[GNC] BotanyBayGardens nonprofit example, and why GnuCash does not suffice

[will at theprescotts.com]

I have a few comments on this long post. I will preface it by admitting that I am neither a tax attorney nor an accountant. I have kept my personal accounts in GnuCash for many years. I am the treasurer for two non-profits, or more accurately, two subsidiaries of one non-profit. But neither of them are legal entities nor in the US. Legally, they are probably more akin to informal associations.

The suggestions for falsifying the dates of transactions for convenience in accounting strike me as very bad advice. Is it even legal for an organization that has to abide by US tax laws. 

Similarly, I don't understand the advice to just treat Paypal transactions as if they were directly on checking. This would make accounting for Paypal fees strange. For organizations outside the US, Paypal no longer holds funds; they transfer them immediately, so the Paypal balance is always zero except for immediately after a deposit to Paypal. Even so, it is much easier to track activity treating Paypal as a bank account.

Finally, I don't understand the suggestions about not having a cash account and immediately depositing all cash to checking. Perhaps it is partly because I live in a country where many transactions are still done with cash, where no one uses checks, just bank transfers. But I often accept donations in cash, and often pay bills in cash. Not accounting for those transactions directly would be neither accurate nor convenient.

Will

On 2020 Jul 24, at 07-24 22:13:26, doncram <doncram at gmail.com> wrote:

Here is an example set of accounts set up as best possible for a real
nonprofit, "Botany Bay Gardens".  This might be enough guidance for a few
nonprofits.  But I explain why/how GnuCash usually fails for nonprofits,
how it usually cannot serve them well enough, so a Treasurer coming here
should probably decide to use Quickbooks (in its Pro version, or in a
version packaged for Nonprofits) instead.  Unfortunately the visiting
Treasurer's time is usually wasted, even more so if they proceed with
trying to implement GnuCash, because they can't tell in advance how it will
not work. I wish GnuCash would make a few changes, so nonprofits could be
served.

Recently Fiona and Joshua (and last year BigAl) asked questions about
how/whether GnuCash accounts could be set up to handle a nonprofit.  Here's
how: see the attached Chart of Accounts, Balance Sheet, and Income
Statement, for a real nonprofit, "Botany Bay Gardens" (not its real name),
and the following notes:

1. Setting this up in GnuCash just now did not take me terribly long, but I
already knew well what are the accounts that are needed and how I want them
organized.  This is in the United States. I previously reviewed some
similar but bigger nonprofits reporting in their publicly available U.S.
Internal Revenue Service Form 990 financial statements filings.  And I
worked with the board and determined how their previous reporting system
did not work for them, as well as how it would not work well for their IRS
990 reporting which they are soon required to start, because the nonprofit
is growing over the reporting requirement threshold.  Take some time and
design out your own chart of accounts in a spreadsheet, and revise as
necessary with others' input.

2. You have to use account numbers (which are optional in GnuCash and in
Quickbooks, but if you use them, they set the order) to make your reports
presentable, with ordering that makes sense for your organization.
Otherwise the default alphabetical order is maddening.

3. I prefer to set up one "Placeholder"-type account titled "Cash", which
in this case contains two items:  the organization's checking account and
its investment account with a local foundation (which charges fees but
handles investment of spare funds and assists in fundraising in various
ways).  These are both convertible easily to real cash.  I don't use a
"Petty Cash" account, because any cash collected in this nonprofit, say at
a fundraising event, should be promptly deposited into the checking
account.  You don't want to record each tiny separate addition to the petty
cash you have in hand (and indicating each as Fundraiser ticket sales
revenue or whatever);  you just want to record one big deposit of all of it
into the checking account (with just one entry recording the ticket sales
in total).

4. Note the way "Cash" is defined is consistent with U.S. and all other
countries' accounting standards:  it is what is really liquid.  It would be
nice if GnuCash provided a Statement of Cash Flows, one of the 3 basic
accounting reports, but it does not.  The SCF would provide a
reconciliation of income (from the bottom line of Income Statement) to the
actual change of cash from beginning to end of period.  Showing how changes
in Accounts Receivable and Accounts Payable and Inventory and other current
assets and liabilities have used up or generated cash, and so on.  SCF
reporting is maybe not crucial for a nonprofit, but GnuCash's lack is a
factor in why Quickbooks is used instead for this nonprofit.

(Long, side comment or rant, please feel free to skip:  GnuCash does have a
feature labelled that way, but it is a report invented by computer
programmers with no concept of what cash flow reporting actually is.  It
has no resemblance to the very well-defined SCF as taught in accounting
classes for all business students and as used in real life for businesses
and nonprofits.  No offense at all is intended; I have the greatest respect
for the GnuCash programmers, current and past, who have achieved so much.
And I even admire how GnuCash's alternative is kind of clever, although in
an odd way not actually useful to anyone.  Note the omission renders
GnuCash less feasible for using in an intro accounting course, for
example.  (You can, with unnecessary work in a spreadsheet, compose a SCF
for your organization though.  There is a structured exercise often
provided in intro accounting textbooks, where students do that, working
from the Income Statement for the period plus beginning and end Balance
Sheets, plus additional information.  It is just a mathematical, easily
programmable thing, but it is very hard to get right when doing on your
own. Accounting rules in all countries, at least for publicly traded
companies, have required their financial statements to include the SCF,
during at least the last several decades.  In the U.S. since 1989 or so.
End rant.)

5. The nonprofit actually does accounting mostly on a cash basis:  pledges
of future donations are not recognized and recorded as Accounts Receivable,
bills due but not yet paid are not recorded as Accounts Payable.  It is
simpler just to recognize those when you receive or send out payment.  And,
at the end of the year, some expenses actually paid on January 2nd, say,
but relating to a December 28th event, are recorded as having been paid on
December 31.  This is simpler than recognizing the expense on December 28
and setting up an Accounts Payable, and has the same effect in achieving
matching of revenues and expenses in the past year period.  (So the Chart
of Accounts should probably not have AR and AP, but I left them in, in this
example.)

5. There is no Credit Card account as I don't see why a nonprofit would
have a credit card.  It should have a debit card or two usable by the
Treasurer and the President, say.  For a purchase, say, you just make one
entry, of the reduction of checking account balance by the debit, and which
expense category applies.

6. There is no Paypal account in this nonprofit's reporting, although this
nonprofit does sell tickets and receive dues there, so in fact sometimes
there are significant balances there.  But before closing any period, the
accountant can just transfer the balance at Paypal to the checking
account.  Perhaps dating the transfer on December 31, say, even though it
actually is implemented on January 15.  Each Paypal transaction can be
recorded just once, on date Paypal received the funds, as an increase in
checking balance and recognition of ticket sales revenue.  Or maybe it
would be better to show a Paypal account, as part of Cash.

7. This nonprofit is simple in having no direct employees, so no payroll
expenses and no accounts to handle Social Security contributions or to
handle required Workmen's Compensation expense, etc.  Instead the one
hourly paid gardener person (say they get $15 per hour) is actually set up
by a local temp agency as an employee of theirs.  The temp agency issues
paychecks and pays the necessary taxes, etc., for charge of something like
$18 per hour.  The gardener's expense, for the nonprofit, is in "Operations
Contract Services".  The nonprofit also has website and social media work
done by an independent contractor.  At the end of the year, the nonprofit
does issue 1099 statements for this contractor and for any companies whose
payments during the year were

8. Where GnuCash really fails for this nonprofit, though, is that it does
not support Job Costing.  Job Costing is not apparent in an organization's
overall, total reporting.  It provides for internally useful reporting.
This nonprofit has multiple separate gardens which constitute different
programs, some of them individually funded by a separate grant, for which
tracking of expenses is required.  It has several fundraiser events each
year, and the organization needs reporting that shows how it does in each
one.  Job Costing, as can be done in Quickbooks, provides that.  For a
construction firm, say, it would allow tracking of each separate job (e.g.
each renovation or new house construction) so the revenues and the expenses
for each one is reported.  An Income Statement by Job is a standard report,
providing a column for each separately defined job and in total for the
organization.  And management can try to figure out which types of jobs are
more profitable, and why.  For a nonprofit, the Job Costing feature allows
you to show a restricted grant that is received as revenue in a given job,
and for you to document the usage of those monies by expenses charged to
that job.  This is essential.  By the way, you can also budget by job, and
have reports on Budget vs. Actuals by Job.

(Another rant, sorry:  When new users come to GnuCash and ask about job
costing, unfortunately they get a lot of misdirection, or at least that is
what I have seen a few times a few years ago.  They may be directed to
expand their Chart of Accounts to add a new separate revenue line for each
job, and a new line for each type of expense incurred in each job.
Consider a catering firm with 100 or 200 similar jobs each year.  The Chart
of Accounts would rapidly become unworkable, and even though the
information is separately recorded, standard reports don't work, either.
If Job Costing is supported, the Income Statement by Job report, run for a
specified period, would nicely show columns for just the jobs that were
active in that period, lined up nicely side-by-side.  Some advice I have
seen given out seems crazy.  And I think it would be fairly easy,
programming-wise, for GnuCash to allow definition of job codes.  In each
entry in a register or journal entry, the user would be allowed to select
which job is relevant, if any, in an available job code field.  End this
rant.)

I'll stop here.  The last numbered note above is why GnuCash can't be used
for the Botany Bay Gardens nonprofit, while an oldish copy of Quickbooks,
the Quickbooks Pro 2017 version, does suffice.  Like many, I personally
dislike most commercial accounting software (for how they drop features I
need, how they add junk i do not want, and how they try to charge more and
more, among other reasons) and I do like freeware in general and GnuCash in
particular, as far as it goes.  But I cannot be at all professional and
impose usage of software that does not provide the internal reporting that
this nonprofit organization needs, when Quickbooks can do it (at least in
the Pro version, at one-time expense of $300 or so, although the software
tries to make you upgrade after 3 years by cutting off some functionality).

I hope this helps someone.  Please do comment!
--Don

P.S. While writing this, I realize the Chart of Accounts that I share omits
a few things that the real nonprofit has, and that I discuss above:  for
example it does actually need and use a grant revenue account line to
record the grants received into its various jobs.  Feedback about these
PDFs as teaching examples would also be appreciated.
<BBG_ChartOfAccounts.pdf><BBG_BalanceSheet><BBG_IncomeStatement>_______________________________________________
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