What is Accounting?


Lesson 1 in the course Intro to Nonprofit Accounting

This lesson will introduce you to what accounting is and how you can apply it every day. The five minute video will walk you through the different types of accounts and show you why nonprofits need fund accounting. If you prefer, you can also read the text version of the lesson below.

In short, accounting is the process of keeping track of your stuff. Accounting can help you understand your organization better and maintain accurate financial records. Accounting can be broken down into 5 primary things that you’ll be keeping track of:

  • things you own
  • things you owe others
  • ways you get money
  • ways you spend money
  • your overall worth

You actually use accounting every day and probably don’t realize it. You have money in your bank account, you receive a paycheck which gives you more money, and you make purchases that spend that money. You may also have debt. All these things affect your overall worth. Welcome to accounting.

Keeping track of the 5 things listed above requires us to have a system set in place. This is where accounts come into play.

What are Accounts?

Accounts are numbers/names that are created to represent:

  • things you own
  • things you owe others
  • ways you get money
  • ways you spend money
  • your overall worth

By creating your list of accounts (commonly called a chart of accounts) you can begin to track these things in detail. A Chart of accounts is used in an accounting system, which we will explain at the end of this lesson. There are 5 areas you’re keeping track of, so accordingly we have 5 types of accounts.

  • things you own = Asset
  • things you owe others = Liability
  • your overall worth = Equity
  • ways you get money = Income
  • ways you spend money = Expense

types-of-accounts

Once these accounts are setup in your accounting system/software, you can begin to use them to track the “happenings” in your organization. These “happenings” are referred to as transactions in an accounting system/software.

When do I use accounts/accounting?

Like I mentioned earlier, accounts are only used when you have an accounting system/software setup. Accounting on the other hand is something you use on a daily basis and probably don’t even realize it. Let’s take a look at a detailed example of accounting:

Example::

Let’s say you currently have $10,000 in your checking account. First off, congratulations! I wish I had $10,000 in my checking account. This is money you own – it’s yours… Therefore, it’s an Asset. In an accounting system you would setup an asset account to represent/track this money (i.e. Checking).

Let’s also say you have a job… one that pays you $1,000 per month. This $1,000 is money you have made, and it is going to be added to your checking balance… therefore, it’s Income. In an accounting system you would setup an income account to represent/track the money you receive (i.e. My Income).

Let’s face it, everyone spends money. With this new $1,000 you’ve earned, let’s say you pay some bills and buy some toys for a total cost of $800. This will come out of your checking account… Therefore, it’s an Expense. In an accounting system you would setup expense accounts to represent/track the different ways you spend money (i.e. Groceries, Rent/Mortgage, Fuel, etc.).

Ok, let’s recap.

You started with $10,000, you earned $1,000, and you spent $800. You are now left with $10,200, the new balance in your checking account – a.k.a. your asset.

income-expense-example

See? Accounting is something we use daily. It’s just a matter of putting new language onto things you already know. Here’s the second piece to this example ::

Great, you now have $10,200. However, is this your overall worth? That depends… If you owe someone money, we’ll have to take that into account as well. See that? Accounting pun…

Let’s say that you have a small school loan you’re still paying off, and the balance of this loan is $5,000. This is money you owe, but haven’t paid off yet… Therefore, it’s a Liability. In an accounting system, you would setup a liability account to represent/track the money you owe (i.e. School Loans).

Now, for the final type of account… your overall worth. You have $10,200 in your checking account, but you owe $5,000, which means your overall worth is the difference of these two. This is called your Equity. In an accounting system you would setup an Equity account to represent/track your overall worth (i.e. Net Worth).

calculating-equity

You may have made $1,000, and you may now have $10,200 in your checking account, but since that loan still exists, your overall worth is less. Now, go pay that loan and we’ll move on.

Why do I use accounts/accounting?

Accounting is an essential part of running a successful business, church, or nonprofit organization. When implementing an accounting system/software you will create accounts to represent/track:

  • things you own
  • things you owe others
  • ways you get money
  • ways you spend money
  • your overall worth

In addition to the above, using an accounting system/software can also help you:

  • develop a budget
  • identify trends of income or spending habits
  • provide accurate financial statements to your board
  • maintain transparency for those incolved with your organization

This and much more will come with accounting. The biggest benefit of all is your confidence. By understanding where your organization stands financially, and keeping an accurate record of things, you can focus 100% on your mission.

What is an Accounting System?

An accounting system is an environment you create to keep track of all the financial information within your organization. This is done through setting up some sort of tracking system for your accounts and transactions, which will also let you generate reports. This is most commonly done through a software like Aplos, QuickBooks, Excel, etc.

In addition to tracking accounts, transactions, and generating reports, an accounting system also has rules and standards in order to be efficient. There are infinite needs and unique features that can differ from one organization to another, but in the Academy we will be highlighting 7 areas that a nonprofit will need to focus on when implementing an accounting system.

accounting-system-infographic

1. Fund Accounting

Nonprofits and churches NEED fund accounting. No question about it. In this lesson (and throughout the others) we will be taking a look at what fund accounting is, how you can implement it for your organization, as well as what is not fund accounting.

2. Accounts

Creating accounts that make sense, provide detail, but don’t get overly complicated is a art form. In this lesson we will take a look at what accounts are, how you set them up, and what structure makes sense for your organization.

3. Transactions

Once you have accounts setup you can begin using them to record transactions. In this lesson we will take a look at all types of transactions, learn how to use accounts properly, and take a look at what other details you will want to record.

4. Reporting

It all boils down to reports… Without a strong reporting capability, you won’t be able to provide accurate details to anyone about your organization. In this lesson we will take a look at the most common reports you will need to provide and understand.

5. Internal Controls

Setting up an effective accounting system is one thing, but it’s ultimately worthless unless you protect it. By learning what Internal Controls are you will begin to understand how you can protect your organization from financial crisis, and establish a standard of transparency and accountability for your organization. This lesson will provide a detailed overview, which will be followed by a full course on Internal Controls.

6. Accounting Rules

Accounting systems all play by the same rules. Choosing a software, or designing an accounting system, that has these rules in place is extremely important. In this lesson you will gain an understanding of what is needed from your accounting system.

7. Accounting Standards

Ever wondered who thought of all of this accounting stuff? You’re about to find out. In this lesson we will learn about the history of accounting, what the guiding standards are today, and how you can make sure your organization is up to par.

Now that you know a little bit about accounting (what it is, a bit about how it works, some of the different types of accounts, etc.), you’re ready to learn about the importance of Fund Accounting for nonprofits. In Lesson 2, “What Is Fund Accounting,” you’ll be introduced to just that. If you’re running a nonprofit, you won’t want to miss it.

Alex is the Product Manager for Aplos; he works with the development team to make changes and enhancements to the software, and trains employees on any new additions. A patient teacher, Alex loves to break down IT and financial concepts to make them easy to understand and to apply to real life situations. In his lessons on Aplos Academy, he also draws on his degree in Business Administration and Management and experience serving at his own church.

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