The Canada Revenue Agency (CRA) does not say how to set up financial books and records or what accounting systems should be used. However, a charity's books and records must allow CRA to verify:
- revenues, including all donations received;
- that resources are spent on charitable programs; and
- that the charity's purposes and activities continue to be charitable.
Records must be supported by source documents that allow CRA to verify the entries in the books, and must be kept in English or French.
Your charity will need to have a bank account. This account will be the central point of controlling your charity's finances. All money received should be deposited into your bank account, and all payments should be made from it (except for very small amounts).
- Choose an account that will provide a statement and return your paid cheques (or copies or digital images of them) every month.
- The board of directors must make a motion to authorize the opening of the account and name signing officers. Often, the bank or credit union will provide sample wording for such a motion that satisfies their lawyers.
- Choose signing officers. Generally this includes the board chair and the volunteer treasurer, as well as the executive director. Signing officers are the only people who can sign cheques.
- Order pre-numbered cheques. You may wish to include your charity’s address and phone number on the cheques.
It is good practice for cheques to be signed by two signing officers. However, you may require just one signature for cheques below a certain (small) limit. Remember that all signing officers will not always be available, so designate more than just two people as signing officers. NEVER pre-sign blank cheques to use when no signing officers are available.
Reconciling the bank account
All transactions will be recorded in both your accounting records and in the bank's records. But, transactions are often recorded in these two places at different times, so the balance shown in the two sets of records will also differ. Reconciliation is the way to be sure that no transactions are missed in either set of records and that your accounting records show the correct balance.
The bank will issue monthly statements showing deposits and withdrawals according to its records. Banks occasionally make mistakes on statements. Reviewing these statements, and reconciling your bank account, will identify any mistakes. Reconciliation should be done monthly, since most banks have time limits on when you can dispute their records.
The bank reconciliation should be prepared by someone who does not write cheques or handle cash deposits. It should also be reviewed and approved by a more senior person.
The bank or credit union will give you deposit slips to be used to deposit money received into the account. For each deposit, you fill out a deposit slip and present it with the items to be deposited.
Keeping records of donations
A charity should keep a record of all donations received, whether a tax receipt is issued for them or not, in a Cash Receipts Journal or in a computerized accounting program. The record should include:
- the donor’s name and address;
- the date of the donation;
- the amount of the donation;
- the amount for which a tax receipt can be issued, if this is different from the donation amount;
- whether or not a tax receipt was issued;
- if a tax receipt was issued, the number of the tax receipt; and
- the purpose of the donation.
Keeping copies of tax receipts issued
A copy of all receipts must be kept for two years after the end of the year in which the receipt is issued. If the receipt is a paper receipt, a paper copy should be kept in a safe place. The Canada Revenue Agency (CRA) may ask to see this copy. More information about retaining receipts can be found in the Gifts and Receipting section.
Issuing receipts other than tax receipts
The charity may issue receipts that are not tax receipts. These receipts simply acknowledge that an amount has been received; they cannot be used by the donor to claim a charitable tax credit. These receipts should be issued in cases where the charity cannot issue a tax receipt (for example, because there is no eligible amount) or where the donor cannot use a tax receipt. These receipts should include:
- the date the payment was received;
- the name and address of the person to whom the receipt is being issued;
- the amount of the payment; and
- the payment reference (for example, the invoice number or a description of the reason for the payment, such as “membership fee”).
Recording memberships & grants
A common source of funds for charities is membership fees or dues. The charity should keep records of all its paying members. These records should include:
- the amount paid;
- the date paid;
- the expiry date of membership (if it has a fixed term);
- the member’s name, address, and contact information; and
- the membership category (if applicable).
A charity may also receive funds from government grants. The records to be kept and the form of reporting are usually set out in the contract between the government and the charity. The charity must set up its records to track the flow of funds for each separate government grant. This may be done through the general ledger. Remember, each expense entered into the general ledger must be supported by source documents.
A government grant requires very precise tracking of every expense charged against it. Depending on the terms of the individual grant, expenses may be tracked and summarized by type (for example, salaries or travel) or by project cost category (for example, needs assessment or Web site development). Some expenses may be 100% project-related (for example, travel) and some may be allocated to several different activities (for example, the executive director’s salary or the costs of an event that showcased several of the charity’s programs). See Recording and Allocating Expenses for more information on this topic.
Invoicing for goods or services
A charity may invoice members for fees or dues, or invoice customers or clients for products or services provided by the charity. The charity should keep a record of all invoices issued and mark all payments received against this record.
Disbursements, or payments, may be made by cheque or cash. Cash disbursements should be limited to very small amounts (generally called petty cash); any large or recurring disbursements should always be made by cheque.
Petty cash disbursements
Records of each petty cash disbursement must be kept, generally on a separate spreadsheet. Be sure that you keep source documents to account for all the cash that has been given out. A source document for a cash disbursement is an invoice, expense chit or cash register receipt that accounts for the cash.
Petty cash disbursement records should be reconciled monthly. This means that the total amount from all the source documents on hand, plus the remaining amount of cash on hand, should be compared to the starting amount of cash on hand (usually called the "float"). These amounts should be equal.
Record of disbursements
Itemized records of all disbursements, or payments, should be kept in a Cash Disbursements Journal or in a computerized accounting program. In addition, if you are writing cheques by hand, be sure to fill out the cheque stub in full; this is your permanent record of cheques issued.
The General Ledger is the central “books” of the charity’s accounting system, and every transaction – a purchase, a payment, a donation, a cash transaction – flows through the General Ledger. The information below on setting up a General Ledger applies to both computerized and manual accounting systems.
Setting up a Chart of Accounts
Setting up a General Ledger always starts with setting up a Chart of Accounts. The Chart of Accounts is a listing of all of the General Ledger accounts. There are many ways to set up a Chart of Accounts, but it is important for the charity to think through what will work best for its own situation. The Chart of Accounts should be flexible enough to allow for future expansion but easy enough to use and understand.
Setting up and maintaining the General Ledger
Usually monthly, the General Ledger is updated. This involves recording all accounting activity that affects an account on the relevant page in the General Ledger. All cash receipts that relate to an account are entered from the Cash Receipts Journal, and all cash disbursements that relate to an account are entered from the Cash Disbursements Journal. There may be other sources of information, as well, such as a General Journal.
Summarizing the General Ledger
The General Ledger provides the information used in preparing financial reports. To make this information more easily usable, and also to verify the accuracy of the General Ledger, the information is summarized into a Trial Balance, which lists the ending balance of each General Ledger account. By totaling this information in two columns, and ensuring that the two column totals are equal, the mathematical accuracy of the General Ledger is confirmed. If the totals are not equal, it is essential to go back and find the error that has caused the General Ledger to be out of balance. Once the General Ledger is in balance, information from the Trial Balance is summarized onto financial statements and other reports.
Financial Statements generally include the following:
- the Statement of Revenue and Expenditure (or Income Statement),
- the Statement of Financial Position (or Balance Sheet),
- the Statement of Cash Flows, and
- Notes to the Financial Statements.
Some charities also include a separate Statement of Changes in Net Assets. A very brief introduction of Financial Statements is provided here; for help in setting up these statements for your charity, speak with a professional accountant. This will ensure that the format is correct and that you understand what should go into each line of the statements.
The information that is recorded over the course of the year goes into these reports. This is why accurate bookkeeping and internal control are so important. The quality of the Financial Statements depends on the quality of the information collected throughout the year.
Also sometimes called the Statement of Operations or the Profit and Loss Statement, this report shows the amount of revenue that was earned over a period of time (usually a year) and the amount of expenses incurred over the same period of time. The difference between these two amounts is the excess ("profit") or deficiency ("loss") for the period.
This report shows the total assets, liabilities, and equity of an organization at a point in time, generally at the end of a month or the fiscal year.
- Assets are what the organization owns or is owed. They are divided into short term (or current assets), that are expected to be converted into cash or used in a year or less, and long term, which will be converted into cash or used in more than a year.
- Liabilities are amounts the organization owes to others. Short-term liabilities (or current liabilities) are those that are payable within one year; long-term liabilities are those that it will pay in more than a year.
- Net assets are what is left after the liabilities are subtracted from the assets.
Statement of cash flows
The statement of cash flows shows all the cash flowing into and out of the organization during the year. As well as showing revenue items (such as money received in a fundraising campaign) and expense items (such as salaries paid), it shows other cash coming into the charity (such as proceeds from a bank loan) and flowing out of the charity (such as for purchasing a delivery van). A charity does not have to prepare a statement of cash flows if the information is already apparent in the rest of the financial statements.
Setting up Financial Statements – a few tips
A charity should set up Financial Statements and select reporting categories in a way that shows the most useful information to the statements' users. It should:
- prepare statements using generally accepted accounting principles ("GAAP");
- use meaningful Financial Statement categories;
- ensure that any large amount is in a separate category; and
- use plain, clear language and avoid jargon.