This page was last updated in 2007. It is outdated. Please talk to Operations for info about how we do our accounting. -- Mkille 23:52, 19 April 2013 (UTC)
Each organization has its own spin on keeping track of its money. This page shows how we do it at Free Geek.
Keep in mind that we're not professional beancounters. This means that you should take what we say with a grain of salt. Hopefully, it also means we can explain things, more or less correctly, to the neophytes who want to see how we do this here.
Double entry bookkeeping
Double entry bookkeeping is an established and flexible way to keep track of our cash. It requires that every time we enter a number, we record where it came from and where it's going to. That is we're entering the numbers twice (therefore "double entry"). This is one of those things that seems overly complicated to folks who are new to accounting, but seems essential to those who have used the system. It will make more sense when you see the examples below.
Accrual vs. cash accounting
Most people are familiar with cash accounting. In that style of accounting you keep track of the money when you get or spend it. You don't count money that you owe or is owed to you until someone pays something.
At Free Geek we use accrual accounting, where we keep track of money owed us and money we owe. This method also allows us to note when the money is earned or when we begin to owe money to us, regardless if the cash has come in or gone out.
The five types of accounts
There are five types of accounts needed double entry accrual accounting, and they are income, expense, asset, liability, and equity (or capital). Every type of account has to fall in one of those five categories. Here are their definitions with examples:
- Income accounts are used to keep track of where money came from. At Free Geek, some of the major income accounts are:
- Thrift store sales -- about 39% of our income
- Monitor fees (collected at Front Desk) -- 19%
- Cash donations (collected at Front Desk) -- 15%
- E-scrap recovery (when a company buys scrap circuit boards, etc.) -- 13%
- Expense accounts are used to keep track of where we spend our money. At Free Geek, some of the major expense accounts are:
- Staff -- about 60% of our income, including
- Payroll taxes
- Health care
- Workers compensation insurance
- Facility -- 28%, including
- Liability insurance
- Monitor recycling -- 11%
- Staff -- about 60% of our income, including
- Asset accounts keep track of what we have (or is owed us) that is of value. For instance:
- Bank accounts (checking, savings, etc.)
- Money owed by donors (often businesses) that we have billed (but haven't paid yet)
- Money owed by recyclers that have picked up scrap material (but haven't paid yet)
- Liability accounts keep track of what we owe others. For instance:
- Unpaid rent
- Unpaid monitor transportation and processing fees
- Unpaid utility bills
- Unpaid loans
- Equity or Capital
- In a for profit business, equity or capital is the money that the owner puts in. It's their ownership stake. Equity can also be described as the difference between assets and liabilities.
- For reading many reports, you don't need to understand what equity accounts are, so don't worry about it at this point.
Some transaction examples
- Payroll advance to staff member
- Say a staff member needs an advance of $100 to hold them until the end of the month. In what kind of accounts is this tracked?
- From Free Geek's point of view this is an asset, because once we've handed the $100 over to the staff member, we are owed money. If we write the staff member a check, we would record a transaction where money comes out of the checking account (a reduction in one asset) and goes into an account called advances (an increase in another asset). The fact that -100.00 goes into one account and +100.00 goes into another means that the transaction is balanced.
- Thrift store sales
- Say someone buys a video card in the thrift store for $5.00. How would that be recorded?
- A transaction would be entered that shows $5.00 coming from an income account (5.00 from "Retail Sales") and going into an asset account (5.00 to "Thrift Store Till").
Assets and Liabilites
The two most common accounts in Assets and Liabilites are accounts receivable and accounts payable.
- Accounts Receivable
- This is the place to track money that is owed us, but we haven't received yet, for instance invoices that we've written for corporate donations.
- Accounts Payable
- This is the place to track money that we owe others, but we haven't paid yet, for instance utility bills that we've received.
Income and Expenses
We track income when it is promised to us (whether paid at that time or not) rather than when we actually see the money arrive. This means we can decide how "good" a month is based on how much unpaid money we will receive as well as money that came in directly.
This also means that we can decide how "bad" a month is based on how much money we will need to pay others as well as money that we spent directly.
Accrual accounting example
We were broke at the beginning of the month, but receiving and recycling folks worked real hard, the store did so-so and as a result:
- We collected $10,000 in monitor fees
- We collected $9,000 in cash donations
- We made $9,000 in sales at the Thrift store.
- Staff costs this month were $22,000.
- Rent was $6,700.
- Utilities were $1,800
- We sent two truckloads of monitors away, costing us $6,000 which we haven't paid yet.
- We also billed for $3,000 in donations that companies dropped off but haven't paid yet.
With cash accounting that looks like this:
Income: 10,000 -- monitor fees 9,000 -- donations 9,000 -- sales ======== 28,000
Expenses: 22,000 -- staff 6,700 -- rent 1,800 -- utilities ======== 30,500
With accrual accounting that looks like this:
Income: 10,000 -- monitor fees 9,000 -- donations 9,000 -- sales 3,000 -- invoices ======== 31,000
Expenses: 22,000 -- staff 6,700 -- rent 1,800 -- utilities 6,000 -- monitor processing ======== 36,500
You can see that the amount of loss is $3,000 greater in the second scenario, because it takes into account the monitor processing fees, but it is the more accurate number. It's pretty clear that under this scenario, we'd need to cut around $5,500 dollars per month in expenses or come up with additional income to break even.
We can have a "good" month but still not have enough cash in the bank to pay everyone we owe. Or we can have a "bad" month, but money from a previous month just came in, so there's plenty to go around. Accrual accounting helps us see the big picture and make good financial plans, but it does not solve the problem of not enough cash in a given month.
To do that, we need to undestand which bills can be put off, which must be paid quickly, and we need to build up enough cash in the bank to get us through the weak times.
Looking so far at this year (2005) it seems that Free Geek's largest loss per month was in January and was about $8,000. For cash flow purposes a good target might then seem to be at least $8,000 "spare" money sitting in the bank. However, looking at the numbers again, we see that February and March were also loss months, and we lost over $19,000 during the three month period. Then we started making money again. So a better target would be to have something closer to $20,000 "spare" money sitting in the bank. (This is just for cash flow purposes. It does not address other problems, such as waht if we were forced to close for a month?)
The monthly cycle at Free Geek
Sixty percent of the money that Free Geek spends happens in the last week of the month when payroll is due. Another 25% goes out around that time as well when rent and utilities are due. So 85% of expenses tend to happen within a few days either way of the last day of the month.
So at the beginning of the month we owe rent and some utilities and hopefully they are paid in short order. Since we have been open for only a few days, very little money has come in at this point, so expect the first week to look like we're losing money.
The second week usually looks better since we've made back the money we spent on rent.
By the third week things looks really good, because we've seen most of the month go by, but we haven't had to pay for staff costs yet.
At the end of the month things even out when we make payroll.
When a truck comes to pick up monitors (which cost us) or scrap material (which make us money), we estimate the income or expense and enter it into the books as soon as possible. However, it may be several weeks before we get an actual amount. We can't know how much money was lost or made in a given month until these estimates have been adjusted.
Several transactions come in during the course of a month. The vast majority of these are recorded in the books as they come in, but some slip by, for instance automatic payments to the ISP or debit card transactions that didn't make it to the bookkeeper. These transactions aren't usually caught until the bank statement comes in around the 10th of the month. An accurate accounting of the month needs to wait for these transactions to be entered.
Mostly for definitions of account types: