If you’re not an accountant yourself, it can be hard to hire a qualified bookkeeper. How can you tell if an applicant really knows bookkeeping? CPA Dennis Walsh created this terrific assessment test you can give candidates for bookkeeping and accounting jobs. We especially like the chart at the end that shows what training is called for based on which questions were answered correctly or incorrectly.
We recommend that you give an applicant 20 minutes to complete the assessment test. The ability to make accurate choices under time pressure is an important indicator of suitability for this type of work.
The Nonprofit Bookkeeping Assessment Test
1. Which of the following regarding the Statement of Financial Position is true?
a) It is also known as a balance sheet
b) It typically covers a one-year period
c) It includes expenses by functional category
d) Both a and b
2. Under the accrual method of accounting, a donor pledge that is supported by verifiable documentation is recorded in the period the pledge is made.
3. Which of the following are typically included in the bank account reconciliation?
a) Bank service charges
b) Outstanding checks
c) Deposits in transit
d) All of the above
4. Which of the following is included in the Statement of Activities?
a) Total fundraising expenses
b) Cash in bank
c) Cash flows from investing activities
d) None of the above
5. Which of the following is an example of a source document?
a) Volunteer time sheet
b) Purchase order
c) Donor pledge card
d) All of the above
6. Costs of operating a vehicle for both program services and organization management should be included within which functional expense category?
a) Program services
b) Management & general
c) Allocate between program services and management & general on a reasonable basis
7. Which of the following is an example of an indirect cost that should be shared among functional expense categories?
a) Salary and benefits of the executive director who spends time on program, management, and fundraising duties
b) An information packet to be distributed to program recipients
c) Costs of producing a brochure advertising the annual fundraising dinner
d) Costs of lunch for a board meeting
8. In December 2010, organization X, a nonprofit using a calendar fiscal year, received a grant of $10,000 with donor instructions that it is to be used for general operations in 2011. In which category of support should the grant be classified on X’s Statement of Activities for the year ending December 31, 2010?
a) Unrestricted contributions
b) Temporarily restricted contributions
c) Permanently restricted contributions
d) The grant funds should be reported as deferred revenue liability in the December 2010 financial statements and reclassified as an unrestricted contribution in 2011
9. Which of the following statements regarding a trial balance is true?
a) A trial balance must be prepared by a CPA
b) A trial balance is the last item performed in the bookkeeping cycle
c) A trial balance assures that the general ledger is in balance before creating any adjusting entries needed for financial statement preparation
d) None of the above
10. Which of the following should be charged to an expense account?
a) Purchase of a small lot for parking
b) Purchase of an office computer
c) Replacement of a paratransit van engine and transmission
d) None of the above
11. One of the following statements regarding the chart of accounts is true. Which one is it?
a) Accounts are listed in alphabetical order
b) A properly designed chart of accounts helps assure appropriate and consistent classification of transactions
c) Designing the chart of accounts does not require any specialized accounting knowledge
d) A chart of accounts is not necessary with most software-based bookkeeping systems
12. All of the following statements about a contribution confirmation needed by a donor for tax reporting are correct except:
a) It may be sent by email
b) It should include the donor’s name, address, and separately list any single contribution of $250 or more
c) It must be sent by January 31 of the following year
d) It must state whether any goods or services were provided in exchange for the donation
13. Within which functional expense category should legal and accounting fees be classified?
a) Program services
b) Management & general
d) Allocate to each of the above categories on a reasonable basis
14. When possible, which of the following duties should NOT be performed by the bookkeeper, but should be done by someone else?
a) Preparing a purchase order
b) Approving an invoice for payment
c) Receiving a delivery of goods
d) All of the above
15. Which of the following sources of income are classified as a contribution (donation)?
a) A gift accompanied by restrictions as to its use
b) Program service revenue
c) Interest income
d) None of the above
16. Which of the following is an example of a poor internal control practice?
a) The bookkeeper stamps checks received with a restrictive endorsement at the time the bank deposit is prepared
b) The monthly bank account reconciliation is performed by the board treasurer
c) Checks must be signed by both the bookkeeper and treasurer
d) Both a and c
17. A donation of non-cash property is recorded at which of the following values?
a) The amount the donor paid for the property
b) The current fair market value of the property
c) Donations of non-cash property are not recorded on the books
d) Either a or b
18. Which of the following is not an example of an expense account?
a) Office supplies
b) Accounts payable
d) Bad debts
19. The balance of loans and other liabilities are presented on which of the following financial statements?
a) Statement of cash flows
b) Statement of activities
c) Statement of financial position
d) Statement of functional expenses
20. Which of the following statements about the IRS form 990 series is true?
a) The Form 990-N e-Postcard may be used by organizations with less than $50,000 of gross income
b) If the organization fails to file an appropriate form 990 for 3 consecutive years, it will automatically lose its tax-exempt status
c) Form 990 must be made available for public inspection
d) All of the above
21. Hands-on math: Please add the following dollar amounts and provide the correct total (provide a calculator or adding machine):
It’s not possible for any 21-question quiz to guarantee competency as a nonprofit bookkeeper. This is not attainable in a 21-question test. The quiz is deliberately short so that it doesn’t require a good deal of time for quiz takers, for scorers, or for comparing results among individuals.
That said, this is not an easy quiz and completion within 20 minutes with a score of 75% or better (16 correct) likely indicates that the individual has sufficient knowledge to perform most bookkeeping duties for a typical nonprofit. However, the quiz cannot test a person’s ability to apply such knowledge in a work setting.
Remember that not all questions have the same weight. Look less at the total score than to see which questions were answered correctly. The grid below may give you additional insight about areas where training is needed. A lower score for nonprofit bookkeeping relative to general bookkeeping may indicate a need for training in nonprofit accounting issues.
In addition, we have highlighted revenue recognition and functional expenses in particular. These present unique issues for nonprofits and represent a high incidence of financial statement error and omission. Mark each blue-shaded field for which the corresponding question was answered correctly, and then total the correct number of responses for each column.
|General bookkeeping knowledge
|Nonprofit bookkeeping knowledge
1) a is correct. The statement of financial position, also known as a balance sheet, is a “snapshot” of the organization’s assets, liabilities, and net assets as of a specific date. By contrast, the other nonprofit financial statements report activity covering a period of time.
2) a is correct. Under the accrual method, a donor pledge is recorded at the time the pledge is made, assuming that it represents an unconditional promise to give and is adequately documented.
3) d is correct. These are the most common items of adjustment on the bank account reconciliation.
4) a is correct. The statement of activities reports revenue and expenses, including expense totals for the functional categories program services, management & general, and fundraising. Membership organizations often use a fourth functional expense category for member development costs. The statement of activities is the nonprofit equivalent of a profit and loss statement. Cash in bank is reported on the statement of financial position, also known as a balance sheet. “Cash flows from investing activities” is reported on the statement of cash flows.
5) d is correct. A source document is the evidence that supports creation of a bookkeeping entry.
6) c is correct. Such costs can be reasonably related to both program and management activities and should be consistently allocated based on an appropriate “cost driver” such as a mileage log or hours of use.
7) a is correct. An executive director typically spends some amount of time in program, management, and fundraising functions. Costs relating to this position would therefore be allocated among these areas on a rational and consistent basis, usually on relative time spent. The other costs are all examples of direct costs to be fully assigned to the respective functional class.
8) b is correct. The grant is accompanied by a donor-imposed time restriction requiring that the funds be used in 2011 and should be classified as temporarily restricted revenue on the statement of activities for the year-ended December 31, 2010.
9) c is correct. Answer c accurately describes a purpose of trial balance preparation as part of the bookkeeping cycle.
10) d is correct. All of the answers are examples of common capital expenditures. Repairs of a major nature that result in an increased to the asset value or extends the life of an asset, such as the replacement of a van engine and transmission, should generally be capitalized as an addition to the asset cost and depreciated over the remaining useful life.
11) b is correct. A sound bookkeeping system starts with a properly designed chart of accounts regardless of whether the system is manual or computerized. Accounts are listed in the order of financial statement presentation. It is important that a nonprofit chart of accounts be designed by someone skilled in nonprofit accounting.
12) c is correct. While it is generally best to send this information no later than January 31 of the year following the contribution, there is no specific due date. A donor may obtain this information at any time prior to filing his or her tax return. Many nonprofits prefer to acknowledge contributions at the time of receipt.
13) b is correct. Expenses that are not for fundraising activities and that cannot be directly or indirectly associated with any program activity fall into the management & general category of functional expenses. Costs such as legal fees, accounting, board meeting expenses, and a portion of the executive director’s salary are common examples.
14) d is correct. A basic objective for good internal control is to segregate duties involving authorization of transactions, bookkeeping, independent reconciliation, and access to assets. Small nonprofits tend to be challenged in segregating duties because of inadequate staffing and board members may need to assist with some key control duties. Preparing a purchase order or approving an invoice for payment are authorization functions that are incompatible with recordkeeping. Similarly, receiving a delivery of goods involves access to assets by a person involved in the bookkeeping functions of recording purchase and inventory transactions.
15) a is correct. A gift, even if accompanied by a donor-imposed restriction, is nevertheless reported as a contribution. Contributions reported on the face of the statement of activities must be separated into unrestricted, temporarily restricted, and permanently restricted categories. Program service revenue represents an exchange for the performance of services and is therefore not a contribution.
16) d is correct. Checks should receive restrictive endorsement at the time received, not at the time the deposit is prepared. The bookkeeper should not be handling cash received or preparing the deposit. Also, the bookkeeper should not have access to the checking account and this practice defeats the benefit of a second signature requirement. In contrast, preparation of the bank account reconciliation by the treasurer provides for reconciliation by someone independent of cash handling functions.
17) b is correct. Under generally accepted accounting principles (GAAP), non-cash contributions are recorded at their fair market value as of the time received.
18) b is correct. Accounts payable represents the total balance of unpaid amounts to vendors and other creditors as of the statement of financial position date. Under accrual accounting, amounts included in the accounts payable balance are recognized in the appropriate expense account in the period the expense is incurred.
19) c is correct. The statement of financial position includes liabilities of the organization as of the report date.
20) d is correct. IRS Form 990-N, known as the “e-Postcard,” is an online information return that may only be filed by organizations with less than $50,000 of gross income. An organization that qualifies to file Form 990-N may choose instead to file Form 990-EZ or the longer Form 990 if it wishes to provide more information about its activities, finances, and governance. Failure to file an appropriate Form 990 for 3 consecutive years will result in automatic revocation of tax-exempt status. Form 990 must also be made available for public inspection.
21) Total should be $3,500,770.05
For nonprofit bookkeeping training, consider the following resources:
- Local community colleges are often a great place to obtain basic accounting and bookkeeping training without having to enter into a degree program. It’s less likely that they’ll have nonprofit-specific classes, but under supervision of an experienced nonprofit accountant, a person with generic bookkeeping skills can learn quickly.
- Many nonprofit technical assistance providers and nonprofit associations sponsor workshops, link to training resources from their websites, and sell training materials through an online bookstore. Ask your local community foundation or United Way for your local nonprofit providers.
- The American Institute of Certified Public Accountants and state CPA societies sponsor self-study and live seminar resources on a variety of nonprofit financial management topics.
- And of course, Blue Avocado.
- How to Hire a Great Accountant for Your Nonprofit
- A Board-Staff Agreement for Financial Accountability
- Seven Ways to Reduce Your Audit Costs
Editor’s note: We couldn’t get Dennis to include this question, so we’re testing you here: In what movie does Cher play a bookkeeper?
About the Author
Dennis Walsh, CPA, volunteers his post-retirement time helping North Carolina nonprofits with accounting concerns, work for which he recently received the Community Service Award from the Guilford Nonprofit Consortium. He shares his expertise nationally with nonprofits through Blue Avocado. Through the Deborah and Dennis Walsh Foundation, he has also published “Legal & Tax Issues for North Carolina Nonprofits” and Man From Macedonia, a memoir by civil rights leader Aaron Johnson. Dennis also authored the Blue Avocado article Nonprofit Bookkeeping Test, which is one of the ten most viewed Blue Avocado articles of all time. Dennis can be reached through the Micah Project. A version of this article was published by the Planned Giving Design Center.
Articles on Blue Avocado do not provide legal representation or legal advice and should not be used as a substitute for advice or legal counsel. Blue Avocado provides space for the nonprofit sector to express new ideas. Views represented in Blue Avocado do not necessarily express the opinion of the publication or its publisher.