In my previous article (Indian Newslink, May 15 2016) I wrote about financial basics for Not-for-profit organisations and the importance of running an efficient business and how your primary financial statements are the key.
I had also discussed the Profit and Loss statement.
We will now look at Balance Sheet, the second essential document.
All businesses, including Not-for-Profit organisations, must keep a Balance Sheet along with a Profit and Loss statement, to meet the minimum financial reporting requirements set out by Inland Revenue Department (IRD).
You can find out more about these minimum requirements at www.ird.govt.nz
What is a Balance Sheet?
A Balance Sheet, also known as a Statement of Financial Position, presents a snapshot of the financial position of an Organisation at a given point in time.
Simply put, it summarises what you own versus what you owe at the end of the financial year. It informs stakeholders of your company’s financial position (i.e. how much cash you have and how easily you can pay your debts).
Balance sheets are made up of three main components, including Assets, Liabilities and Equity.
In basic terms, Equity is what is left after subtracting the liabilities from the assets.
So far, so simple, however, it does get more complicated because of the way your Assets and Liabilities need to be classified as Current or Non-Current.
Current means the things for which the benefit will be seen in the current financial year. Non-current are things where the benefit will not be realised until sometime outside of this 12-month period.
The Assets section of a Balance Sheet will list any cash sitting in the bank along with other assets, which can be things like land, buildings, furniture and equipment. As mentioned, these Assets should be separated into Current and Non-current to figure out which to which accounting period the benefit should be attributed.
Current Assets will be cash in the bank while Non-current could be a term deposit that will not mature for a couple of years; it is still an asset, but you will not see any benefit until later.
These are things such as debts and income tax payable.
Again, these liabilities are divided into Current and Non-current. A term loan is a good example of a Non-current liability, while income tax payable is classed as Current.
The total of Liabilities is subtracted from the total in the Assets column, and you end up with equity; what belongs to your Non-Profit group.
At this point, you are probably thinking that all these sound very similar to the Profit and Loss Sheet, and you would be right, at a first glance, at least.
The difference is in the way they treat time. Whereas the Profit and Loss Statement looks at the income and costs as they are happening to show if you are profitable, the Balance Sheet takes a broader look at all these component parts, including long-term Assets and Liabilities and shows how much your organisation is actually worth, not just how much money is coming in or leaving.
There are still more intricacies to come to grips with when it comes to classifying the outgoings and deciding which document to record things in. For instance, repairs and maintenance would go on the Profit and Loss Sheet but Capital Expenditure (purchasing a new asset) goes on the Balance Sheet.
To help get you thinking in the right way, ask yourself, “Are we spending money on maintenance or assets?”
Obviously, keeping track of everything at this point is getting trickier.
That is where good bookkeeping habits come in, along with good relationship with your Accountant and the Bank.
If you have any questions about how BNZ can support your Non-Profit organisation call us on 0800-273916.
The above article is intended as a general discussion only, and is based on selective information which may not be suitable for your purposes. BNZ strongly recommends the recipients take independent legal, investment and financial advice prior to making any financial or investment decisions.
Cherie Trewavas is BNZ Partner based in Wellington. The above is her insight into Balance Sheets for building the financial capabilities of Not-for-Profit Organisations.
BNZ is the Title Sponsor of the Indian Newslink Indian Business Awards 2016 and Indian Newslink Sir Anand Satyanand Lecture 2016.