Tales from the Balance Sheet
Joan M. Renner, CPA, CGMA, Director 501(c)(fit!)
Question: True or False—If you want to evaluate the money that went out of your organization, just review the expense section of your financial statements.
Answer: False! While you can evaluate outgoing payments by reviewing your recorded expenses, that’s not the whole story.
When you spend money, you expect the payments to end up as expenses on the income statement. You can see the expenses, compare them to last year’s and focus on the variances. It’s all out in the open.
But, you can also spend money without it hitting the expense section at all. Why? Because expenditures can be parked on the balance sheet in asset or liability accounts, and not even show up on your P&L. Whether payments get stacked up in balance sheet accounts accidentally or per GAAP, you’re not likely to see them unless you review a comparative balance sheet and ask questions.
Payments for next year will cause prepaid expenses to go up. This is GAAP, but you’ll only see it if you look at a comparative balance sheet. Generally, you will have a consistent amount of prepaid expenses from one year to the next. If the account went up significantly, ask for an explanation of what else was paid out and charged there.
Payments for property purchases will increase the property balance. Payments for progress on developing your new website will increase intangible assets. This is GAAP, but you won’t see it unless you look at a comparative balance sheet. “What did we buy?” Good question.
What if you saw a balance sheet line item called “Receivable from affiliate”? That might mean you paid out money for another other organization, and they haven’t paid you back yet. “Why hasn’t our affiliate paid us back yet?” Good question.
What if you saw a balance sheet item called “Suspense”? That’s accountant-speak for “not sure where this belongs”. Eventually, each payment needs to be taken out, and put where it belongs. “What’s in Suspense?” Good question.
What if you saw a balance sheet line item called “accrued payroll”, presented as a negative number? I doubt it’s a payroll receivable. You probably have a bookkeeping mistake that needs some controllership, fast. “Why is accrued payroll negative?” Good question?
What can we learn?
Insist on seeing a comparative balance sheet. It’s helpful to see your current period balance sheet compared to your last audited balance sheet.
Understand the nature of each balance sheet line item. “What is this?” If the account title is vague, ask for an explanation.
Evaluate changes from one period to the next. Ask for an explanation of significant variances. Your staff may have to do some research to get the answer for you, but it’s a good question. Make sure you get a good answer.
We’ve got some helpful sessions about financial reporting in our Fall financial leadership seminar, Financial Leadership Training for Emerging Nonprofit Professionals.
There’s a helpful session on The Power of Financial Reporting—making your finance function work for you, and one on making financial statements accurate, called Controllership and the Layer Cake of Finance.
Read more FIT! TIPS.
Join our 501(c)(fit!) community so you won’t miss another FIT! TIP.
©2018 501(c)(fit!) All Rights Reserved