You are talking to your accountant and he loses you or you lose him. All because he uses words that sound Greek to you. When you tell him you are confused, he is sometimes hard pressed explaining what he means.
The two of you need a common basis for communication.
Here’s a list of the most common financial terms and their meaning. Study them so that next time you meet with your CPA, his talk will not go above your head and you will have a more productive meeting.
Accounts payable
An organization’s unpaid bills.
Accounts receivable
Income already promised or earned but not yet received by an organization. Can be further specified, for example, grants receivable, contracts receivable, pledges receivable.
Accrual
The recognition and recording of income when earned and expenses when incurred.
Activity
A core element of the nonprofit organization, for example, key programs, administration, and fundraising. See also allocation, common costs, specific activity costs.
Activity by funding source report
A report that shows how costs for a particular activity are covered by multiple funding sources.
Administrative activity
The finance, legal, board-related, and general oversight of a nonprofit organization.
Allocation
The process of spreading costs to two or more activities. See also activity, allocation basis.
Allocation basis
The rationale for allocation percentages, for example, number of full-timeequivalents (FTE) per activity or total costs before allocation. See also allocation.
Assets
The properties or resources the agency owns and uses, for example, cash, investments, receivables, and equipment. Assets are found on the Statement of Financial Position. See also liquidity.
Audit
The process completed by an auditor that results in an issued opinion on whether year-end financial statements reflect the actual financial activity and condition of the organization for the time period in question.
Balance sheet – (See statement of financial position.)
Below-the-line allocation
The process of allocating total common costs proportionately among the activities of the organization. See also common costs and allocation.
Budget
The organization’s plan expressed in dollars (income and expense). Allows the organization to track actual performance against an approved plan.
Budget manager
The staff or board person responsible for collecting information for the budget and building the drafts for staff/board review.
Capitalization
The recording of an item as an asset rather than as an expense when it is purchased. See also depreciation.
Cash basis of accounting
The recognition and recording of income and expenses only when the cash (income) is actually received and the bills are actually paid (expense).
Cash flow
The timing of cash receipts and disbursements.
Chart of accounts
The numerical system for tracking assets, liabilities, net assets, income, and expenses in an accounting system. Drives the reporting capacity of an organization.
Common costs
Those costs that benefit more than one activity and that are not easily identifiable with a single activity. See also activity.
Contingency budget
A budget created to anticipate a potential change to the organization’s primary budget, for example, the development of a second budget to be considered if a large grant comes in half-way through a fiscal year.
Contracts receivable
See accounts receivable.
Current assets
Those assets that are cash or can be converted to cash within one year.
Current liabilities
Those liabilities that will be paid within one year.
Current ratio
A comparison of an organization’s current assets to its current liabilities; indicates the ability to pay bills and meet financial obligations. See also current assets and current liabilities.
Deficit
Expenses in excess of related income.
Depreciation
The process whereby the cost of a capitalized item is allocated across the years of its useful life. See also capitalization.
Depreciation schedule
A spreadsheet for tracking the purchase of capitalized items and their depreciation status.
Diversification
In reference to nonprofit income, this means having a variety of funding types and sources so that an organization is not unduly dependent on a handful of sources.
Earned revenue
Income that the organization obtains through exchange transactions such as fees, ticket sales, and certain but not all government contracts.
Endowment
A fund permanently restricted by the donor. Interest generated may be unrestricted, temporarily restricted, or permanently restricted.
Fiscal year
The organization’s business year, that is, January through December or July through June.
Fixed assets
Assets with a prolonged useful life such as equipment, land, and buildings.
(Click here to read Part 2 of this glossary.)
Photo: “The financial statements were improved this year” by Stephen Day, c/o Flickr. Some Rights Reserved