accrual accounting. A basis of accounting in which revenue is recognized when earned and expense is recognized when incurred. Distinct from cash accounting.
accumulated depreciation or accumulated amortization. Depreciation is an accounting method by which the cost of a long-lived tangible asset (a fixed asset, typically one with a useful life of more than one year) is spread over its useful life. Each year, a portion of its cost is charged to depreciation expense on the income statement and credited to accumulated depreciation on the balance sheet. Accumulated depreciation reduces the net remaining cost of the asset on the balance sheet, and this process continues until the reported net value has been reduced to a minimum amount, known as salvage value. Various methods are used to calculate the portion of cost that is charged to expense in each year, and some tangible assets are not depreciated (notably land). Nonprofits most often use straight line depreciation, in which the asset is depreciated at a uniform rate over its useful life. Accumulated amortization functions similarly for intangible assets.
AGI. adjusted gross income. An intermediate subtotal in the calculation of an individual's taxable income, in which total income is reduced by certain statutory (Internal Revenue Code) deductions. Used as the basis for calculating a number of limitations, including the limitation on the deduction for charitable contributions.
AICPA. American Institute of Certified Public Accountants.
amortization. (See accumulated depreciation or accumulated amortization.)
annuity. An income payment of a specified amount at specified intervals for a specified period. The period may be fixed or contingent, often continuing for the recipient's life. These annuity payments are made in return for a premium that was paid either in prior installments or in a single payment. The payor is usually an insurance company, but need not be, and is sometimes a large nonprofit.
appreciation. The amount by which an asset has increased in value.
asset. Any item of economic value owned by an individual or organization. Examples include cash, accounts receivable, equipment, buildings, furniture, stocks, and bonds.
audit. An examination of financial statements by CPAs (the auditors), using generally accepted auditing standards. It normally results in the CPAs expressing an opinion on whether the financial statements are fairly stated in all material respects in accordance with generally accepted accounting principles. Audited financial statements are frequently required of a nonprofit by its funders.
board of directors. The part of an organization that is charged with governance. It may have a number of different names, such as board of trustees or board of regents.
bonded. An insurance contract whereby the insurer agrees to indemnify the policyholder if the bonded individual misappropriates the assets. When an individual has control over or access to significant valuable assets, it may be wise to have that individual bonded.
bylaws. A set of rules adopted by an organization to regulate its affairs and the behavior of its members.
churning. Excessive trading by a broker for the purpose of earning additional commissions. This practice is illegal in most jurisdictions but is often difficult to prove.
cash accounting. A basis of accounting in which revenue is recognized when cash is received for it and expense is recognized when paid. Distinct from accrual accounting.
constituents. The people involved in or served by an organization; stakeholders.
contemporaneous. Documentation is contemporaneous when it is prepared at the same time as the events being documented, rather than later. Those concerned with the reliability of documentation, such as auditors and the IRS, generally value contemporaneous documentation more highly than documentation prepared after the fact.
cutoff. In preparing financial statements, whether on the accrual or cash basis, it is important to ensure that only transactions belonging to the reporting period go into the financial statement preparation and that transactions belonging to a succeeding period are cutoff from the current period and assigned to the next one.
deferred revenue. An organization may receive funds that appear to be revenue but do not pass accounting tests to be recognized as revenue in the financial statements. Such funds are reported on the balance sheet as a liability called deferred revenue and are recognized as revenue only when they are subsequently earned.
defraud. To commit an act of fraud.
depreciated value. The net value of fixed assets on the balance sheet after reduction by accumulated depreciation.
diversification. A means of reducing the overall riskiness of an investment portfolio by investing in a variety of different assets so that the failure of any one will not be catastrophic.
diversion. Occurs when a dishonest person takes assets that belong to the organization and diverts them to his or her personal use.
easements. A limited right for another to use an owner's land, usually for a narrowly specified purpose. For example, a nonprofit may acquire a conservation easement to prevent development of a piece of land.
embezzlement. Theft by an employee.
escrow. Assets are in escrow when they are held by a neutral third party until certain contractual obligations are fulfilled.
expense. Money or other thing of value paid or obligated to be paid for goods or services (except goods with a useful life of usually one year or more, which become assets).
fraud. Intentional misrepresentation of a material existing fact with the purpose of inducing another to act in such a way that the perpetrator will receive an unearned benefit at the expense of the one defrauded.
funders. Persons and organizations that provide funds to a nonprofit through contributions and grants.
governance. Consists of the systems by which the board ensures that its policies are being effectively implemented. Usually this includes systems to monitor and record what is happening, to identify instances in which policy is not being followed, and to take corrective action in those cases.
illiquid. An asset is illiquid if it would be difficult or costly to convert it into cash within a short period of time.
imprest. An imprest fund is money given to an employee to make small disbursements; petty cash.
indemnify. To pay or agree to pay losses or expenses that one party may incur because of another. For example, a nonprofit may agree to indemnify members of its board of directors for expenses or judgments resulting from a lawsuit that results from the performance of their duties as board members.
inventory. Items owned that were acquired with the intent of reselling them or of incorporating them into items to be sold.
investor owned. For-profit organizations are owned by investors, who are entitled to share in profits earned. Contrast with nonprofit organizations, which do not have owners.
lessor. One who grants a lease; one who receives rent.
lessee. One to whom a lease is granted; one who pays rent.
levied. Imposed; for example, “additional taxes were levied to cover the city budget deficit.”
liability. An obligation for payment; for example, accounts payable (amounts due for goods and services previously purchased), notes payable (money previously borrowed), or accrued payroll (due to employees for time worked but not yet paid for).
liable. Responsible to pay or otherwise fulfill an obligation.
liquidity. The liquidity of an asset is how quickly it can be liquidated (converted into cash). The liquidity of an organization is a measure of the overall balance between current (easily liquidated) assets and current (short term) liabilities.
litigation. A legal proceeding in court; lawsuit.
lobby. To influence a decision by a legislator or other government official. Sometimes extended to mean an informal effort to influence any decision maker.
lockbox. A service offered by a bank whereby a depositor's incoming checks go directly to the bank and are put in the depositor's account without being handled by the depositor's employees.
margin. The excess of revenue over expense.
master file. Files that contain relatively permanent information about items, donors, vendors, employees, and the like. For example, the employee master file may contain an employee's identification number, name, address, social security number, and date of hire. Contrast with transaction file. For example, the employee transaction file may contain an employee's identification number, paycheck number, check date, earnings amount, tax withheld, and net check amount.
maturity. The length of time until a financial asset matures (in other words, until the time specified by contract when it must be repaid). For example, a 2 year loan made 20 months ago now has a 4 month maturity.
median. The middle value in a set of values. Not the same as average. For example, the median number is 11 in this set of numbers: 1, 2, 3, 11, 700, 800, 900.
metrics. Any number (often one calculated using two or more input numbers) used to evaluate some part of an organization's performance.
nonprofit. An entity organized for other than profit making purposes.
orientation. Initial training of new board members, employees, and the like.
oversight. Monitoring of activities and processes by those charged with governance.
payee. One who receives payment from another (the payor).
payor. One who pays to another (the payee).
Ponzi Scheme: A fraudulent investment operation in which unrealistically large returns promised to investors are in fact paid out from money that they and other investors paid in. The scheme will collapse soon after the inflow of money from new investors slows because it becomes more and more difficult to pay out the promised rate of return. Named after Charles Ponzi, who did not invent this fraud but made it famous around 1920.
prospectus. A detailed description of any new financial security and its issuer. It must be filed with the Securities and Exchange Commission as part of the process of registering the security, and it must be given to prospective purchasers before the security may be sold to them.
reconcile. To ensure that two separate parts of the financial recordkeeping system are in agreement. For example, reconcile the accounts receivable ledger by determining that its totals are the same as those on the accounts receivable summary page in the general ledger. For example, reconcile a general ledger cash account to its bank statement by preparing a list of outstanding checks and deposits in transit to account for the difference.
recuse. Originally, a judge may recuse (excuse) him- or herself from a case if he or she has a personal interest in the outcome or otherwise lacks impartiality. May apply to anyone in a decision-making role, such as a nonprofit board member.
skimming. A form of embezzlement in which an employee responsible for receiving cash or other easily stolen property steals a portion of it. Because the theft occurs before the property is entered into the financial system, detection is especially difficult.
SSAE. Statement on Standards for Attestation Engagements. Issued by the Auditing Standards Board of the AICPA.
stakeholder. Anyone with an interest in an organization. In the nonprofit world, examples include board members, donors, employees, grantors, vendors, service recipients, and the IRS.
stockholders. In a for-profit organization, the stockholders are the owners. Nonprofit organizations do not have stockholders.
subsidiary organization. An organization that is entirely or mostly owned and controlled by another.
subsidiary ledger. An accounting ledger that contains a particular category of accounts (such as accounts receivable, accounts payable, or payroll) and that is subsidiary (subordinate) to the general ledger, which shows only the totals from the subsidiary ledger.
transparency. Transparent organizations seek to improve their operations by acquiring better feedback and earning greater trust from their stakeholders. They do this by disseminating more information about their operations (sometimes information that in the past may have been considered internal or confidential), and they disseminate this information to a wider audience.
variances. The difference between a budget amount and the corresponding amount actually earned or received or incurred or expended. Analysis of variances can provide valuable information about how the organization is performing.
variance power. The ability to expend funds in a way that is at variance with the donor's instructions. Normally this requires particular legal language in solicitation materials.
whistleblower. An informant who exposes wrongdoing in an organization.