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What Is Accounting?

by Alex Acree

Intro To Nonprofit Accounting: Lesson 1

This lesson will introduce you to what accounting is and how you can apply it. In short, it is the process of keeping track of your stuff. It can help you understand your organization better and maintain accurate financial records. It can be broken down into five primary things to keep track of:

  • Things you own
  • Things you owe others
  • Ways you get money
  • Ways you spend money
  • Your overall worth

In this video we will walk through some basic principles and different types of accounts, and show you why nonprofits need fund accounting.

It’s likely you use accounting every day and don’t realize it. You have money in the bank, 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.

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

What Are Accounts?

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. Since there are five areas you’re keeping track of, we have five types of accounts that represent the following:

  • 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 are set up in your system or software, you can begin to use them to track the “happenings” in your organization. These “happenings” are referred to as transactions.

When Do You Use Accounting?

Let’s take a look at a detailed example of accounting. Suppose 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. You would set up an asset account in your system or software to represent and 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. You would set up an income account to represent and track the money you receive (i.e. income).

Everyone spends money. With this new $1,000 you’ve earned, suppose 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. You would set up expense accounts to represent and track the different ways you spend money (i.e. groceries, rent or mortgage, fuel).

So 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? We use it daily. It’s just a matter of putting new language to things you already know.

So 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 what I did there? Excuse the pun…)

Let’s say 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. You would set up a liability account to represent and track the money you owe (i.e. school loans).

Now, for the final type of account: overall worth. You have $10,200 in your checking account, but you owe $5,000, which means your overall worth is the difference between these two. This is called your equity. You would set up an equity account to represent and 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 You Use Accounting?

Also commonly known as bookkeeping, accounting is an essential part of running a successful business, church, or nonprofit organization. In addition to the five accounts above, using a system or 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 involved with your organization

The biggest benefit of all is your confidence. By understanding where your organization stands financially, and keeping an accurate record, you can focus 100% on your mission.

Systems And Software

An accounting system is an environment you create to keep track of all the financial information within your organization, including your accounts and transactions. It also needs to 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 for efficiency. There are infinite needs and unique features that can differ from one organization to another. During this course we will highlight seven areas a nonprofit needs to focus on when implementing this system.

accounting-system-infographic

Lesson 2: Fund Accounting

Nonprofits and churches need fund accounting. No question about it. We’ll take a look at what it is, how you can implement it for your organization.

Lesson 3: Accounts

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

Lesson 4: Transactions

Once you have accounts set up, you can use a general ledger to record transactions. We will discuss all types of transactions, learn how to use accounts properly, and take a look at other details you will want to record.

Lesson 5: Reporting

It all boils down to reports. Without a strong reporting capability, you won’t be able to provide accurate details about your organization to anyone. We will take a look at the most common reports nonprofits need.

Lesson 6: Internal Controls

Setting up an effective 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. We’ll provide a detailed overview, which will be followed by a full course on internal controls.

Lesson 7: Rules And Standards

Accounting systems all play by the same rules. Choosing a software or designing a system that has these rules in place is extremely important. We will discuss what the guiding standards are and how you can make sure your organization is up to par.

Next Up: Lesson 2

Now you’re ready to learn about the importance of fund accounting for nonprofits, which is Lesson 2 of this course. If you’re running a nonprofit, you won’t want to miss it.

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2 comments

Christine Wilson January 15, 2019 - 11:37 am

I am new doing the accounting for a non profit so I need all the help I can get

Reply
Jayne January 15, 2019 - 7:49 pm

Hi Christine,
We’re happy that you found Aplos! Our team would love to help answer any questions that you have. We’ll reach out by email to start the conversation!

Reply

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