It Helps to Know a Little about Accounting

I regret to inform evaluators that money is real.

If you manage to complete a full evaluation without saying anything about money, I can guarantee you that your recommendations are not being taken at face value by stakeholders. If you are lucky, your recommendations are being brought into a meeting with someone who does want to talk about money and some currency signs are being added to some of your sentences: the program (which costs $450k annually) prevented 100 people from being incarcerated for a collective 1500 days (at a savings to taxpayers of $547,500), so it should be continued (which will save the government $97,500 annually). If you aren’t so lucky, the absence of writing about money will immediately relegate your evaluation to practical insignificance while the money people get on with running the world.

I understand that this might be tough to hear, but money is real and it is impacting the evaluation somehow. I have met evaluators who have no trouble believing a version of this statement in which money is replaced with “politics.” If it helps, remember that money is the primary political instrument of our times. By tracing the way money moves around, you are learning more about politics than you will ever learn by listening to rhetoric.

Occasionally, stakeholders will surprise me and express the idea that money doesn’t matter for the evaluation. In my experience, often these are not the stakeholders who get to the make major decisions about the evaluand. People empowered to make these decisions know that eventually they are going to be looking at a budget with a red pen in hand.

To be of any real use to these planners, it helps to know a little about accounting. In this post, I’m going to introduce a some basic documents from accounting that I think every evaluator should know: the Three Books of Entry¹ and the Three Financial Statements. If you know how to read these six documents, you can see how money is moving in and out of a project and thus track actual costs.

Because financial documentation looks different across business, nonprofit, and government sectors, and because I mainly work in the US, I’m going to use US nonprofits as a reference point for my examples in this post. However, know that the principles here apply across many contexts because they are basic to accounting.

If any of this is intimidating to you, just remember: you don’t have to prepare these statements, you just need to be able to read them.

Book I: The General Journal

The books of entry are not complicated to read if you know how they are structured and what they are trying to tell you. The general journal is the most basic. It looks kind of like your bank statement with a few extra columns. We have the date of the transaction, then the account the money is going into or coming from, a reference code, and the amount that is either debited or credited. I don’t want to assume that you know what these terms mean, so I’ll break them down.

\( \begin{array}{|l|l|l|l|l|} \hline \text{Date} & \text{Account Title and Description} & \text{Reference} & \text{Debit} & \text{Credit} \\ \hline 1/1/2025 & Naloxone \ Sprays & & 1000 & \\ \hline 1/1/2025 & Cash & & & 1000 \\ \hline \end{array} \)

Here, an account doesn’t actually have to be a bank account. It’s more like a “category” into which the money goes. We need account categories because of double-entry bookkeeping, which is the idea that money should always go somewhere in the books – such as into an asset (like a material thing) or an expense (like a salary) – so that there are always two accounts involved whenever money is moving. The reference column is used to indicate that this expense has been copied into the second book of entry, which we will discuss in a moment, and allows us to easily track money across our books. Because we are talking about assets, the debit column shows how much money went into an account and the credit column shows how much money left an account. In the above table, the organization purchased naloxone sprays from a supplier, so it received $1000 in medicine as a debit in the naloxone sprays account and parted with $1000 in cash as a credit from the cash account. The process of recording this information has a special name: “journalizing.”

Oh yes, and you may be wondering about my use of the word “money” in this post. In fact, a better word would be “value” since often we are tracking the things on which money was spent. In the above example, we debit $1000 to naloxone sprays, but that cash is gone – we have medicine now. In reality, we won’t be able to refund it for its full value once it starts to expire, which is immediately. However, at the moment of purchase, it was worth $1000 and this is what goes into the general journal. Later, the accountant will have a way to depreciate the value of assets to reflect the effects of time on money (see Statement II), but for now, its value is just its price.

Having access to the general journal is pretty good as an evaluator because you can see where money is actually going day by day. In a previous post about cost-inclusive evaluation, I echoed Brian Yates’ warning that public budgets, such as what programs show funders and boards, are usually oversimplified. Indeed, I’ve been in rooms where non-profit leaders are trained – yes, trained – to massage their budgets into a form that will attract donations at the expense of transparency. (If you are a nonprofit funder or donor, this should give you a good reason to demand an evaluator.) There is no more direct look at an organization’s finances than its general journal. However, the information in the general journal is the least structured form of information, which is why we will want to look at the general ledger and beyond.

Book II: The General Ledger

A list of all the individual expenses is good to have, but the advantage of the Three Books of Entry is that each one rolls up into a higher level of abstraction. The general ledger classifies the transactions in the general journal into five main categories: assets, liabilities, income, expenses, and equity. Assets are stuff we own and liabilities are debts we owe. Income is the money that we bring in and expenses are the funds we spend. Equity is the ownership stake of the owners of an asset, but usually isn’t something we need to think about too much in public-sector evaluation. These five categories are known as the GL Accounts. Each of them can have subcategories. For example, the Assets account can have a cash account and a tangible assets account. There are many different ways to format a general ledger, but the most basic is simply to add an “Account” column to the general journal.

\( \begin{array}{|l|l|l|l|l|} \hline \text{Date} & \text{Account Title and Description} & \text{Account} & \text{Reference} & \text{Debit} & \text{Credit} \\ \hline 1/1/2025 & Naloxone \ Sprays & Asset & GJ-2 & 1000 & \\ \hline 1/1/2025 & Cash & Asset & GJ-3 & & 1000 \\ \hline \end{array} \)

There are a couple quick things to look for in the general ledger to get an idea of whether an organization is doing a good job keeping their books. First, all transactions should reference the general journal so that the original transaction can be located. Second, the general ledger should be up-to-date, according to whatever internal accounting schedules the organizations says it uses, e.g., monthly or quarterly updates.²

Rick Moranis ad libbed his accounting speech in Ghostbusters. It was also his idea for the character to be an accountant in the first place. The thing that makes this scene work for me is that he is shouting this couple’s (embarrassing) financial situation out to the entire room but no one can understand him because he is an account.

Having a general ledger is helpful as an evaluator because you can be sure that you understand how to treat each transaction. A debit increases assets or expenses and decreases liabilities, equity, or revenue. A credit increases liabilities, equity, or revenue and decreases assets or expenses. For example, if there is a debit to liability, this means we are paying off a debt, so the amount owed should decrease. The general journal doesn’t clearly categorize the five type of GL accounts, but the general ledger does, so you will actually know whether a credit or debit to these accounts means that the organization is spending or losing money. (The way to treat debits and credits across the five GL Accounts will take some getting accustomed to, since accountants use a technical sense of debit and credit. I find it’s easiest to just handle these one GL Account at a time to avoid mistakes.)

Book III: The Trial Balance

In the general ledger, we categorized individual transactions into GL accounts. In the trial balance, we get the totals for those accounts. The totals for each account are a snapshot of the organization’s overall financial situation. The trial balance sheet is a summary of the big accounts and a total of totals of debit and credit. Debits and credits need to balance out to zero. This should be true by definition due to the accounting equation: Assets = Liabilities + Equity. In plain words, every dollar that the organization has plus all the stuff it owns came either from money it borrowed or money it made.

The reason it’s called a “trial” balance is that the sums of the debit should balance to the sums of the credit. If the books pass this trial, then they can be used to prepare financial statements. A trial balance looks like this:

\( \begin{array}{|l|r|r|} \hline \textbf{Account} & \textbf{Debit} & \textbf{Credit} \\ \hline Assets \ Total & 1,000.00 & \\ \hline Expenses \ Total & & 1,000.00 \\ \hline Total & 1,000.00 & 1,000.00 \\ \hline \end{array} \)

Once the accountant has a correct trial balance, they move on to creating the financial statements.

Statement I: Statement of Activities (Income Statement)

The first financial statement required for tax purposes is known as the Statement of Activities if the organization is a nonprofit and an Income Statement if the organization is a business. The purpose of this first financial statement is to show what happened to the organization financially during a particular period of time.

There will always be a revenues section, which typically includes donations, grants, service revenue, membership dues, investment income, or fundraising proceeds. For a business, this would show income from sales.

In my example Statement of Activities below, I’ve categorized revenues as unrestricted or restricted to clarify how funds can be used, since this is common in the nonprofit world. Contributions without donor restrictions are classified as “unrestricted,” while funds designated for specific programs or purposes are tracked under restricted categories.

There will always be an expenses section that breaks down spending into categories such as program services, administrative expenses, evaluation expenses, and fundraising expenses.

\( \begin{array}{|l|r|r|r|} \hline \textbf{Statement of Activities} & \textbf{Unrestricted} & \textbf{Restricted} & \textbf{Total} \\ \hline {\textbf{Revenues:}} \\ \hline Contributions & 50,000 & 20,000 & 70,000 \\ Program \ Revenue & 30,000 & 5,000 & 35,000 \\ Investment \ Income & 2,000 & 500 & 2,500 \\ \hline \textbf{Total Revenue} & 82,000 & 25,500 & 107,500 \\ \hline {\textbf{Expenses:}} \\ \hline Program \ Services & 60,000 & & 60,000 \\ Administrative & 15,000 & & 15,000 \\ Fundraising & 10,000 & & 10,000 \\ \hline \textbf{Total Expenses} & 85,000 & & 85,000 \\ \hline \textbf{Change in Net Assets} & (3,000) & 25,500 & 22,500 \\ \hline Net \ Assets, Beginning & 50,000 & 10,000 & 60,000 \\ \hline \textbf{Net Assets, End} & 47,000 & 35,500 & 82,500 \\ \hline \end{array} \)

For nonprofits, the final line of the Statement of Activities is usually the Change in Net Assets, which we calculate by getting our initial assets, then updating this with information on revenue and expenses from the the year. After expenses are deducted from revenues, the change in the net assets section shows whether the organization experienced a net increase or decrease in funds during the reporting period. Businesses conclude the Income statement with their Net Income instead.

For cost-inclusive evaluations, we will usually want to look at the total costs of services versus administration, since administration is one of the main drivers of program cost today. It is quite typical for any efficiencies in service delivery to be eaten up by a small proportional increase in administrator time on the project. For example, if someone making $150,000 spent 10% more of their time on the project this year versus last year, this would double the administrative cost of the program in my example.

Statement II: Statement of Cash Flows

The Statement of Cash Flows does exactly what it sounds like. It focuses on cash, where it comes from, and how it is used in operating, investing, and financing.

Thus, this statement is divided into three main sections. The Operating Activities section shows cash flows related to the organization’s primary mission-driven activities. It includes cash received from contributions, grants, and revenues, as well as cash paid for salaries, supplies, and program expenses. Adjustments for non-cash items like depreciation are also commonly baked into these amounts.

The Investing Activities section reports cash flows related to the purchase or sale of long-term assets, such as property, equipment, or investments. It may also include proceeds from the sale of investments or the acquisition of fixed assets.

The Financing Activities section reflects cash flows associated with borrowing or repaying loans, as well as cash received from donor-restricted contributions intended for long-term use, such as endowments.

The statement ends with the net increase or decrease in cash for the period and reconciles the beginning and ending cash balances to demonstrate changes in liquidity.

\(\begin{array}{|l|r|} \hline \textbf{Statement of Cash Flows} & \textbf{Amount} \\ \hline \textbf{Cash Flows from Operating Activities:} & \\ Cash Received From Contributions & 70,000 \\ Cash Received From Program Revenue & 35,000 \\ Cash Paid For Program Expenses & (60,000) \\ Cash Paid For Administrative Expenses & (15,000) \\ Cash Paid For Fundraising Expenses & (10,000) \\ \textbf{Net Cash Provided by Operating Activities} & 20,000 \\ \hline \textbf{Cash Flows from Investing Activities:} & \\ Purchase Of Equipment & (5,000) \\ Proceeds From Sale of Investments & 3,000 \\ \textbf{Net Cash Used in Investing Activities} & (2,000) \\ \hline \textbf{Cash Flows from Financing:} & \\ Proceeds From Restricted Contributions & 10,000 \\ Repayments Of Loans Payable & (2,000) \\ \textbf{Net Cash Provided by Financing} & 8,000 \\ \hline \textbf{Net Increase in Cash} & 26,000 \\ \hline Cash, Beginning Of Year & 50,000 \\ \hline \textbf{Cash, End Of Year} & 76,000 \\ \hline \end{array}\)

The utility of the Statement of Cash Flows from a cost-inclusive evaluation is mainly in the Operating Activities section, where we can quickly see how much cash it takes to actually run the organization. The Investing and Financing sections are more important from a public accountability perspective. For example, if an agency did something really strange, like offering $48 million in loans to nonprofits with no strings attached and no repayment terms, those loans would show up in the Statement of Cash Flows.

Statement III: Statement of Financial Position (Balance Sheet)

The Statement of Financial Position for a nonprofit is similar to a balance sheet for a for-profit entity. This financial statement focuses on assets, liabilities, and net assets.

The assets section lists everything the organization owns that has monetary value. These are divided into current assets (e.g., cash, receivables, and short-term investments) and non-current assets (e.g., property, equipment, and long-term investments). If you’ve heard the term “liquidity”, this refers to the same thing, where current assets are the most easily converted into cash (the most liquid) and non-current assets are the least easily converted into cash (the least liquid).

The liabilities section shows the organization’s debts. Likewise, these are divided into current liabilities (e.g., accounts payable and short-term loans) and long-term liabilities (e.g., mortgages and bonds payable). There is a distinction made between money we need to pay out soon and money we need to pay out later.

The net assets section represents the residual value of the organization’s assets after liabilities are subtracted. Again, in nonprofits, net assets can be categorized as unrestricted, temporarily restricted, or permanently restricted based on arrangements with donors.

\( \begin{array}{|l|r|} \hline \textbf{Statement of Financial Position} & \textbf{Amount} \\ \hline \textbf{Assets:} & \\ Cash & 50,000 \\ Accounts\ Receivable & 15,000 \\ Investments & 25,000 \\ Property\ and\ Equipment (Net) & 100,000 \\ \textbf{Total Assets} & 190,000 \\ \hline \textbf{Liabilities:} & \\ Accounts Payable & 10,000 \\ Deferred\ Revenue & 5,000 \\ Longterm\ Debt & 20,000 \\ \textbf{Total Liabilities} & 35,000 \\ \hline \textbf{Net Assets:} & \\ Unrestricted\ Net\ Assets & 100,000 \\ Temporarily\ Restricted\ Net\ Assets & 30,000 \\ Permanently\ Restricted\ Net\ Assets & 25,000 \\ \textbf{Total Net Assets} & 155,000 \\ \hline \textbf{Total Liabilities and Net Assets} & 190,000 \\ \hline \end{array} \)

What we want to see here is that the following formula works out:

\(Assets = Liabilities + Net\ Assets\)

If this equation doesn’t balance, then there is a problem. In this way, the third Statement of Financial Position is the financial statement analog to the the third book of entry, the Trial Balance.

From an evaluation perspective, what does the Statement of Financial Position tell us? Persaud and Yates (2023) say that it tells you where you are at the end of the year. Notice that we’re getting some values that we didn’t get in the Statement of Cash Flows, such as the total value of the equipment and property owned by the organization. You’ll need to dig more deeply into this number while doing a cost-inclusive evaluation to separate operating costs from sunk costs (which don’t count for the evaluation), so you need to know if the equipment was purchased specifically for the program. Additionally, the Statement of Financial Position serves some accountability purposes, allowing us to calculate metrics like liquidity, operating margin ratio, and fundraising efficiency ratio.³

Takeaways

By combining the financial statements, you can deduce a lot of what you need to know to get started with a cost-inclusive evaluation of a program. If you still have questions after looking at the financial statements, the books of entry can generally be used to answer these. Only after you’ve thoroughly studied these six documents should you start interviewing program staff with questions about costs, since from their perspective, all of this is already public information.

If you aren’t using this information as part of your evaluations, remember that organizations are already collecting it for tax and audit purposes. The reason you haven’t seen it is usually because you didn’t ask!

1. The alternate names for the the Three Books of Entry are: Fellowship of the Bookkeeping, The Two Entries, and The Return of the Auditor.

2. From time to time, I bump into an organization so small that it doesn’t have anyone to regularly update the books – this is one service that is always worth paying for if you can’t manage it in-house. I know people who do exactly this sort of work, so message me if you need help.

3. I may do a follow-up post on some of these evaluation metrics of the financial health of organizations in the future. Let me know if you’re interested.