Dear Sir,
I am Finance Manager at an NGO.
We maintain Books of Account for All Donor Project wise separate for each donor.
Now we had an Community event (Six Monthly /Yealry). We had booked Event Expense in one head ” Community Event Expenses Sep-20″. This Expense include Travel Expenses , Food and Snacks, Flower bouquet, Supplies etc. All with each and every bill attached with proper Excel Sheet details. Now Auditor raised query that we should book Expenses “Nature wise” Like for- Food Expenses , Travel Expenses, Transport Expenses, Supplies expense all this in different Head Under Community Event Expenses. We told them we could not do so as their are many recurring program expenses at different project’s and diffreenet Funder.
Please Advice is their any specific requirement to provide the Expenditure Nature wise also to CA/Auditor laid by ICAI.
Thanks
Amar
Dear Amar,
A very interesting query, you have raised. There are no statutory requirements, except in case of S.8 company, which needs to follow Sch III. Issue raised by you, if expenses under a NPO should be classified based on Natural Heads (as per the natural names of the expenses), as your auditor is suggesting or should it be based on functionality (i.e. purpose of the expenditure). There is a Technical Guideline issued by ICAI, though a bit dated. Last version available is of 2009. On Page 27, it gives recognition criteria for expenses. It classifies expenses under four broad heads: Programme Implementation Expenses, Administration Exps, Salaries & other personnel costs and Non-monetary exps., such as depreciation, etc. Please note Technical Guide is for Guidance and not mandatory, however from above it can be made out that an NPO is expected to disclose its Programme Implementation Costs. Thus function-wise expenses that you have shown are nothing but Programme Implementation Exps. and hence can be disclosed accordingly. Many NPOs show these grant-wise, since they need to disclose expenditure incurred under different Grants.
For comparison with commercial organisation, only analogy, I can offer is that in case of a manufacturing company, most of the manufacturing costs are shown as Direct Costs, with the purpose to come out with Gross Profit. In most such companies normally what most people show after Gross Profit are really administrative or support costs of the main manufacturing function.
Similarly in case of an NPO, Programme Costs are the cost of core function that they perform (programme implementation) and hence should be disclosed as such to indicate how much of Grants have been used for programmes. I have observed, lack of such disclosure can result in adverse observations as they start having doubts about the charitable nature of the NPO, as most costs disclosed are similar to what are there in a commercial organisation. Hope this helps.
Also the same expenditure head could be used for different projects if you assign project ids to your projects. Accounting software these days have this functionality. This way you will be able to distinguish betweenTravel expenditure charged to project X and Project Y.
Dear Amar,
It is always a good practice to have specific accounts head for various category of expenditures. An activity/project could contain various expenditure and showing all these activities under one activity head and maintaining the expense items excel sheets might not be considered keeping appropriate accounting record because the auditor might find it difficult to establish proper audit trail if expenditure heads are maintained in excel sheets as excel sheets are easy to manipulate.
Proper accounting heads should be identified and a Chart of Accounts should be prepared based on which expenditures should be booked. This will help in maintaining integrity of the accounting records (based on internal control capability of the accounting software) for e.g. if any figures needs to be modified in an expense head, there will be corresponding modification entry which is not possible in an excel sheet.
Further expense head wise accounting will make it easy to retrieve accurate information about expense pertaining to that head for informed decision making. For e.g. if you have multiple projects and you want to know how much is the total travel cost at organisation level then you can easily retrieve such information directly from the system if expenditures are booked on expense head instead of project/activity name.
The auditor might have asked for the details to satisfy himself before certifying the expenses. But, there are some other questions. Whether the money spent for the community event is from local fund or FC, whether that expenditure is approved by the donor in the project proposal? If so, the expenses have to be shown under that particular project, while filing FCRA Annual return.