Lessons · Accounting · why these books are not one set of books
Why these books are not one set of books
A company has one pot of money and one question: did it make a profit. An organisation funded by grants, taxes and donations has many pots, most with conditions attached, and a different question: was each pot spent on what it was given for, and did the spending stay inside what was authorised.
Hone is a place to practise a career, one idea a day. This is one of its lessons, written out in full and free to read without an account.
In beta. This lesson was written for Hone and has not yet been checked by a qualified accountant. Practice material, not professional advice. What that means.
What it is for
It explains everything else that looks strange. Somebody arriving from commercial accounting sees separate sets of books, a balance that cannot be spent even though the cash is in the account, and a budget that behaves like a rule rather than a plan, and assumes the organisation is disorganised. It is not: it is answering a different question, and the structure follows from the question.
How to think about it
Before reading any of these accounts, ask what the organisation is accountable FOR rather than what it earned. The answer is almost always: spending particular money on particular purposes, within particular limits.
Worked example
A company: one pot, one questionDid we make a profit.
A charity: many pots, each with a purposeWas each spent on what it was given for.
A government: money authorised by somebody elseDid we stay inside what we were allowed to spend.
Cash in the bank is not the same as money you may spendWhich is the sentence that confuses every newcomer.
Your turn
Name what these organisations are accountable for, rather than profit.
They are accountable for spending particular money on its
Solve one, graded on the server
The trap
Reading a healthy total cash balance as financial strength. Much of it may be restricted to purposes that do not include the salaries due next week, and an organisation can hold a large balance and be unable to pay its staff.