Introduction to Accounting: Concepts & Ideas 1

Barbara Clemenson, CPA, CFRE

Outline Accounting • What is accounting? • Why is accounting important? • What are some basic accounting terms and ideas?

Clemenson - Introduction to Accounting ©

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Accounting: What is it? • Language of business – It reveals what is going on in a life, an organization, a society – It defines how we look at a life, an organization, a society because it defines the unit of measurement we believe is important – It directs our actions as we give value to numbers by measuring them and evaluating ourselves by those measurements Clemenson - Introduction to Accounting ©

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Accounting: What is it? Language • Reveals our thinking • Defines our thinking • Directs our thinking

Clemenson - Introduction to Accounting ©

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Accounting: What is it? Accounting is NOT numbers! Numbers simply reveal what is happening underneath. The biggest mistake accountants, auditors and regular people make is that they think about and talk in numbers instead of seeing the numbers as simply one language of the entity. Clemenson - Introduction to Accounting ©

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Why is accounting important? Because of what money tells us about ourselves • Money reveals our choices • Our choices reveal our values

Clemenson - Introduction to Accounting ©

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Why is accounting important? McLaughlin: Two Bottom Lines • Profit = Revenue - Expenses • Value = Ability to attract $ into the organization

Clemenson - Introduction to Accounting ©

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Why is accounting important? • Nonprofits need to make a profit. That profit just cannot benefit a private individual. [Prohibition against private inurement] • Nonprofits need to create value. The value society gives them is measured by their ability to attract $ into the organization. Clemenson - Introduction to Accounting ©

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Why is accounting important? Because resources are limited and we want to invest them in the best way possible.

Clemenson - Introduction to Accounting ©

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Why is accounting important? Good accounting provides good information to investors and organizational decision-makers. When investors and managers have good information and can make wise investment and deployment decisions, the world’s resources are used most wisely, raising the standard of living for everyone. Clemenson - Introduction to Accounting ©

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Basic Accounting Terms • Fiscal Year

• Cost Concept

• Net Income

• Realization

• Debit and Credit

• Matching

• Money

• Accrued

• Cash vs. In-Kind

• Materiality

• Conservatism

• Entity

Clemenson - Introduction to Accounting ©

• Going Concern11

Basic Accounting Terms • Fiscal Year - The 12 month cycle an organization uses to plan and record its financial activities. An organization’s fiscal year should make sense with considering its operational year. Clemenson - Introduction to Accounting ©

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Basic Accounting Terms • Gross Income = All Income • Net Income = All Income - All Expenses Make sure when you are talking about income, you know WHICH type of income you are talking about. Clemenson - Introduction to Accounting ©

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Basic Accounting Terms • Debit = Left

• Credit = Right

Debits ALWAYS have to equal Credits. Debit and Credit are NOT value terms. Debits are not better than credits, nor are credits better than debits. All debit means is left; and all credit means is right. Clemenson - Introduction to Accounting ©

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Basic Accounting Terms • Debit = Left

• Credit = Right

Double-entry bookkeeping: If you make a debit, you have to make an equal credit.

Everything has to Balance, that is, Equal. McLaughlin calls this the Dual Aspect. Accountants get obsessive-compulsive about balancing. Sometimes they call it tying-out. We’ll look at some of the details of debits and credits and balancing when we look at financial statements. Clemenson - Introduction to Accounting ©

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Basic Accounting Terms • Accounting measures money or things that can be valued with money. • McLaughlin calls this Money Measurement. • Not everything can be measured using $$$$$$ This is a – Goodwill limitation of financial – Appreciated Assets information! – Intangible Assets Clemenson - Introduction to Accounting ©

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Basic Accounting Terms • Accounting measures money or things that can be valued by money. Cheryl&Co • "Our success is attributed to three critical ingredients, on which you cannot place a price tag: our customers, our associates, and our reputation.” -Cheryl Krueger 17 Clemenson - Introduction to Accounting ©

Basic Accounting Terms • Cash vs. In Kind - Just because we measure things using money, not everything we measure is cash. • Some income we receive, especially in nonprofits, is not cash income but “In-Kind” income -- gifts of donated goods or services. Clemenson - Introduction to Accounting ©

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Basic Accounting Terms • Cash vs. In Kind • Implications – Revenue ≠ Cash – In Kind donations can substantially assist an organization fulfill its mission and reduce cash-flow expenditures, provided the donated goods and services are mission and organizationally needed – In Kind donations can also be misused to manipulate financial information Clemenson - Introduction to Accounting ©

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Basic Accounting Terms • Conservatism - Measure bad things that are likely to happen; good things only when they do happen. • Purpose - Financial reports need to be credible. People do not like to be surprised by bad news, but don’t mind being surprised by good news. Clemenson - Introduction to Accounting ©

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Basic Accounting Terms • Conservatism • Tension - Financial reporting comes out of and plays into the political climate of the organization. – Executive Director and Board – Finance Director and Executive Director – Finance Director and Director of Development – Finance Director and Program Director Clemenson - Introduction to Accounting ©

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Basic Accounting Terms • Basic Nonprofit Structure: Threelegged stool

Finance/Administration

Programs Clemenson - Introduction to Accounting ©

Development 22

Basic Accounting Terms • Basic Nonprofit Structure: Threelegged stool Board of Trustees Executive Director Development

$$$$ In

Finance/ Administration $$$$ Information, Reporting, Balancing

Clemenson - Introduction to Accounting ©

Programs

$$$$ Out

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