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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. These charts will also help you to know how your seis tax relief investment scheme works.

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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