Explain discrepancies by understanding primary accounting methodsDo you know the type of accounting method your nonprofit uses? This information can help you resolve a problem that routinely arises in nonprofit accounting — what to do when financial statements from accounting and development don't match.
Typically, the discrepancy occurs because of how donor contributions are recorded, which in turn depends on which accounting method you use. Here's why.
Understanding primary accounting methods
There are two primary accounting methods: cash and accrual. The key difference between them comes down to timing — that is, when transactions are recorded as credits and debits in your books.
- Cash method. In the cash method, income — such as donations — is counted only when the money is in hand, not when the donor pledges to contribute. Similarly, expenses are debited only when they're paid.
- Accrual method. In the accrual method, income and expenses are recorded when the transaction is made — such as when a donor makes a pledge — even though the money may not be received until months later.
For example, in the cash method, if a donor pledges $1,000 in 2017 but doesn't fulfill that pledge until 2018, the money will be counted as revenue in 2018. In the accrual method, that $1,000 pledge would be counted as revenue in 2017.
Given this and the many types of contributions nonprofits receive, it's easy to see how discrepancies in accounting and development reports can occur. So, what's the best way to handle the differences? That's where account reconciliation comes in — comparing records from both departments to help identify errors, irregularities and potential adjustments.
There's no single account reconciliation formula, and reconciliation processes can be simple or complex depending on the size of your nonprofit and the volume of data you manage. Assuming your nonprofit is smaller, a simple way to reconcile differences is to do it manually — compare accounting and development reports side by side on a regular basis, perhaps weekly or monthly. This will help build skills and familiarity with your organization's data.
Depending on the types of donations your organization typically receives, you could review the following during a manual account reconciliation:
- Donations by cash, check and credit card
- Gifts of stock, wire transfers and Automated Clearing House (ACH) transactions
- Gifts of goods and services
- New pledges and current pledge balances
- Pledge payments and pledge write-offs
Check off transactions as you verify them on both the accounting and development reports. If you find discrepancies, identify when the contributions were made, paid and expended. This should go a long way toward helping reconcile any differences.
To streamline reports and revenue tracking, you might also consider creating an integrated system or process between accounting and development. In addition, account reconciliation software can help automate and standardize the reconciliation process — saving both time and money.
npENGAGE: The nonprofit accounting cheat sheet by Jeff Sobers (2014)
Nonprofit Advantage: How nonprofits differ from for-profits when it comes to their financial statements by Dawn Bryant (2013)
Nolo: Cash vs. accrual accounting by Stephen Fishman