Liabilities Make the World Go ‘Round
“Today, there are three kinds of people: the have’s, the have-not’s, and the have-not-paid-for-what-they-have’s.” ~Earl Wilson
When it comes to nonprofit organizations, nearly all fall into the “have-not-paid-for-what-they-have’s” category, even if managers are scrupulous about paying everything on time. That’s because at any given point in time, a nonprofit organization with active operations in pursuit of its mission likely owes somebody for something!
The Big Picture
In the big picture of the balance sheet, Assets = Liabilities + Net Assets. Basically your organization owns stuff (cash, receivables, fixed assets, investments, etc.) which are financed either by debt or by owning it outright.
Many nonprofits take pride in having almost no liabilities. But even the most debt adverse nonprofit, if it has employees, will have accrued payroll liabilities.
Employees are typically paid AFTER they have performed services. So at any given point in time, if your organization has employees, you owe these folks for the work they have done since the work they were last paid for.
Even more importantly, you owe the IRS for the related payroll taxes.
(“The trick is to stop thinking of it as ‘your’ money.” – IRS auditor)
Unpaid wages and payroll taxes are referred to as accrued payroll. If you’ve ever had an audit done, you know that one of the year end entries is to record a liability for accrued payroll.
It’s funny — sometimes we have asked an executive director for the pay periods for the hourly employees and the salaried employees, since they are often different, and we get either a blank stare or the same answer for both. Often hourly people are paid weekly or every other week for a pay period that ended a week ago, while salaried employees have a pay period that ends on the last day of the month. You know what you are paying salaried employees so you don’t need any lead time to crunch the numbers. If an employee leaves, it’s handy to know how many days or hours they have worked in the current pay period so you know how much their last check is. Knowing the pay periods is also essential to figuring out the unpaid payroll liability at fiscal year end.
Liabilities to Vendors
Another liability that’s hard to keep at zero is bills owed to vendors. At any given time, if your organization has regular ongoing operations, you probably owe vendors for various services or merchandise. Examples of payables could be lawn maintenance work done last week, computer repair services performed, or supplies received but not paid for. These types of short term obligations are called accounts payable.
It can be very handy from a cash flow perspective to enter accounts payable in your accounting system. Then when you pay the bill the payable is reduced to zero and cash is reduced at the same time. The payables give the users of the financial statements notice of a claim on the cash of the organization. If you have a large amount of accounts payable, but that number is not on the balance sheet, the reader of the financial statements would think the organization is in much better shape than it actually is!
Short Term vs. Long Term
Short term liabilities are debts owed within one year of the balance sheet date. Accounts payable and accrued payroll are short term liabilities usually owed in the next 30 days.
Knowing about liabilities is important for cash management. The organization needs enough cash to satisfy liabilities when they are due to be paid.
What kinds of liabilities does your nonprofit have? Perhaps you have long term liabilities (debt owed more than one year from the balance sheet date), such as a mortgage loan on a building, in addition to the short term liabilities described above.
Chart of Accounts Grand Tour Progress
Our Chart of Accounts Grand Tour has meandered a bit, though if you’ve been following us, we have taken in most of the popular sights on the balance sheet in recent weeks. Next week we move on to our last balance sheet stop – Net Assets – and some important changes recently announced that will affect all nonprofits that issue audited financial statements. Hope you’ll join us!
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