6: Financial and Asset Management

Complete Records: The Basic Bookkeeping Journals

The process for keeping clear, complete and accurate financial records is straightforward

    and clearly defined by GAAP. However, the complexity of financial records depends on

    the nature, size and complexity of the land trust’s operations. The board must decide, in

    consultation with the land trust’s accountant, what systems are required to sufficiently

    capture all of the financial information needed. A new land trust, or one that has very

    little financial activity, may find a checkbook provides sufficient recordkeeping, as long

    as all the information described below is included.

Financial records are maintained through bookkeeping. Bookkeeping was traditionally

    done in books called journals and ledgers, but now is primarily done on the computer.

    There are several simple software packages for small businesses that work equally well

    for nonprofit organizations. Most land trusts need to have the following records.

? Cash receipts journal. All transactions involving incoming money are recorded in

    the cash receipts journal. Each receipt should be recorded by:

    o Date received;

    o Name of donor or source;

    o Total amount received; and

    o Revenue account category or categories (using the same categories in the budget).

? Cash disbursements journal. When a check is written, it is recorded in the cash

    disbursements journal. The journal record should include:

    o The date of the disbursement;

    o The name of the payee;

    o The total amount of the disbursement; and

    o The general ledger account (see below) to which the payment applies. (Often

    there is more than one account affected by a payment.)

? Payroll records. Although payroll is a cash disbursement, there is usually a

    subsidiary journal or set of records where payroll details are recorded. It is important

    to have access to the payroll information in various formats including:

    o Individual employee for each pay date (earnings records);

    o Total payroll for each pay date; and

    o Quarterly and annual totals of various types of withholding from pay.

    The use of payroll summary forms records information in a way that enables the land

    trust to prepare the various payroll tax returns required by local, state and federal


? Copyright 2004 Land Trust Alliance

Land Trust Standards and Practices 2004 Standard 6: Financial and Asset Management

? General journal. All non-cash transactions, such as land gifts and depreciation, are

    recorded in the general journal. This journal also is used to switch an item from one

    account to another if necessary to correct a posting error.

Each entry in a journal should be supported by documentation, which should be retained

    for certain periods of time. Documents that must be kept indefinitely include:

    ? Canceled and voided checks for payments made by the organization;

    ? Invoices indicating items or services purchased;

    ? Correspondence from donors indicating the nature of their contribution and

    intended use; and

    ? Payroll tax returns and W-2s issued to employees.

The general ledger

    The general ledger is produced from information contained in the journals. The general

    ledger is the data from the journals organized by account. The activity of each account is recorded monthly or at the end of an accounting period. Most bookkeeping software

    tracks the journal and general ledger activity. Once all cash receipts, cash disbursements, non-cash items, and reclassifications have been posted in the general ledger, financial

    statements can be prepared. If the journals are maintained correctly, then the general

    ledger can be generated at any time by anyone inside the land trust or by an independent


Accurate Records: Double-Entry Bookkeeping

Certain measures should be taken to assure the accuracy of the bookkeeping ledgers and


The accuracy of the cash receipts and cash disbursements journals can be assured by

    double-entry accounting. The cash receipts and cash disbursements journals described

    above are double-entry journals. Whenever income is received, for example, the total

    amount received is recorded in a total cash column, and then it is also recorded in the

    revenue account column or columns (membership, contributions, sales income, etc.) to

    which the funds are to be allocated. Similarly, whenever the organization writes a check,

    the full amount of the check is recorded in a cash column, then the expenses to which that

    check is allocated are recorded in the account columns. At the end of the accounting

    period, the total of the account columns should equal the total cash column. Again, most

    bookkeeping software follows the double-entry system.

    In addition, the accuracy of the account totals in the general ledger can by verified by the preparation of certain supporting work papers. Examples are a bank reconciliation, a

    listing of payables and receivables, mortgage amortization schedules, and any other

    ? Copyright 2004 Land Trust Alliance

Land Trust Standards and Practices 2004 Standard 6: Financial and Asset Management

    listings of assets, liabilities, revenues, or expenses. The totals or balances of these schedules should match the totals in the general ledger.

    (This is a simplified explanation of double-entry bookkeeping. For further information, an accounting textbook or course at a community college may be helpful.)

Cash Versus Accrual Accounting

    There are two common methods of accounting used to produce financial statements. Cash basis accounting is fairly simple and is often used by small organizations. Accrual-based accounting is more complex but presents a clearer picture of the financial status of a land trust. Use of financial statements based on accrual-based accounting is one of the “generally accepted accounting principles” for audited financial statements.

    In cash basis accounting, receipts and disbursements of cash are recorded as they are made. Amounts owed to or by the land trust are not recognized until cash settlement has occurred. For example, a land trust may incur a financial obligation when it sends its newsletter to the printer, but the expense is not recorded until the bill is paid. In contrast, accrual-based accounting not only requires the organization to recognize and record income and expenses at the time cash is exchanged but also to record the commitment or obligation of a cash exchange in the future. The expense of the printing, for example, is recorded as a liability at the time the commitment is made.

    Accrual-based accounting is most important when a land trust maintains large or varying amounts of accounts payable or receivable. A presentation stating these commitments creates a fair and complete view of the financial condition of the land trust. Accrual-based accounting also is necessary if there is a need or desire to determine the cost or profitability of a program or service. All revenues and expenses of such programs must be recorded in the same time period in order to evaluate the bottom line.

    The major advantage of cash basis accounting is its simplicity. But it should not be adopted merely for ease. Cash basis accounting should be used only if its results will not be materially different from accrual-based accounting.

    Some organizations use modified cash basis accounting in which cash basis financial statements are converted to the accrual basis at yearend. The organization can enjoy the ease of the cash method and still comply with generally accepted accounting principles at fiscal yearend for its audit.

Who Does the Work?

    For a small organization with few financial transactions a year, it is cost effective and reasonable to have the basic accounting records maintained by a volunteer treasurer. As an organization grows, it may contract with a bookkeeper or turn the bookkeeping ? Copyright 2004 Land Trust Alliance

Land Trust Standards and Practices 2004 Standard 6: Financial and Asset Management

function over to staff. Even after the organization has a consultant or staff member to

    handle the daily transactions, it may still be effective to have the treasurer prepare interim

    financial statements. As financial transactions become more numerous and detailed, it is

    easier for the internal accounting staff or an independent accountant to compile financial

    statements and for the treasurer to fill the role of a reviewer.

Links to Helpful Resources and Publications

    ? American Institute of Certified Public Accountants the national, professional

    organization for all Certified Public Accountants.

    ? Compliance Guide for 501(c)(3) Tax-Exempt Organizations, Internal Revenue Service.

    ? Federal Accounting Standards Advisory Board promulgates federal accounting

    standards after considering the financial and budgetary information needs of citizens,

    congressional oversight groups, executive agencies and the needs of other users of federal

    financial information.

    ? Financial Accounting Standards Board establishes and improves standards of financial

    accounting and reporting for the guidance and education of the public, including issuers,

    auditors and users of financial information.

    ? Generally Accepted Accounting Principles, Federal Accounting Standards Advisory


    ? Generally Accepted Accounting Principles (GAAP) Basics, reprinted from Wikipedia.

    ? Statements of Financial Accounting Concepts, Financial Accounting Standards Board.

    ? Statements of Financial Accounting Standards, Financial Accounting Standards Board.

    ? Statement of Position, American Institute of Certified Public Accountants.

Sample Materials from Land Trusts

    ? Connemara Conservancy (TX) Chart of Accounts


    ? Copyright 2004 Land Trust Alliance

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