Financial management and accounting
An association’s financial management is one of the most important prerequisites of the community’s functionality. Well-managed finances are beneficial to both the association’s whole membership and its Board. Financial management is regulated, and it must be done with care. If you are wondering whether this is necessary, you should think about how unfortunate it would be if your own community’s finances were organised any which way. In other words, it is about caring for, using and reporting on the property collected for the operations for the benefit of the community and its members.
A registered association is legally bound to keep accounting records, meaning it is obliged to systematically manage its finances. In addition to this, the Accounting Board (KILA) finds that in accordance with the Accounting Act, unregistered associations must also keep accounting records. Systematic financial management is hence necessary in both a registered and an unregistered association.
Responsibility over financial management
Responsibility over an association’s financial management never lies with an individual person, and nor should its monitoring be left to depend on one person alone. It is always important to acknowledge that you are dealing with the community’s property, so the community should also always be sufficiently aware of the association’s financial situation. Openness in decision-making generally also increases openness in financial matters. Just making the membership aware of the budget and financial statement confirmed by the meeting of the association is openness that increases the transparency of the operations also for the part of finances.
Meeting of the association
- Approving the budget
- Confirming the financial statement
- Sale, acquisition and mortgaging of significant portions of property and real estate
- Granting freedom from liability to accountable parties
- The association’s accounting is legal
- Financial management is organised in a trustworthy manner
- Responsibility over all finances for the operations’ part and total responsibility over decision-making
- Duty of care, duty of initiative, liability for damage
- In most cases, in charge of financial management in practice
- Total responsibility over decision-making can be broadly delegated to the treasurer. Check your association’s financial instructions, etc., if such have been approved in meetings of the Board or association
- Duty of care, liability for damage
- Careful recording of financial decisions in meeting minutes
Financial or performance auditor
- Duty of care, duty of commenting on neglect and misdemeanours, liability for damage
Duties and obligations
Duty of care
In accordance with legislation, the association’s rules and the decisions of the meetings of the association, the Board must handle the association’s matters with care and ensure that the bookkeeping is legal and that the association’s finances are organised in a trustworthy manner.
The treasurer must take care of the duties assigned to them responsibly and carefully and based on legislation, the association’s rules and decisions and the Board’s decisions.
The financial and performance auditors must handle their duties carefully, objectively and with a critical eye while taking into account the association’s members and public interest (e.g. legality).
Duty of initiative
A Board member must bring up, for example, possible flaws in the operations of the Board and/or association and to point it out if a decision or measure is contrary to law or the association’s purpose or otherwise not beneficial to the association or its operations.
Liability for damage
A Board member, association official or performance auditor is liable to compensate for damage they have caused in their position to the association intentionally or out of carelessness. The same applies to damage caused to a member of the association or another person by violating the Associations Act or the association’s rules. Neglecting duties related to a Board position may also lead to liability for damage.
A financial auditor is liable to compensate for damage they have caused to the party obliged to keep accounting records – here, a registered association – intentionally or out of carelessness when performing the audit. The same applies to damage caused to a member of the association or another person by violating the Accounting Act, Associations Act or the association’s rules. The financial auditor is also liable for damage caused by their assistant intentionally or out of carelessness.
If the financial audit is conducted by an auditing community, the community along with the person in lead charge of conducting the audit are liable for damage.
Duty of commenting
If damage has been caused to the association or its rules have been violated, this must be mentioned in the audit report. A financial or performance auditor must mention to the Board any possible smaller mistakes in the accounts, for example, so that these can be rectified.
Documents and statutes regulating associations’ finances
An association’s finances are regulated by a surprisingly large number of documents and statutes. You should not be scared by this listing, as in nearly all cases, trustworthy and appropriate bookkeeping and implementing the association’s rules suffices. The latter means to say that an association’s finances should be based on operations that are in accordance with its rules. It is questionable if, for example, the largest part of an association’s financial operations relates to something completely different to the association’s specified purpose and operations – such as an association promoting reading organising national skiing competitions.
Generally, the following should be taken into account:
- Association’s rules
- Association’s previous accounting
- Associations Act
- Accounting Act
- Accounting Ordinance (in Finnish)
- Statements by the Accounting Board (KILA) (in Finnish)
- Auditing Act
Depending on the type of operations, the following must be taken into account:
- Association’s own guiding decisions, such as financial instructions
- Income Tax Act (in Finnish)
- Business Tax Act (in Finnish)
- Value Added Tax Act
- Money Collection Act
- Decisions of aid grantor and legislation or precedents regulating these
- Official notices and possible required permits
Accounting serves to enable the observation and monitoring of finances and financial management. Accounting is a legal requirement for registered associations and highly recommended for unregistered associations due to its obvious benefits.
The purpose is for the Board to be able to manage and guide the association’s finances and for the meeting of the association, i.e. its members, to stay aware of the usage of communal funds throughout the fiscal period.
Accounting consists of various accounts, the nominal ledger – that is, the actual recording of accounting entries – and monitoring .
In an association’s accounting, primary operations and fundraising are usually separated from investment and financing operations. Not all associations necessarily have the latter. There are usually several accounts under each operation – the primary operations often contain plenty of accounts.
Remember that there is more to accounting than merely putting in numbers!
In accordance with Section 2 of Chapter 1 of the Accounting Act, a party with an obligation to keep accounting records must use the double-entry bookkeeping system, i.e. each entry is recorded to two accounts. Each entry is recorded to one account’s debit side and another account’s credit side so that the entries explain the reason for the movement of funds and the used account.
Example: The member Emma Example paid her membership fee of 100 € into the association’s bank account. In this situation, 100 euros is entered to the debit side of the account Bank Account, and 100 euros to the credit side of the account Membership Fees. Thus, the value of the Bank Account increases by 100 euros which is known to originate from a membership fee payment.
The entry chain’s continuity is an important element of accounting. This means that the accounting must be organised so that the connection of transactions, receipts and entries via possible subledgers to the nominal ledger and, from there, to the financial statement can be stated effortlessly in both directions. Hence, in practice, it should be possible to derive the 100 euros in our example from the credit side of the account entry to the returns of the Membership Fees account recorded in the profit and loss statement (and, hence, also in the financial statement). Similarly, it should be possible to derive the formation of the returns of the Membership Fees account all the way to individual entries, which would denote the membership fee paid by Emma Example.
Effect of association rules on accounting entries
The execution of the purpose in accordance with the association’s rules and its statutory operations must be a visible part of the primary operations. The various accounts formed by the rule entries are divided by fields of operations (e.g. fitness training operations, competitive sports operations or seminars and social gatherings).
The financial operations undertaken by the association to support its primary operations (i.e. to cover its expenses) must be recorded under fundraising. These include, for example, membership fees, collections, raffles, donations and grants.
Note that the line between fundraising and primary operations can be thin if the execution of the purpose specifies as support of the operations such operations that are related directly to the execution of the purpose. Hence, it is important to aim for consistency in different years’ accounting. If necessary and with conscious reasoning, it is also possible to make the entries differ from those of previous years.
- Business operations (i.e. the commercial operations mentioned in the rules, or other similar operations) can be either primary operations, fundraising or investment and financial operations. Entries should be clarified association-specifically and case-specifically. Business operations primarily refer to operations that the tax authorities have defined as taxable commercial operations. This rarely applies to financially small non-profit associations.
Accounts and accounts list
An account is an accounting tool meant for a specific type of expense and/or item of expenditure. For example, an association that collects membership fees should have an account entitled n Membership Fees. N refers to numbers being assigned to the accounts. When a membership fee is paid to the association, in accounting, this revenue is recorded to the debit side of the Membership Fees account.
There are usually plenty of accounts, and it should be possible to check them as a list in the accounts list. The accounts must also be comparable to the profit and loss statement and the budget. The profit and loss statement and the budget disclose the revenues and expenses of each account and the results of the different fields of operation, as well as the fiscal period’s final result or an estimate thereof.
Accounts should not be altered on light grounds, as it is easy to follow the planned and effective activity of each account by looking at the profit and loss statements of multiple years. Comparable accounting also simplifies the planning of future fiscal periods. If the accounts list is changed, solid reasons must be provided for this and the change must be documented in the accounting in a manner that provides unambiguous reasons for it and explains how the change affects the structure and recording of finances in the future.
Any grant or financial aid provided for a specific project is always bound by the grantor’s decision. In most project funding cases, the received grant must be used for the purpose it was applied for by a certain date or returned. No usage purpose is specified for general grants, but very strict conditions might be in place for receiving the grant.
The operating grant distributed by AYY is a general grant and can be used by the association in a manner it wishes for operations that are in accordance with its rules. However, it is advisable to use the operating grant at least for covering the costs of mandatory notices and ongoing operations.
When applying for any grant, it is always vitally important to learn about the application conditions and usage purposes set by the grantor. Careful familiarisation with the conditions at hand guarantees, for example, that applications are not made for a purpose for which the grant is not allocated or that nothing essential to receiving the grant is left out of the application. It is not advisable to leave applying for a grant to the last minute and, when planning for bigger projects, it is also good to pay attention to when the potential grant will be paid out.
Financial management documents and appendices
Accounting is based on receipts recording revenues and expenses. These are recorded in the nominal ledger. By recording the receipts, a clear and chronological chain is formed which reveals to the date each revenue and expenditure item recorded in the books. A profit and loss statement is formed from the entries and, after changes to the assets, the balance sheet is formed from this.
The balance sheet expresses the amount of assets on the date DD.MM.YYYY, while the profit and loss statement shows the changes in the association’s property for the period of DD.MM.YYYY–DD.MM.YYYY. You can find a model base for a profit and loss statement and a balance sheet here.
A budget is a plan regarding an association’s financial management, which the meeting of the association approves for the fiscal period stated in the budget in the order specified in the association’s rules in, for example, the spring or the autumn meeting. For comparison purposes, the budget should also include a column providing at least the previous fiscal period’s results.
Indeed, the budget must be comparable with other accounting documents, meaning that the budget cannot be prepared in a way that does not correspond in the least with the pattern of the previous fiscal period’s profit and loss statement, for example. Instead, a good rule of thumb is to start preparing the budget using the same template as the profit and loss statement.
An accounting receipt is proof of a money transaction related to the association’s finances, such as a purchase receipt or an invoice. It should reveal clearly and unambiguously at least which business transaction and with whom it concerns, as well as the time and the amount.
When paying by card, it should be checked that the receipt contains all of the required details and not just the seller’s name and the purchase sum. If the receipt only contains these two pieces of information, it is not a valid accounting receipt. Similarly, all pages of multiple-page invoices must be kept.
However, a receipt can be supplemented, and this is even necessary at times. Expense claim forms, for example, should call for the provision of a detailed usage purpose. If a receipt for coffee and pastries is entered into the books, this alone does not reveal how this purchase relates to the association’s operations. Instead, at its simplest, if the receipt is taped onto a hand-written note saying it is for the refreshments for the meeting of the association, the purpose of the purchase is clarified and passed on to the performance auditor, too.
Note that a fading thermal printer receipt is not admissible; instead, these must be photocopied or a permanent receipt copy requested. The receipts can be paper or electronic, but make sure they are durable enough.
The journal is often seen as the actual bookkeeping. It lists all individual accounting entries in order of receipt number, which usually also means chronology. You can check in the journal, for example, what individual expenses were recorded at Midsummer or on the last day of August.
The nominal ledger is practically a list of all accounting transactions organised per account. Hence, a combined list of all transactions recorded to the Membership Fee account, for example, can be seen in the nominal ledger. Smaller associations with only a few revenue and expense entries may not need to use a nominal ledger, as the entries can easily be found in the journal. When there are a lot of entries, the nominal ledger is a handy way to follow the transactions of an individual account.
Profit and loss statement
The profit and loss statement shows both the revenues and the expenses of each account for a specified time period. The profit and loss statement also contains the results of the (fiscal) period, i.e. its profit or loss. Often in mid-year, the profit and loss statement alone does not paint a truthful picture of an association’s finances or where they are heading, if some known revenues or expenses have not yet been recorded. This should be kept in mind when monitoring the finances. For example, an association may have used a lot of money in advance on organising a big event, but the revenues from it are only gained on the day of the event.
The balance sheet is divided into assets and liabilities. The assets and liabilities on the balance sheet should match up, i.e. add up to exactly the same amount.
The asset side is divided into fixed assets and current assets.
Fixed assets: Generate revenue over multiple years, e.g. machinery and equipment. Where necessary, their depreciation is calculated periodically.
Current assets: Batches/money that can be easily turned to cash, i.e. inventory, accounts receivable (membership fee receivables), petty cash and bank accounts, for example.
The liabilities side is divided into net assets and borrowed capital.
Net assets: Surplus of previous fiscal periods. If the surplus is negative, it is high time for the Board to take some measures.
Borrowed capital: Long-term loans (> 1 year to falling due), all debts (incl. purchases payable, accrued liabilities).
An association’s financial statement must consist of at least a profit and loss statement and a balance sheet. The rules may additionally stipulate that an annual report must be prepared, and in such cases, this is usually done in connection with the financial statement.
In accordance with the Accounting Act, the financial statement must be prepared within four months of the end of the fiscal period. The financial statement is not public, unless it is entered into the Trade Register (only very large associations) or made public by the association itself.
Read more about the financial statement here.
Fiscal period rhythm
The beginning and end of the fiscal period are stipulated in the association’s rules. The fiscal period cannot be any other than the time period stipulated in the rules, except for new associations whose fiscal period can be a maximum of 18 months. For example, if an association is founded in September and its rules stipulate that its fiscal period is a calendar year, it is advisable to only end the first fiscal period at the end of the year following its founding. In general, when establishing a new association that has little funds to begin with, it is rather advisable to take advantage of the option of a longer fiscal period to avoid wasting time on a financial statement with practically nothing in it.
The instructions below have been written with particularly those associations in mind that have two statutory meetings and whose fiscal period is 1 Jan–31 Dec. Please remember to adapt the schedule where necessary to correspond with the scheduling stated in your rules in terms of preparing the budget, for example.
Measures for the early part of the year
These measures provide an overall picture of what must be done in most associations preferably already during the first month of the fiscal period. The financial statement must be prepared within four months of the end of the previous fiscal period. The following is not a strict chronological order but rather a listing of important measures of which particularly the treasurer, but if necessary, the entire Board as well, should be aware.
1) Familiarise yourself with the association’s accounts list and take control of it.
2) Begin an accounting routine as soon as possible.
3) By the Board’s decision, transfer the usage rights of the association’s bank accounts and other possible rights specified in the bank agreement, such as online banking details and bank or credit cards, to the new operators.
4) Take care of the practical matters with the bank, e.g. transfer of account usage rights. This usually requires a visit to the bank with a copy of the minutes and electronic identification or signatures of the persons with the right to sign on behalf of the association. So, also make sure to update the rights to sign on behalf of the association with the Finnish Patent and Registration Office.
5) Piece together and clarify to yourself what the association’s liquid assets, i.e. bank accounts and cash assets, consist of. It is useful to acknowledge that all of the money on an account is not necessarily readily available, as a part of it may be restricted by an earlier decision, for example. Such decisions include, for example, the association’s own decision to save up for an annual ball or a decision accompanying funding for a project, according to which the received grant must be used for a specified purpose by a certain date or returned.
6) Spend time on getting to know the accounting tool used in the association, such as Tiltin, Procountor or Excel.
7) Piece together and clarify to yourself the assets listed on the balance sheet, i.e. for example, what the association’s inventory listed on the balance sheet consists of and what the ratio of the inventory value of things like association products is to their potential sale price.
8) Preparing and signing the financial statement must be done within four months, so it should be agreed upon whether the financial statement is prepared by the old administration or if it becomes the new administration’s responsibility. Generally, student organisations’ financial statements are in practice prepared by the old administration, primarily the old treasurer and Chair. However, the Board that currently has a quorum must sign the financial statement, even if it covers a fiscal period during which they did not hold financial responsibility.
9) When necessary, ask for your predecessors’ help with these matters and do not hesitate to turn to the Student Union as well when necessary.
Keep the accounting up-to-date each month – and more often, if necessary, depending on the scale of operations. The most important thing is for the routine not to drag too far behind the transactions, meaning you should not let the routine slip into accounting that is done every now and again. This usually leads to the materials piling up, which makes accounting more laborious. A good way to ease the process is to always record cash transactions immediately. Figuring them out afterwards can be noticeably laborious compared to other transactions.
Remember to invoice the association’s receivables each month and keep a record of the invoices as well. This way, you will not have to wonder later on whether something was invoiced in the first place or whether a reminder was sent after the due date. It is advisable to collect unpaid invoices quickly. You should also make sure that the association’s own invoices are not paid late.
Preferably, the whole Board should monitor the accounting each month. It is not always necessary to go through individual transactions – remember to keep your meetings worthwhile – but it would be good to go through at least the fiscal period’s current profit and loss statement, presented by the treasurer. You should keep an eye on the balance sheet’s development particularly in connection with acquisitions. In the meetings, the treasurer can explain any possible deviations in the profit and loss statement or the development of assets. Reporting does not require too much work, as you can usually get a profit and loss statement or a balance sheet directly from the accounting software or a well-prepared table template. When looking at the profit and loss statement, always remember to compare it to the budget. Make sure you stay within budget and, if necessary, propose a supplementary budget to the (possibly extraordinary) meeting of the association. There is reason to prepare a supplementary budget whenever there are significant changes to the expenses – especially in the case of overruns.
Measures for the end of the year
It is advisable to begin budget planning in the beginning of autumn. In budget planning, it is very important to take into account the operating plan’s effects on the budget. In other words, you should think about whether some of the following year’s projects will require special financial investment. When planning the budget, it is good to compare it to the ongoing year’s current budget and think about what will still be added to this during the ongoing year. When preparing the budget, think about what should be done differently and what will be done to the possible surplus or how to adjust to a possible deficit.
Make sure by the end of the fiscal period that everything has been invoiced and that all remaining expense claims and invoices are paid within the fiscal period. You should take care of supplementing the fiscal period when necessary. Record any accrued liabilities and receivables as well as debts and receivables. Start preparing the transfer of rights to the next operators and organise an induction for them.
Note that provisions can only be made to a financial statement for a reason based on taxation. A non-profit association can only make a voluntary provision to the extent to which it affects the dictation of taxable business income (Accounting Board).
Taxes and tax authorities
Every now and then, an association’s finances also include rarer and often occasional factors like taxes. It is good to be aware of these, but do not let them scare you. In most cases, you will survive as long as your association does the things it exists for.
In these cases, e.g. business income should be taken into account, which is generally other than income supporting the association’s primary operations. It is advisable to check and ask the Tax Administration about this whenever you are the least bit unsure. An unregistered association’s revenue is divided to the association’s members for taxation.
You can read about this in more detail from the Tax Administration’s detailed guidance for non-profit associations (in Finnish), and you should also check the page with the frequently asked questions on the taxation of non-profit associations (in Finnish).
Non-profitability is decided by the Tax Administration based on the rules and, in particular, the true operations of an association: “In taxation, an association or foundation is considered as non-profitable if it fulfils all of the following criteria:
- The association or foundation operates exclusively and directly for the common good. The common good can be material, spiritual, ethical or societal.
- The operations of the association or foundation are not directed at a limited group of persons only.
- The association or foundation does not produce to those participating in the operations any financial gain as dividends or a higher-than-reasonable salary or other compensation.” (Tax Administration)
A non-profit community pays income tax on its business income and the income produced by its real estate with certain conditions. If an association’s operations are not considered as non-profitable, it is liable to pay income tax on all of its income. A non-profit community is liable to pay value added tax only on the operations which are considered in income taxation as its taxable commercial activities. An unregistered association cannot be non-profitable. In taxation, an unregistered association is considered as a syndicate whose income is taxed as its members’ income.
Further information on the determination of non-profitability is available from the Tax Administration.