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When people give us money, they are entrusting that we will use that money wisely and for the purposes for which it was intended.

In order to make sure that happens, donors, the board, and the government require that you keep track of your income and expenses. Having a good accounting system facilitates your capacity to do this as it provides the methods to help your organization comply with the legal requirements and is an excellent business management tool. Additionally, a bank account is essential and an accounting software package can be invaluable.

Setting Up an Accounting System
Businesses base their systems on one of two accounting methods, cash or accrual.

• The cash method is the most simple in that the books are kept based on the actual flow of cash in and out.
• The accrual method is a little more complex, due to the fact that income and expenses are recorded as they occur, not necessarily when the cash changes hands. The accrual method incorporates accounts receivable and accounts payable, which are discussed elsewhere. The large majority of small organizations use the cash method.

Accounting has a simple definition of a system which tracks money coming in vs. money going out. The system will help you to operate your venture proactively concerning important financial decisions. Every accounting system has several key components.

Even if you choose to farm out all your bookkeeping to an outside accountant or computerize your system, you will need to understand the basic elements of an accounting system. While some may vary depending on the type of business, these components typically consist of the chart of accounts, the general ledger and internal controls.

Bank Accounts
You need a checking account in order to operate effectively. All money coming in or going out of your business should flow through the bank account. This provides an excellent paper trail and a source of backup documentation.

• To open a bank account you need to be incorporated, have officers and obtain signatures of those officers.
• The officers are legally accountable for the money that goes through these accounts.

Resources:

1. Learn more about nonprofit accounting: http://www.managementhelp.org/finance/np_fnce/np_fnce.htm#anchor1608850