I’m a bit of a newbie (inexperienced non-accountant) and need some advice.
I’m the treasurer of a Beekeeping Club and we use Manager.io for all our accounting. We have a number of bank accounts (working and savings and PayPal) and a small cash account (money tin for people still unable to use the internet). We use cash accounting in all our reporting. It’s all working very well.
The club committee has recently resolved to ‘set aside’ 5% of our membership fees (in an ongoing accumulative basis) to go towards a fund that is to be used to support local beekeepers through natural disasters such as bushfires, floods etc. This ‘fund’ may build over a few years and then be partially, or completely, depleted in a short space of time. The severity, nature and timing of those disasters is not known in advance.
How do I reflect those ‘special reserved use funds’ in Manager? I had thought of going down to the local bank and creating another bank account (and periodically transferring 5% of membership dues from our other accounts) - but I’d rather not do that if I don’t have to. I’d rather just keep track and report the value of that ‘fund’ than having a seperate physical bank account for it.
I had thought of creating some sort of ‘Natural Disaster Liability Account’ and periodically adding liabilities to it - but - I don’t know how to do that and, I’m still not sure it’s the right way to go…
Suggestions/guidance would be very much appreciated.
First, do not setup a liability account for this; this is an internal restriction on spending funds, so you truly can’t have a liability because the committee could always change their mind and direct the money to be used for the club’s benefit (it’s also not possible with the basic mechanics of accounting; you cannot credit cash and credit a liability at the same time ).
The easiest thing to do may be to see if the bank you already have the club’s accounts with will allow you to setup “funds” within a single account. Some banks are now offering such setups and this would allow you to separate the 5% out, but without having to setup a new account, or do anything differently in Manager.
If that’s not an option, you could setup a new bank account in Manager for the 5%, and then use a Control Account to group the 5% account and source bank account the funds are transferred from. This will allow you to keep both Manager accounts in a single line item on your Summary page and Balance Sheet to easily match to your bank’s records, but let you see the breakout when you click through the balance. The tradeoff would be, if you’re using Manager’s Bank Reconciliation tab, you would have to adjust how you record the reconciliations.
If you could offer some more about how you have Manager setup, I’m sure we could come up with other, or more refined suggestions. Hope this helps.
Thanks for your reply. Thanks also for the basic accounting lesson The liabilities thing did seem a bad idea - even for a beginner like me.
I like the idea of a Control Account. I do use the Bank Reconciliation utility - but only as a check on my own work and not as a reporting tool or anything like that. I do realise that I’d have to use the total of the two accounts when performing a check like that. I guess I’d have to keep an eye on the ‘balance after import’ figure that’s reported when I’m importing a bank statement (another of my favourite checks).
I reckon I’ll run a test on that and see how it goes.
Thank you for your time and your advice; it has helped. Much appreciated.
@StephenJ there’s absolutely no reason why you cannot apply bith @p4unger and @AJD methods, one of them helps with liquidity management and the other with bookkeeping.
@AJD suggestion would be my preferred option except when you need the funds.
The funds would be spent from the bank account so instead of the second journal do a payment.
Cr Bank
Dr Natural Disaster Reserve.
Otherwise the payment would need to go to a P&L account which may distort your club’s reporting.
The reserve is an alternative to a trust account.
Payments from it wouldn’t be P&L related as they aren’t a club operating expense.
They are a distribution of the reserve.
Your first journal sets up the reserve by transferring “funds” out of retained earning.
But your second journal cancels the reserve, by returning “funds” back to retained earnings.
However the funds have been expended, not retained.
In my opinion, disaster relief is not one of the core functions of the beekeeping club. As far as I understand, disaster relief has no other purpose than to provide money.
Therefore, depositing the 5% from the subscription fee can only be done if the loss and profit position and the balance sheet allows it.
My advice would be, annually transfer the amount to the balance sheet item [Natural Disaster Reserve] upon approval of the annual financial statements and validated by the board.
As AJD wrote:
CR Retained Earnings
DR Natural Disaster Reserve
If disbursement from this reserve is required, do so on a case-by-case basis. I assume that any request for disbursement from this reserve must be validated and approved by the board, and that the affected beekeeper will receive money, not goods purchased by the beekeeping club.
As Brucanna wrote:
Cr Bank
Dr Natural Disaster Reserve.
It becomes a function of the bookkeeping club as soon as they choose to spend money on it.
In my opinion it is no different to a business donating to a charity.
It may have tax implications
It may have a marketing benefit
It does involve share holders funds
Expenditure trends over time are important
It effects club cash reserves (even if it is donated for a range of purposes [more than one disaster may occur relevant to a bookkeeping club])
It is a business expense
I agree it need member support for the expenditure but so does every other expense
It can actually be done quite easily.
A receipt/payment to income/expense account(s)
A journal entry between the liability account(s) and the retained earnings to ensure the transaction effects a specific balance sheet account not the general retained earnings pool.
In practice I combine both 1 and 2 above into a single payment/receipt as it better documents the overall transaction (a journal entry balances credits and debits so adding all the journal entry line items to a payment/receipt doesn’t change the total). As the transaction does become longer, I find Manager clone facility useful for subsequent entries.
I mostly use this technique when working with capital account owners funds to ensure both the overall businesses accounts and individuals accounts are accurately recorded.
Correct. In fact, in the US, our GAAP requires treating the expenditure as a P&L expense. It is not considered a trust or agency account because the variance power will rest with the club.
Okay…I suppose you have me there . You can do;
Dr. Expense / Cr. Cash
Dr. Retained Earnings / Cr. Reserve
I just meant to say; in basic principles, you can’t do;
Cr. Cash / Cr. Liability as a direct entry
Why can’t you, this Natural Disaster Reserve is nothing more then an accounting provision.
Which is no different to a Dividend or Taxation accounting provision and they can certainly be paid : “Cr. Cash / Cr. Liability as a direct entry”.
It’s a pity you didn’t correct @p4unger when they first posted that error instead of correcting my quoting of the error. Anyhow, it doesn’t change my response which is edited below.
I did not correct @p4unger because their post was correct: you cannot make a credit/credit entry. You were the one who asked why that was not possible.
In fact, the reality is, that @p4unger post is incorrect as the model that they used to make that “credit/credit entry” assertion is flawed as you can’t double deduct the one expense item.
Their model was:
1st line - Dr Expense > which reduces profit
2nd line - Dr Retained Earnings > which reduces accumulated profit.
So how can the one expense item reduce / impact profit twice. Now lets put that model to work.
Lets assume that the club has already setup its reserve of 5000 with:
Dr Equity > Retained Earnings 5000
Cr Liability > Disaster Fund Reserve 5000
Now taking the 1st line of the model “Dr. Expense / Cr. Cash” for an expense of 1000 you have:
Dr P&L > Expense 1000
Cr Asset > Bank account 1000
Now taking the 2nd line of the model “Dr. Retained Earnings / Cr. Reserve” you have:
Dr Equity > Retained Earnings 1000
Cr Liability > Disaster Fund Reserve 1000
So please explain, how can the Disaster Fund Reserve increase from 5000 to 6000 when 1000 of that Reserve has been spent. Wouldn’t it have actually decrease from 5000 to 4000.
So the model should have been:
Dr. Expense / Cr. Cash Cr. Retained Earnings / Dr. Reserve
So then the assertion becomes:, or should have been
I just meant to say; in basic principles, you can’t do;
Cr. Cash / Dr. Liability as a direct entry.
).
The liabilities thing did seem a bad idea - even for a beginner like me.
. You can do;