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Accounting of Grants for NGOs

Do you know how Grant is presented in your NGOs Financial Statements? As REVENUE or as LIABILITY ? This is one of the crucial question regarding accounting of Grants for NGOs. Generally, we depend on the Chartered Accountants on how our Financial Statements are prepared and presented. Sometimes presentation of Financial Statements become misleading and serve no purpose.

Today we learn how to do accounting of grants for NGOs which is more appropriate in present days.

Introduction – Accounting of Grants for NGOs

There is no clarity Inida regarding how grants should be presented. We have Indian Accounting Standard 20 which mainly dealt with  accounting of Government Grants and not grants for specific projects from Funding Agencies. However, considering Indian Accounting Standards #20 and US Statement of Financial Accounting Standard #117, we can derive following three methods of presenting Grants in the Financial Statements.

Option A – Grants treated as Revenue

Here, we consider Grants Received as Revenue of the current year whether it is related to current year or for next years. Thus, when two years project is sanctioned and total grant received in the first year only, we treat full grant as income of first year. See below image to understand presentation in Financial Statements.

 

In this method, you can see above that unspent grant of Rs 40 clubbed in Income and Expenditure Account as “Excess of Income over Expenses” . Due to this, it becomes difficult to know what funds lying in the I/E Account. Check out the Balance Sheet where I/E Account show Rs. 50 which comprise of Unspent Grants and Other Income.

Option B – Grant treated as Liability

Here, it assumes that, grants and funds received for specific project, is the liability of organization and not Income. Thus whatever grant received, whether for current year or next years taken to Balance Sheet and considered as Liability. Expense from such grant then deducted from the liability and net amount shown in the Balance Sheet. Checkout below how Financial Statements look if we treat Grant as Liability.

In this method, Balance Sheet present correct financial position. However, Income and Expenditure does not show much revenue except income earned by NGOs like Non Specific Donations and Interest Income.

Option C – Best of the above Two

Due to limitations of both the above method, we should presented financial statements as per this hybrid method using best of both the above methods. In this method, we consider that much revenue for current year which actually spent during the year and remaining balance transfer to next year as “Unspent or Unutilized Grant”. Lets have a look, how the financial Statements presented under this method.

In this method, Income Expenditure Account and Balance Sheet showing correct information and in self explanatory manner.

Conclusion

In India, there is no such proforma available in any Act regarding presentation of Financial Statements of NGOs. Thus as per my opinion it is advisable to follow accounting of grants for ngos as per option C – Hybrid method, which is self explanatory and showing correct information.

Note – In all the above three methods, presentation of Receipts and Payment Accounts would not change.

For any questions or query hit the below comment section.

Cashbook of NGO

After, note ban, cash book is getting more importance. Some of the entities also getting notice from Income Tax Department to submit cash book. So, let us today discussed, some of the points related to cash book.

1. Manual V/s Computerized Cash Book of NGO

Now a days, all the books of accounts are maintained on computer, so it is difficult to find manual cash book of ngo. However, for better management and internal control purpose, it is required to have a Manual Cash Book along with the computerized cash book of NGO. There are many benefits to have manual cash book, like, daily cash checking and authorization, no cancellation or deletion, no rectification of amounts etc…

Thus if you maintained manual cash book along with the computerized cash book, that definitely increased the credibility of your accounting and control system.

2. Negative Cash Balance

For any reason, it is not accepted to go cash in a negative balance. Check the cash balance and see whether at any point of time it goes negative or not. To check negative cash balance in Tally go to cash book – F6 Daily breakup

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3. Unnecessary Withdrawals

Many a times major chunk of cash is withdrawn from bank for some event and event is cancelled later on.  At that time it is advisable to deposit the same amount to the bank. Many a times while checking cash book, it found that cash is withdrawn even though there was a enough cash balance on the books. This situation creates doubts about the genuine transactions of cash.

4. High and Law Cash balance

What should be  the average cash balance in the NGO. As such there is no such norms on the amount. However, it is advisable to keep low cash balance in the NGO. To check high and low cash balance in Tally,  go to Cash Book -> F6 Daily Breakup -> F12 Configure -> Show High Low Details – YES

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Hope this post on Cash book of NGO will give you some information on how your cash book should look. Check out your cash book and above points before its too late. Please give your comments and suggestion in the given below comment section.

How to configure Tally ERP9 for NGOs – Cost Category

Series – How to Configure Tally ERP9 for NGOs

Topic – Using Cost Category for Three Di-mention Reports

Do you need to provide different reports to different funding agencies in different format ? Are you using EXCEL as main tool to get report ? Do you need to take figures from Tally and present it in different formats ??? If, so than read this blog to configure Tally ERP9 in such a way to get almost all the reports from it.

What is the Problem ?

NGO need to report to different agencies / people in different formats. Like funding agencies wants  to know “Expenditure as per budget Head”, Trustees or Program Head wants to know about Project wise / Area wise / Activity wise expenditures and Auditor wants to know expenditure in standard format like nature wise expenses and so on…

What is the solution ?

To Create such an accounting system so that expenditures are entered once but get the reports from different Di-mentions. Tally ERP9 is capable of doing this by using Cost Category features. Lets take a look how we do it.

Step 1 – Configure General Settings

Gateway → F11 Features → Accounting Features → Cost/Profit Centers Management → Maintain Cost Center → Yes → More than once Cost Category → Yes

Step1_TallyERP9_CostCategory

Step 2 – Create Cost Category

Gateway → Account Info → Cost Categories → Create

I have Created two categories

1) Project wise Expenses – For entering expenses as per Budget Head of the Project

2) Nature wise Expenses – For entering expenses as per Nature like standard expenses i.e Telephone Exp etc..

Step2_TallyERP9_CostCategory

Step 3 – Create Cost Centers (Project Name)

Gateway → Account Info → Cost Centers → Create

I have Created three Projects – Project A, Project B and Project C expenses under Cost Category “Project wise expenditure”

Step3_TallyERP9_CostCategory

Step 4 – Create Ledger Account  (Budget Head)

Gateway → Account Info → Ledgers → Create

Create Ledger Account same as per Budget Head of the Funding Agencies under Project Name as group (Indirect Expenses) .  See below image – I have created Ledger “Communication – Field (PA) under “Project A Expenses” under “Indirect Expenses”

Step4_TallyERP9_CostCategory

Step 5 – Cost Center (Standard Expenses)

Gateway → Account Info → Cost Centers → Create

Now create Standard Expenditures under theses second type of Cost Category “Nature wise Expenditures”. I have Created Telephone Expenses and such other Standard expenses – see below image.

Step5_TallyERP9_CostCategory

Step 6 – Voucher Entry

Now whenever voucher entry is made you have to select two components i) Project wise and ii) Nature wise.- see below image.

Step6_TallyERP9_CostCategory

Step 7 – Reports

Gateway → Display → Statement of Accounts → Cost Centers → Category Summary

From this Report, you can get total expenses bifurcated in both way Nature wise Expenses and Project wise Expenses. Have a look.

Step7_TallyERP9_CostCategory

Step 7 – Reports (Continue…)

Gateway → Display → Statement of Accounts → Cost Centers → Cost Center Breakup

From this Report, you can get total expenses Project wise. Have a look.

Step7.1_TallyERP9_CostCategory

Conclusion – Use your creativity

By using cost category and your creativity, you can fulfill any requirements and have wonderful reports.

I have created Area wise expenditure to know exactly how much expenses in Rural Area and Urban Area or Filed office Expenses and Head office Expenses. Have a look….

Step7.2_TallyERP9_CostCategory

How to file Audit Report of Trust?

Audit Report of Trust

As per Income Tax Act, every Trust has to file Audit Report for the relevant Assessment Year in Form 10B.

E-Filling of Form 10B

This Audit Report of Trust has to be filled in Form 10B. It is mandatory to file this form online with Income Tax department website. This form is initiated by Chartered Accountant of Trust and later on approved by Authorized Representative (Trustee/secretary/chairman) of the Trust.

Last Date

Last Date for filling Audit Report of Trust in Form 10B is 30th September. So For Financial year 2013-14 last date is 30th September 2014.

Video Tutorial

Just go through our video below showing tutorial on how to file Audit Report of Trust.

Pros and cons of per/km Travel Policy of NGO ?

In earlier posts, we have seen what should be good NGO Travel Policy.  As questions asked by many of my readers regarding each traveling policy in detail,  I inspire to write a blog on each  Traveling Policies prevailing in the NGO sectors in detail and also its advantages and disadvantages. Today, Let us take a traveling policy used by many NGOs, from small one to huge one, which is per kilometer charge to project.

Charging per kilometer to Funding Agency

We all know that NGOs have to agree on a specific budget with Funding Agencies. Many of the NGOs have decided per kilometer rate and charged to Funding Agency and created a Fund with whatever name, be it Vehicle Maintenance Fund, Vehicle Fund, Traveling Fund Reserve…. etc.. Now from this fund, actual expenses for travel (Fuel, Servicing, Oil etc…) is paid. Is this an ideal policy? In my opinion a BIG NO. One should avoid this policy. Lets us discuss positive and negative points of this travel policy of ngo. Start with Negative.

Why one should avoid this policy?

  1. The amount charged to Funding Agencies may or may not be same as actual total expenses of travel. This lead to generate surplus amount in your Vehicle Fund in your Balance Sheet at the end of the year.
  2. This give wrong impression, that you are saving some money from year to year from Projects supported by funding agency.
  3. Some NGOs even raise a Bill of Traveling to Funding Agency as support. This will lead into double entry of Income and expenses. First time entered as income in Grant Received and Project Expenses and second time Traveling Income by raising invoice and actual travel expenses. If you are doing this , stop it immediately.
  4. By using this you are violating terms of Project Agreement with Funding Agency. Because you agreed to spent budgeted money on specific Project. However when you adopt this policy, you are saving some money and not actually spending all as per agreed budget.
  5. As per FCRA rules, you have to spent Foreign Grants for the purpose it is received. You can not create reserve or Vehicle Fund  from FC money.
  6. When Vehicle Fund gets accumulated from year to year and showing balance of considerable amount on Liability side on Balance Sheet, it is assumed that you have that much amount in your Bank or FDs on the assets side correspondingly. This sometime become obstacles in getting fund from Funding Agencies.

What is the solution then ?

In my opinion, Actual expenses of travel to be booked to project. In supporting, original fuel bills, maintenance bills should be attached. In second level supporting, a Log book should be maintained. In case of more than one project, bills and expenditure should be divided proportionately.

Summary

Try to adopt that Traveling policy which suits your organization and your funding agencies more. My advice is, if you are following this travel policy, add one clause in the agreement with funding agency.

 

How to prepare Chart of Accounts in NGO

The new Financial Year is at the doorstep. There are some steps to be taken in the beginning of the year, so that the whole financial year will pass smoothly.  One of such step is to prepare Standard Chart of Accounts in NGO.

What is Chart of Accounts in general?

In common terms, chart of accounts means, ledger accounts and group accounts shown in books of accounts. For different types of business activity and entity, chart of accounts is different. To maintain uniformity throughout the financial year, it is advisable to have standard chart of accounts.

Chart of Accounts in NGO

Why Chart of Accounts require in NGO ? As we know, there is vast difference in ledger accounts of corporate world and ledger accounts of NGO, specifically ledger accounts of Income and Expenses Group. In Corporate World, common ledger accounts are Sales Account, Service Income Accounts, Purchases, Salary Account, Telephone Expenses, Office Expenses, Stationary Expenses etc… However in NGO, apart from above, we have to take care of Budget line items of particular funding agency, so mainly ledger accounts are equal to line item of budget. Here in NGO grouping is made according to projects. Thus it is one of important exercise accountant has to do is preparing Standard Chart of Account in NGO at the beginning of the year.

Steps to prepare Chart of Accounts in NGO

 

Step 1 : Identify all continuing projects and its ledger accounts

Al l the ledger accounts of the projects, which are continue as on 1st April, are to be identified and put on paper or prepare an excel sheet with grouping.

Step 2: Identify other common Income and Expenditure Accounts

Apart from Projects, if NGO is doing other activities, like income generation, production, consultancy assignments etc… then, one hast to identify this type of common income and expenditure accounts and add in to that excel sheet.

Step 3 : Balance Sheet Items

Chart of Accounts also includes even balance sheet items. There are mainly two types of Balance Sheet items, some of which are same from year to year like Trust Fund Account or Corpus Fund Account or Building Reserve Fund Account, Name of Bank Accounts etc …. and others are changing in nature like Salary Payable Account, Audit Fees Payable Account etc.. One has to incorporate both these type of balance sheet items in the list.

Step 4 : Grouping

After finalizing all ledger accounts, next step is to give group name to it. We can give grouping according to project name like Bal Vikas Shiksha Group Expenses or Mahila Suraksha Project Expenses. Also, for Balance Sheet items, group  name is given like Grant Unutilized, Receivable Grant etc…

Step 5 : Enter Chart of Accounts in Accounting Software

Once exhaustive list of accounts are prepared, it should enter into Accounting Software maintained by NGO. Either you have to enter chart of accounts manually in the software or you can import excel into accounting software if such facility is there. In Tally ERP9, you can easily import chart of account from excel sheet.

Example of Standard Chart of Accounts

Please check out below an example of Chart of Accounts prepared by me. This is standard example, you have to prepare according to your NGO’s project and expenditures.

chart-of-accounts-ngo

Summary

Chart of Accounts in NGO is to be prepared every year, because every year some projects are closed and some new projects are implemented by NGO. Looking to benefits of preparing chart of accounts, it is highly recommended that one has to spare some time right at the beginning of financial year to prepare chart of accounts in NGO.

Cleanup of NGO Balance Sheet before 31st March

BEFORE year ends on 31st March, NGO has to look out some points regarding its books of accounts.   An NGO has to prepare an Income & Expenditure Account, Balance Sheet and Receipts and Payments Account. In case of Income Expenditure Account and Receipts Payments Account, only current  year figures are taken and thus no cleaning process required for it.

However in case of NGO Balance Sheet, figures and items are carried forwarded from year to year. In many of the accounts, only opening balances are  carried down from years without having any transactions, and thus every year it is the duty of NGO Accountant to look at the Balance Sheet before 31st March, list out such types of dormant accounts and pass necessary journal entries to remove it, only after taking approval from higher designated person of the NGO.

Dormant Accounts in NGO Balance Sheet

Mostly Fund Accounts with very nominal balance, mostly in Unutilized Grants or Grants Receivables may be consider as dormant. If project was completed before 2 to 3 years back and if there is nominal balance either positive or negative, should be transfer to General fund.

Unused Bank Accounts

Because of emphasis of Government funded projects to open a Separate Bank Account for Project, it may be seen that in an NGO, more than 5 to 10 Bank Accounts are opened. As such, there is no limitation on Maximum number of Bank Accounts, it should be restricted for administrative smoothness. Secondly, some charges are debited every year even we do not use Bank Accounts. To avoid all such, it is lookout of accountant to identified such unused bank accounts and start procedure of closing it.

“Ghost” Fixed Assets

Some of the Fixed Assets in NGO are on paper but you could not find it physically. I say them “Ghost” Fixed Assets. All these type of “Ghost” Fixed Assets should be removed even from paper by passing resolution and journal entries.

TDS Receivable (Income Tax Refund Accounts)

TDS of NGO is deducted from consultancy, or on Interest on Fixed assets and such other types of Income. This TDS is claimed as refund in Income Tax Return of NGO. However due to slow process of Income Tax Department in issue of refund. These “TDS Receivable” Accounts are carried forwarded from years. Sometimes, refund is already deposited in bank account but not properly accounted for. Go to this link of Refund Status Website to check how much refund is pending and only those related refund accounts should reflect in the NGO Balance Sheet

Summary

NGO Balance Sheet is a financial mirror of any organization and thus it must be clean periodically, else the picture reflects, will not look transparent.

Hope this will help you in your NGO, if you have any question,  you can ask here or chat with us. Also your comments are welcome on the above subjects.

Donation in cash for more than Rs. 10000

Donation in Cash

Can an NGO collect donation in cash? yes. NGO can collect donation in cash. However it is advisable to take donation by cheque and make the system transparent.

Income Tax Act and Cash Donation

From 1/04/2013, the donor will not get any tax benefit for donation in excess of Rs. 10000 unless such sum is paid by any mode other than cash.

As per the new sub section 5(d) to section 80G of the Income Tax Act 1961, any payment exceeding a sum of ten thousand rupees shall only be allowed as a deduction if such sum is paid by any mode other than cash.

Consequences

From the NGO point of view, NGO can accept donation in cash for more than Rs. 10000, but does not issue receipts claiming 80G exemption. From donor point of view, he can not get exemption under section 80G.

Also note that Rs. 10000 limit is per year per donor means a single donor cannot give more than Rs. 10000 in cash in entire year.

Applicability

This amendment will take effect from 1/04/2013 in relation to A.Y. 2014-15 and subsequent Assessment years.

Do you show Disclosure of Related Party Payments ?

Disclosure of Related Party Payments

As per Accounting Standard 18, issued by Institute of Chartered Accountants of India, business entity has to show disclosure of Related Party Payments. This Accounting Standard is applicable from 1st April 2001. You can read full Text of AS 18 here.

NGO and Accounting Standard 18

AS 18 is also apply to NGOs  in some cases. NGO has to show such disclosure when salary, remuneration or any other payments made to Chief Functionary, Trustees or Top management and associated with NGOs.This disclosure will form part of annual audited financial statements.

Some Examples

Remuneration paid to Trustee, Managing Trustee, Chief Functionary
Consultancy paid to Trustee etc…
Consultancy paid to Related NGOs where one of the Trustee
However Reimbursement of Traveling Expenses to attend meeting is not covered by this AS.Where to show such disclosure

Generally, this disclosure is to be made in financial statement of NGO. As per Income Tax Act, even Auditor of NGO has to disclose such kind of payments to his Audit Report under section 10B. In my opinion to reflect greater transparency, one has to show it in Financial Statements, Audit Report and even in Annual Report of organization.

Summary

As public money involved in NGO, it is accepted that each and every transaction must be very very transparent. Such kind of disclosure serve the above purpose and also it works as an internal check system in broader senses.

Hope this will help you in your NGO, if you have any question, you can ask here or chat with us. Also your comments are welcome on the above subjects.

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