The August and November 2024 Nonprofit Connection newsletters included articles about best practices for segregation of duties related to the cash receipts, cash disbursements, payroll, and financial close processes. This article will cover documentation related to each of these processes and the reasons it is important to retain proper documentation.
Proper documentation for accounting records helps organizations maintain a clear and organized financial trail and provides evidence to support financial decisions. Below are additional reasons why documentation for accounting transactions is so important:
- Ensures accuracy and completeness – Proper documentation provides the evidence to verify figures recorded in the financial records. Without documentation, there is risk of errors, misstatements, or omissions in the financial records.
- Supports financial transparency – When transactions are well-documented, it is easier to understand the flow of funds and how resources are being allocated.
- Facilitates audits and reviews – Auditors rely on proper documentation to verify the accuracy of financial records. It also serves as a trail of evidence that auditors can follow to validate financial activities of the organization.
- Ensures legal and regulatory compliance – Generally Accepted Accounting Principles require organizations to maintain adequate records of all transactions. The Internal Revenue Service (IRS) requires financial records to be maintained for at least three years after the Form 990 is filed. Failure to maintain proper records can lead to penalties, fines, or even legal action.
- Prevents fraud and errors – When transactions are properly recorded and supported by appropriate documentation, it is more difficult for individuals to manipulate financial records. Well-maintained documentation also allows for easier identification of discrepancies or inconsistencies.
- Provides a historical record – Documentation serves as a historical record of an organization’s financial activities. In the event of disputes or disagreements with vendors, clients, or others, having clear and reliable records can provide evidence to support claims and help resolve conflicts.
Next, we will identify the documents to retain related to each internal control process from the previous newsletters.
Cash receipts process documentation – Documents that should be retained related to the cash receipts process include, but are not limited to, customer sales order forms, invoices sent to customers or clients, copies of checks received, copies of donor letters received with contributions, ACH payment confirmations, and bank deposit slips. If your organization receives significant contributions with donor specific purposes, but with no donor letters, it is important to reach out to the donor to request a letter stating their intended purpose of the contribution. This letter should be retained as supporting documentation to show if the contribution has a restricted purpose or if it can be used for general operations.
Cash disbursements process documentation – Documents that should be retained related to the cash disbursements process include, but are not limited to, purchase orders (if applicable), vendor invoices, and copies of the checks paid.
Payroll process documentation – Payroll documentation to retain includes, but is not limited to, payroll summaries by employee for each pay period and full year, time cards for each employee supporting the amount of hours paid each pay period, and documentation of authorized pay rate. Organizations should prepare and retain documentation of authorized pay rates for all employees. This documentation should include a start date for the pay rate, the amount that will be paid (annually if salary or per hour rate if hourly), and should be signed by the employee and a member of management.
Financial close process documentation – The Organization should retain copies of all account reconciliations that are prepared. It is also important to retain supporting documentation for all reconciling items on prepared reconciliations. Examples of this could be vendor invoices and subsequent statements showing clearing of transactions. The Organization should also retain documentation for manual journal entries that are recorded throughout the year.
Although not all inclusive, other documentation that is important to retain includes:
- Articles of incorporation
- Tax-exempt status elections and letters
- By-laws
- Board meeting minutes, including meetings of board committees
- Written policies and procedures
- Grant agreements
- Lease and loan agreements
Documentation can be stored electronically or in paper format, as long as it is easily accessible. Some organizations may not have space to store paper documents for multiple years, in which case original documents can be scanned and retained in electronic files. Some accounting software programs also allow you to attach documentation directly to transactions within the software. If original documents are scanned and saved electronically, it will also be important to make sure those electronic files are backed up appropriately, either on an external device or in the cloud.
Documentation is a cornerstone of sound accounting practices. From ensuring the accuracy of financial records to facilitating audits and ensuring compliance with regulations, proper documentation is essential for all organizations. Organizations must prioritize accurate and organized record-keeping as part of their overall financial strategy to ensure long-term success and sustainability. If you have any questions in regards to documentation of transactions for your organization, please contact your Hawkins Ash CPAs representative.
Our recommended retention schedule can be found here: https://www.hawkinsash.cpa/recommended-record-retention-schedule/
