Home / Articles / Minimizing year-end financial adjustments

Minimizing year-end financial adjustments

June 23, 2021

Share:

If your not-for-profit periodically prepares internal financial statements for your board, you may have noticed that your auditors propose adjustments to these interim statements at year end. Why do auditors do this? Generally, it reflects differences due to cash basis vs. accrual basis financial statements. But you can help with minimizing year-end financial adjustments. Here’s how.

Cash basis accounting

Under cash basis accounting, income is recognized when you receive payments and expenses are recognized when you pay them. The cash “ins” and “outs” are totaled (generally by accounting software) to produce the internal financial statements and trial balance you use to prepare periodic statements. Cash basis financial statements are useful because they’re quick and easy to prepare and they can alert you to any immediate cash flow problems.

The simplicity of this accounting method comes at a price, however: Accounts receivable (income you’re owed but haven’t yet received, such as pledges) and accounts payable and accrued expenses (expenses you’ve incurred but haven’t yet paid) don’t exist.

Accrual basis accounting

With accrual accounting, accounts receivable, accounts payable and other accrued expenses are recognized when they occur, allowing your financial statements to be a truer picture of your organization at any point in time. If a donor pledges money to you, you recognize it now when it’s pledged rather than waiting until you receive the money — which could be next month or next year.

Generally Accepted Accounting Principles (GAAP) require the use of accrual accounting and recognition of contributions as income when promised. Often, year-end audited financial statements are prepared on a GAAP basis.

Reasonable estimates

Internal and year end statements also may differ because your auditors proposed adjusting certain entries for reasonable estimates. This could include a reserve for accounts receivable that may be ultimately uncollectible. Another common estimate is for litigation settlement. Your organization may be the party or counterparty to a lawsuit for which there’s a reasonable estimate of the amount to be received or paid.

We can help you reduce disparities between monthly or quarterly statements and those prepared at year end by maximizing your accounting software’s capabilities. Also, we can work with you to improve the accuracy of estimates so you are minimizing year-end financial adjustments. Contact us.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.

Guidance

Related Articles

Article

2 Min Read

For nonprofits, quid pro quo isn’t a simple exchange

Article

2 Min Read

Unique Entity Identifier (UEI) Has Replaced the DUNS Number

Article

2 Min Read

Nonprofits: Tips for getting the grant

Article

2 Min Read

Support your nonprofit’s financial plans with board designations

Article

2 Min Read

NFP Experts Discuss: How Should Our Nonprofit Handle Cryptocurrency Donations?

Article

2 Min Read

Time to Increase Your Internal Audit Awareness

Get in Touch.

What service are you looking for? We'll match you with an experienced advisor, who will help you find an effective and sustainable solution.
  • Hidden
  • This field is for validation purposes and should be left unchanged.