Keeping the books

The terms 'bookkeeping' and 'accounting' are often used interchangeably, but they have different meanings, and these differences are significant.

Accounting refers to the whole process of financial recording and reporting, while bookkeeping, as its name suggests, is about keeping the books - recording your income and expenditure.

Organisations have different accounting and financial reporting needs, depending on their size and the volume of their transactions. But every organisation needs some kind of bookkeeping system.

You must be able to show how much was spent and received, what it was for and who authorised it. This should be recorded using invoices, receipts, bills, cheques and other financial records. Then you need to classify your records into meaningful categories so the information can be sorted and analysed.

The chart of accounts is a list of the different type of expenses and revenue. For example, you might have an account for program fees and another for fund-raising income and expenses.

Many people find the terms 'accrual' and 'cash' accounting confusing when they first start dealing with finances.

Accrual accounting

In accrual accounting, revenue is recognised when it is earned rather than when it is received, and expenses are recognised when they are incurred, rather than when they are paid. So if you buy an item using your credit card, record the date you bought the item, rather than the date you paid your credit card bill.

Cash accounting

With cash accounting, you record entries according to the date you paid someone or someone paid you. So if you invoice someone, you record the date you receive the money, rather than the date you sent the invoice. At its simplest, cash accounting uses the receipt book and bank deposit details to track income and the chequebook to track expenditure.

Cash accounting is the simplest form of bookkeeping and small organisations may find it adequate. If your organisation operates largely on short-term transactions and you don't have long-term debts or commitments, cash accounting will work as long as your organisation stays small. If you start growing, you will need to switch to accrual accounting.

Accrual accounting is generally preferable because it gives a better idea of your organisation's overall medium-term financial status.

If your accounts only reflect the commitment once you have met the liability, there is a risk you'll wrongly assess how much money you have available. For example, your accounts will not include outstanding bills that have not been processed.

Some financial accounts include a mixture of cash and accrual accounting, which can lead to further confusion. When preparing and reading financial statements, it is important to understand what's included and what's not.

There is no one method of bookkeeping. Small organisations may use a paper-based system, but larger organisations will use a software package. Spreadsheet programs may not have the security of tailored packages, in that anyone can alter a figure.