[GNC] BotanyBayGardens nonprofit example, and why GnuCash does not suffice
David Cousens
davidcousens at bigpond.com
Mon Jul 27 03:40:52 EDT 2020
Don,
One of the reasons I started using GnuCash was to prepare assignments while doing a Master's in accounting 10 years ago.
It's value then and now was it could be adapted fairly easily to a variety of needs and the transition to it from
traditional accounting theory and T accounts was pretty smooth. While it didn't handle Cost Management Accounting or
Inventory or Payroll within GnuCash, I was able to get through that using a combination of spreadsheets for calculations
and transferring the results. OK for the toy exercises in a course program but possibly not so good for an operating
business with serious needs in these areas and much greater volume. I do agree a proper formal Cash Flow Statement would
be nice in the reports section.
David Cousens
On Sat, 2020-07-25 at 06:47 -0600, doncram wrote:
> Thanks Will, Jean, and John for your jumping in, and your many good points
> in response to my posting.
>
> To Jean, yes, most important to me would be development of Job Costing,
> because then many/most nonprofits could be served (which must be able to
> track restricted grants) and both non-profits and for-profit businesses
> could internally budget and track actuals for their projects/jobs. Job
> Costing again is not needed for generating overall financial statements
> (Balance Sheet, Income Statement (called Revenue less Expenses for
> nonprofits), and Statement of Cash Flows), because only totals are reported
> in most financial statements going externally. Maybe for that reason, many
> persons are not aware of how crucial Job Costing is for many
> organizations. You cannot expect the organizations to have one system just
> for external reporting, and separate systems to track revenues and expenses
> in different narrow areas for internal purposes and for specialized
> purposes like reporting back to grant givers. And it is crucial for use in
> teaching, in my opinion; it is definitely always included in the second of
> two intro accounting courses that are required of all business majors in
> any U.S. university or college. And second, lack of proper Statement of
> Cash Flow reporting is another drawback of GnuCash, a serious one for
> teaching purposes and also important in how practice should work. And
> fixing these two gaps would address the biggest concerns I have, enough for
> me to become comfortable to recommend GnuCash use in classes teaching
> accounting, say (which is a very important threshold: is GnuCash good
> enough to be incorporated into teaching/learning of accounting). I do have
> two other major concern areas about GnuCash, which I think can be mostly
> addressed by new documentation. Or by an informed teacher giving a course,
> or by an informed consultant/coach to a small business or nonprofit
> entrepreneur. Note I do not think "everything possible" must be done. For
> two examples, I think GnuCash's lack of coverage of inventory is NOT a
> serious problem, because inventory can be handled by a spreadsheet or
> database, as is done in many businesses that have significant inventories,
> instead of their using the available Quickbooks inventory stuff.
> Quickbooks' treatment is not as good, in some serious ways, as what the
> business does in their separate spreadsheet/database. Only summary journal
> entries, based upon the spreadsheet detail, are needed in GnuCash. The
> second example is that I am not concerned about GnuCash's lack of a fixed
> assets module, i.e. for recognizing property plant & equipment purchases,
> and depreciation thereof. These are my views about major areas needed or
> not needed for GnuCash to be recommended/used in accounting courses.
>
> I like John's comments about cash management concerns. To Will, when you
> receive a cash donation, I would think that should be taken directly to the
> bank and deposited, so having a clear and auditable record is ensured,
> rather than allowing it to go into a petty cash pot which is also used to
> pay for expenses. At a fundraiser where lots of cash is received, there
> can be a simple counting sheet provided which one or two others could use
> to verify starting cash and ending cash. And then the ending cash is to be
> deposited to the bank (and those witnesses to the counting could possibly
> check to see that exactly that amount was deposited). That way all cash
> receipts are auditable (e.g. potential donors can be sampled to ask what
> amounts they donated), and there is little/less chance of any accident in
> tracking, and there is more reason for others to trust the
> treasurer/accountant. If only a debit card is used to pay for
> expenditures, then there is clear record of everything outgoing, which is
> auditable, too (show us the receipts). I dunno, if in your area you have
> to use cash to make market purchases (do you really, would a debit charge
> really not be accepted?), then at least the petty cash pot could be
> one-way: supplied only by specific withdrawals from the bank, with
> payments out documented by receipts. And that petty cash could be
> inspected at any time, and selected receipts can be further checked to
> verify that purchases claimed are matched by items now on hand, say. If
> you mingle incoming and outgoing cash, it would be harder if not impossible
> for auditing/inspection to be done, and easier for mistakes to be made, and
> I think board members or others should question why the system not set up
> differently. (This is partly about what Chart of Accounts makes sense, but
> is not about GnuCash features in any way though.)
>
> Will's use of term "falsification" about any practice of using different
> dates for recording transactions around the end of the year is kind of
> alarming. I was trying to be descriptive of what I think actually happens
> in an organization which has chosen to stay on a cash rather than accrual
> basis. "Earnings management" of various kinds is common, in fact, as
> proven by academic studies, and just as much in firms using accrual basis.
> It is bad when there is any deception and any selfish interests potentially
> being served (e.g. just enough change being made to allow a manager to earn
> a contract bonus, for example). For BBG there is no selfish interest
> possible, and I just saw it as a bookkeeper "tidying up" so that late bills
> from December events would be recorded "where they should be", so the next
> year's accounts should be cleanly started. Just like if they were able to
> collect invoices and promptly pay the outstanding bills, really on December
> 31. For a for-profit, where the timing of cash receipts and payments would
> affect tax reporting, yes, that would not be allowable. I think, but now
> am less sure, that nothing is wrong with a nonprofit doing that. Although
> I myself would in fact use accrual accounting and set up APs and ARs. And
> about Paypal, yeah it would be better, and is what I would do, to
> explicitly show a Paypal account and its balance. (This also is not about
> GnuCash features in any way.)
>
> Jean, yes the possible coverage of Job Costing has been discussed within
> GnuCash development (including in big discussion located within a
> long-standing bug report somewhere), but I don't think it has been properly
> discussed out. What current or prospective teachers think, teachers who
> could adopt use of GnuCash into courses and could greatly expand its usage
> by different types of users over time, should matter a lot, IMO. I do
> assume/believe that GnuCash programmers and other volunteers do want to
> have a greater impact if possible, but I assume they naturally focus mostly
> on serving the current users (which do not include anyone needing job
> costing, besides some who need it but don't know they do). I dunno, would
> it help if I wrote out my views about relative importance of various
> changes, in one essay?
>
> Don
>
> On Sat, Jul 25, 2020 at 3:31 AM John G Sullivan <sullij_27615 at att.net>
> wrote:
>
> > When I saw this come up, I avoided jumping in since I'm not an accountant;
> > however, I have been treasurer for a couple of nonprofits, including one
> > which are subsidiary of a large nonprofit.
> >
> > a. the expectations of any software to fit most issues is high. The
> > treasurer is almost always going to find specific needs which examples
> > don't cover. I still don't understand how GnuCash developers manage to do
> > as much with open source software.
> >
> > b. I've used QuickBooks, both stand alone and online and found it
> > expensive, put too much 'under the covers' and designed for users for don't
> > want to have to understand accounting. I also know treasurer's who use
> > Quicken to do the job. If you spend the time you can have a very
> > professional setup.
> >
> > c. 20 years ago I had access to the very top end professional accounting
> > software. I found the ability to follow standard accounting rules,
> > flexibility to provide reports excellent; however, cost is outside the
> > 'ballpark' for most nonprofits.
> >
> > Consider the number of transactions, the total overall necessary balance
> > sheet and income/expense accounts. If you don't have too much activity, you
> > can do this with anything, including paper and pencil. The real turning
> > point is when (in the US) you pass the 990 reporting thresholds and much
> > document to your board and outsiders particular information.
> >
> > A few side notes:
> >
> > I consider cash on of the most vulnerable areas of a nonprofit. I took
> > over one company where $1,000 was floating around in a wooden box and
> > everyone had access to the box. I require collected cash be deposited
> > immediately. Debit cards and reimbursed expenses are used for expense
> > spending.
> >
> > I treat PayPal as a bank account. ( I don't have the account set where any
> > purchase is immediately charged against my bank. However, I also have
> > receipts which go to PayPal)
> >
> > John G Sullivan
> >
> >
> >
> >
> >
> > On 7/25/20, 2:00 AM, "gnucash-user on behalf of jean laroche"
> > <gnucash-user-bounces+sullij_27615=att.net at gnucash.org on behalf of
> > ripngo at gmail.com> wrote:
> >
> > Thanks for the very detailed analysis of Gnucash's shortcomings for
> > nonprofits (and other businesses).
> > I'm not an accountant either, barely a computer scientist.
> > If I were to summarize the areas where GC falls short, it seems to me
> > GC
> > is missing:
> > - Support for Job Costing
> > - Cash Flow reporting isn't what it should be.
> >
> > Could the original poster (Don) confirm that these two features, if
> > fixed/implemented would go a long way toward making GC more suited for
> > nonprofits?
> >
> > Perhaps the developers (including me, in a modest manner) could then
> > discuss whether these would be easy to add/fix. Perhaps these features
> > have been discussed in the past? Job costing, in particular, may not
> > be
> > that hard to implement? The Cash Flow reporting might also not be too
> > hard to fix, once the OP specifies exactly how it should be done,
> > ideally.
> >
> > Jean
> >
> >
> > On 7/24/2020 10:03 PM, will at theprescotts.com wrote:
> > > 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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Dr David R Cousens
B.Sc, M.Prof. Acc., Ph.D., G.C.Ed
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