Evangelista, Ma. Sarah C.
Master of Arts in Education major in Educational Management
Dr. Nelia Prieto
Professor, Financial Resources Management
School Accounting & Finances: Best Practices Guide
The challenges of running a private school have never been greater. Having witnessed the
successes and challenges of many private schools over the years, this guide contains best practices
for managing your school's accounting and finances.
1.
BUDGETING
The budgeting process is arguably one of the most important tools for creating a road map to your
school’s success. Planning and monitoring your budget can help you identify wasteful
expenditures, adapt to financial changes and achieve your school’s financial goals.
Apply a Budgeting Process
The budgeting process shouldn’t be limited to your school’s financial personnel; it should also
include the board and senior leadership. A timeline for the process should be established, leaving
adequate time for budget research, review and feedback. Finally, be prepared to document
everything along the way, as good documentation will ensure that each participant understands his
or her responsibilities and deadlines.
Practice Income-based Budgeting
It’s important to budget primarily for income, establishing income goals is conservative, reliable
and realistic expectations. However, in order to accurately budget for income, you’ll need input
and cooperation from all departments.
Tie Your Budget to Your School’s Mission and Goals
Revenue and expenses should be tied to your school’s mission and goals. Salaries for instructors,
one of the largest expenditures, are variable based on the student/teacher ratio of your school’s
teaching model. If you tie this expense to the enrollment targets you should have your largest
variable expense under control.
When you review the other expenses based on your mission and goals, you will likely be able to
identify expenses that can be reduced or eliminated, potentially saving your school money. These
savings can then be applied to other purposes that are more closely tied to your school’s mission.
The same approach should be taken when it comes to revenue. Are you, for example, putting a lot
of time and energy into applying for a grant just because it might be available, even though it might
not support your school’s mission?
Be Detailed, Detailed and More Detailed
The more detailed your budget is, the better your school’s leaders – some of whom might not have
a financial background – will be able to see sources of revenue and expenditures. A detailed budget
helps position your school’s leaders to make informed decisions.
Many budgets are approved by board and finance committee members who might not have
knowledge about all of the school’s departments and programs. This can make it challenging for
them to fully understand the budget that’s presented to them for approval.
When assumptions (expected income or expected expenses) are included in the budget, it can be
even more difficult for non-financial people to understand. A detailed explanation of each
assumption will allow your board members to fully understand and determine if that assumption
is necessary and accurate.
2. FINANCIAL STATEMENTS
Anyone on a private school’s leadership team and board of directors should have knowledge
regarding the financial oversight of their school. In addition to addressing funding and expenditure
challenges, there is a legal and professional responsibility for a school’s leadership team and board
to protect their school’s assets. This includes overseeing the school’s financial activities and
implementing policies and procedures to protect the organization.
Financial statements can be a valuable resource in helping understand and evaluate a school’s
performance. Here’s what every private school leader and board member should know about
financial statements.
Who is Responsible for the School’s Financial Statements?
Although it’s the CPA firm that performs the audit, review or compilation of the school’s financial
statements, a school’s financial statements remain the responsibility of the leadership team and
board of directors. Although it is common for an independent CPA firm to assist with the
preparation of financial statements, including footnotes, the only section of the statements the CPA
assumes direct responsibility for is the Independent Auditor’s Report, known as the opinion letter.
In nonpublic company entities, like private schools, the school’s management is responsible for
the presentation of the statements and the accompanying footnotes in accordance with generally
accepted accounting principles (GAAP). If the school does not assume responsibility for these
principles, the CPA would encounter a scope limitation and is required to disclose that limitation
in his or her report.
Although your school’s management might not include experts in GAAP, they should at least be
able to review the financial statements and confirm that the information is presented correctly and
that there are no misleading statements or material omissions. The leadership team and board of
directors is responsible for ensuring that management fulfills its responsibilities for financial
reporting and is ultimately responsible for reviewing and approving the financial statements.
How Financial Statements Are Presented
Even though there are certain financial statement disclosures required by GAAP, there is often
flexibility in how these disclosures are presented. Usually, your school’s management and board
can present information in the style and format they prefer. From a practical standpoint, the audit
firm typically has a standard way of presenting certain information. However, management has
the final say as long as the minimum disclosure requirements are met.
It is also important to note that management may always disclose more than the required minimum
information if they feel that the information presents a clearer picture of their school and its
operations.
Variation of Nonprofit Financial Reporting
Most private schools are nonprofits, meaning their financial statements differ significantly from
commercial entity financial statements, since nonprofits do not present or operate on the concept
of net income or profitability. Some of the key differences between nonprofit and for-profit
financial reporting include:
Contributions
One of the biggest differences between for-profit and nonprofit organizations lies in how
income and contributions are reported. With a nonprofit, contributions or gifts often come
with certain stipulations, which may relate to a purpose or time frame. Contributions and net
assets should be clearly identified on your school’s financial statements as with or without
donor restrictions, or permanently restricted, depending on their exact specifications.
Pledges Receivable
Pledges receivable also vary based on an organization’s entity type. Pledges are generally
considered revenue in the year they are made, even though the funds may not have received
and cannot be spent that year. This has the tendency to cause large fluctuations in the bottom
line compared to a commercial entity that has a more stringent matching principle. This is
because a nonprofit organization isn’t really tracking “net revenue” like a commercial entity.
Rather, it reports changes in net assets.
If a pledge receivable is made with a condition that condition must be met before the
organization can recognize the gift as revenue. If pledges with conditions exist, they will not
appear on the financial statements.
Measuring Your School’s Performance
You can gain a better understanding of your school’s operating efficiencies and performance by
analyzing the data presented in the financial statements. There are three basic comparisons used to
assess both revenue and expenditures: year-to-year, actual-to-budget and peer results.

Year-to-Year Comparisons
Year-to-year comparisons reveal changes that occurred from the previous fiscal year to the current
year. Management should be able to explain to the significant increases or decreases.

Actual-to-Budget Comparisons
Actual-to-budget comparisons look at the actual results from operations next to what was projected
by management and the board at the beginning of the fiscal year. These variances determine
whether the budget process was accurate or whether unforeseen circumstances occurred during the
year.
Board members should be informed of all budget amendments. It is reasonable to question results
that significantly exceed or fall short of the budget.

Peer Analysis
Peer analysis compares your school’s results with those of other similar schools. However, when
making comparisons among schools, it is important to keep differentiating factors in mind,
including student population, teaching style, fundraising and the cost of tuition.
Key Ratio Analysis
Along with comparison analytics, you can also use ratios to better understand your school’s current
position. It’s easy to get overwhelmed by the large number of ratios you can consider, but there
are a few simple ones that can provide useful information: student-teacher, cost-per-student and
current ratio.

Student-Teacher Ratio
The student-teacher ratio, calculated by dividing the total student population by the total number
of teachers, determines the number of students per teacher. By comparing this calculation with
those of prior years or expectations, you can determine whether the school is appropriately staffed
for its current enrollment.

Cost-per-Student Ratio
Cost-per-student ratio is calculated by taking the total expenses or a specific group of expenses,
such as salaries, divided by the number of students, to determine the average cost per student. This
is helpful in evaluating whether your cost of tuition is on target.

Current Ratio
The current ratio (current assets divided by current liabilities) is a liquidity ratio that estimates the
school’s ability to meet its short-term obligations. A higher current ratio indicates a more likely
ability to repay debts.
Moving Forward
Financial statements are an important tool for understanding your private school’s financial
position, performance and direction. Moving ahead, use financial statements to make informed
decisions for your school. One way to simplify this process is to distribute your school’s financial
statements to the board a few days before a scheduled meeting. That way, board members can
review the documents and prepare a list of questions for either management or the outside
accountants.
Compare the financial statements to board meeting minutes, conversations with staff and your own
knowledge of the organization to see if the information is consistent. If applicable, follow up on
any findings or recommendations reported by the external auditors.
3. ACCOUNTING & FINANCIAL REPORTING
How to Avoid Misstatements
More so than other nonprofits, private schools are often operated like a for-profit entity given the
competition, increased costs and scrutiny that schools face. Private school financial reporting is
also unique and can be plagued by misclassifications or misstatements due to the complex
accounting required for the different funding sources private schools receive. Here are the top
issues in private school financial reporting:
Classification of Net Assets
Net assets should be included in one of two classes depending on the presence and type of donorimposed restrictions:
 Net assets without donor restrictions
 Net assets with donor restrictions
The school and its board of directors cannot restrict net assets; only donors can restrict net assets.
If the board determines that it wants to limit the use of certain net assets without donor restrictions,
the net assets are considered board designated net assets. Net assets with donor restrictions are
subject to donor-imposed restrictions that are temporary in nature, such as those that will be met
by the passage of time or other events specified by the donor, or are perpetual in nature, where the
donor stipulates that resources be maintained in perpetuity.
Revenue Recognition
Private school income is accounted for differently depending on the source of revenue. Tuition
income is considered an exchange transaction and is recognized ratably over the term of the school
year. Tuition payments received in advance are recorded as deferred revenue when received. On
the other hand, contributions are recorded when received or pledged as support that is either with
or without donor restrictions depending on the existence and nature of any donor restrictions.
This can get much more complicated if the school maintains its books on a cash basis during the
year instead of an accrual basis, which is typically the basis used for year-end audited financial
statements. Conversion from cash to accrual is usually where some disconnect happens and
something ends up wrong in the financials. While monitoring and budgeting cash is extremely
important and easier to do on the cash basis, we recommend keeping the books on the accrual basis
and then preparing Excel-based cash monitoring reports with an accrual basis change in net assets
as the starting point and projecting cash position based on cash to accrual differences.
Pledges
Proper accounting for pledges depends on whether there are donor-imposed conditions, donorimposed restrictions or both. Private schools need to carefully review the terms of the pledge to
determine whether the pledge is conditional or unconditional, and with or without donor
restrictions, as the accounting for each is different.
Unconditional pledges should be recognized, in full, as revenue in the year the pledge is made. If
the unconditional pledge contains a donor-imposed restriction, it should be classified as with donor
restrictions.
Conditional pledges should be recognized as revenue when the conditions are substantially met.
This means an unconditional pledge is not recorded at all until the condition is fulfilled. One
exception is if the money is actually received for a pledge but not available for use until the
condition is met, the school would record the cash deposit and a liability instead of revenue.
Capital Campaigns
This can result in a large increase in revenue but a lesser increase in cash, as capital campaign
pledges are usually paid to the organization over a period of years. Capital campaigns raise funds
to renovate or construct buildings, develop athletic fields and facilities, initiate a new program or
build an endowment.
Capital campaigns usually have explicit or implied restrictions in which the stated objective is to
raise funds for a specific program or purpose. Although the donor may not have explicitly
communicated the restriction, the stated objective of the capital campaign usually makes the
donor’s restriction clear.
Parent Associations
Parent associations are organized to allow the parents to provide additional support to a school
with the aim of enhancing the level of education. In addition to collecting dues, parent associations
often sponsor fundraisers and special activities for students and faculty. If the parent association
is formed under the federal employer identification number (EIN) of the private school, the
activities of the parent association must be included with the activities of the private school. On
the other hand, if the parent association is formed under a separate EIN, the activities of the parent
association are not included with the private school. While it is parent associations that are often
overlooked, these rules apply to any group activity that occurs under the auspices of the school if
it is not separately incorporated.
Planned Giving
One of the many ways donors provide financial support to charitable organizations is through
arrangements in which nonprofits receive benefits that are shared with other beneficiaries. These
planned giving arrangements are commonly known as split interest agreements.
The most commonly used split interest agreements are:
 Charitable lead annuity and unitrusts
 Charitable remainder annuity and unitrusts
 Charitable gift annuities
Depending on the type of arrangement and who holds the assets, the school will either recognize
the split interest agreement as contribution revenue along with the related assets and liabilities, or
recognize its beneficial interest in the assets as an asset and contribution revenue when the school
is notified of the split interest agreement’s existence.
Unfortunately, nonprofits may not always be recording split interest agreements correctly or may
not realize that they are a party to a split interest agreement at all. As a result, nonprofits might be
understating assets, liabilities, revenue and net assets.
Endowments
Endowments are a common method private schools use to secure a steady income stream for the
long term. Endowments represent donor gifts which are required to be invested in perpetuity or for
a designated period of time. Endowments can also be amounts designated for long term investment
by the private school’s board of directors. Endowments set up at the direction of the board are
referred to as “quasi” endowments while donations with donor restrictions for the funds to be
maintained and only income to be spent are true endowments.
The Uniform Prudent Management of Institutional Funds (UPMIFA), in the absence of specific
donor instructions, provides guidance regarding endowments and specifically sets standards for
endowment spending and the preservation of the original gift in accordance with donor intent.
UPMIFA mandates that earnings, unless otherwise instructed, be classified as donor restricted for
legal purposes until they are appropriated for expenditure. It is critical for private schools to adopt
investment and spending policies for endowment assets approved by the board of directors in order
to maintain a predictable income stream.
Note: Most states have adopted their own version of UPMIFA that have minor variations in
regulations.
Deferred Compensation Plans
Private schools, like most nonprofits, often face the challenge of competing against for-profit
companies to attract key employees. One option available to schools is to establish deferred
compensation plans for key employees.
A deferred compensation agreement should be accounted for on an accrual basis in accordance
with the terms of the agreement. In other words, the school should accrue deferred compensation
costs so that the costs are recognized in the period the related services are performed. The costs
accrued at the end of the employee’s service period should equal the present value of the benefits
expected to be paid to the employee or beneficiaries. Misstatements occur because accounting and
finance staff are not always aware of the agreements until cash payments begin. By then it’s too
late so it’s very important for the board and other members of the management team to keep the
accounting and finance staff informed about all contracts so they can determine if anything should
be recorded on the books.
4. PLANNED GIVING ARRANGEMENTS
Split Interest Agreements Require Special Accounting Treatment
One of the many ways donors provide financial support to charitable organizations, including
private schools, is by establishing trusts or other arrangements under which the nonprofit receives
benefits that are shared with other beneficiaries. These planned giving arrangements are commonly
known as split interest agreements.
The most commonly used split interest agreements are: charitable lead annuity and unitrusts,
charitable remainder annuity, and unitrusts and charitable gift annuities.
Charitable Lead Trusts (CLT)
Under a CLT, the nonprofit receives periodic payments (the “lead” interest) during the term of the
agreement. The payments may be for a fixed amount, an arrangement called a charitable lead
annuity trust or for a fixed percentage of the trust’s fair value as determined annually, known as a
charitable lead unitrust. At the termination of the agreement, the remaining assets revert to the
donor or the donor’s designated beneficiary (the “remainder” interest).
Charitable Remainder Trusts (CRT)
Under a CRT, the trust makes periodic payments to the donor (the “lead” interest) or the donor’s
beneficiary during the term of the agreement. At the termination of the agreement, the remaining
assets revert to the nonprofit (the “remainder” interest). The payments to the donor or beneficiary
may be for a specified dollar amount, an arrangement called a charitable remainder annuity trust,
or for a specified percentage of the trust’s fair value as determined annually, known as a charitable
remainder unitrust.
Charitable Gift Annuities (CGA)
Under a CGA, the donor and nonprofit enter into an agreement whereby the donor contributes
assets (typically cash or shares of stock) to the nonprofit in exchange for a promise by the nonprofit
to pay a fixed amount for a specified period of time or for the life of the donor or beneficiaries
designated by the donor. CGAs are similar to CRTs except that no trust exists. The assets received
are held as general assets of the nonprofit and the annuity liability is a general obligation of the
nonprofit.
Initial Recognition of CLTs, CRTs and CGAs
The initial recognition of CLTs and CRTs depends on who controls assets (whether or not the
nonprofit is trustee).
When the nonprofit is not the trustee, a beneficial interest in trust and contribution revenue are
recorded at fair value upon the creation of the trust. In cases where the nonprofit is the trustee, the
nonprofit will recognize contribution revenue, assets held in trust and a liability for amounts held
for others in the period in which the trust is established.
Typically, present value techniques are used to determine the fair value of the contribution. Under
a CLT, the fair value of the contribution can be estimated based on the present value of the future
distributions to be received by the nonprofit as a beneficiary. Under a CRT, the fair value of the
contribution can be estimated based on the fair value of the assets contributed by the donor less
the fair value of the payments to be made to other beneficiaries.
In the case of CGAs, the nonprofit should record a liability for the fair value (present value of the
future payments if present value techniques are used) of the future payments to be made to the
donor and contribution revenue for the difference between the assets received and the liability.
Net Asset Classification
Determining the classification of contribution revenues as with or without restrictions is another
nuance of split interest agreements that must be considered.
Contribution revenues recognized under split interest agreements are classified as with donor
restrictions unless the donor has explicitly given the nonprofit immediate right to the assets without
restrictions, in which case they would be classified as without donor restrictions.
5. INTERNAL CONTROLS
- Internal controls are the plan of organization and all of the methods (processes and
procedures) adopted in an organization to safeguard its assets, check the accuracy and
reliability of its accounting and reporting data, promote operational efficiency, and
encourage adherence to policies.
Concentrate Internal Controls on Your Biggest Risks
Nonprofit organizations that don’t exercise constant vigilance in adhering to internal controls open
the door to fraud. For private schools, acts of fraud can cast an unwanted shadow on your school’s
reputation, possibly warding off donors and future students.
While many nonprofit leaders want to believe that employees work at an organization as much for
the mission as they do for the paycheck, sometimes that just isn’t the case. Unfortunately, weak
economic conditions have only increased the likelihood of internal theft, making internal controls
more important than ever. However, preventive theft and fraud measures can be upheld by
regularly reviewing and updating your school’s internal controls and concentrating your energies
on the biggest risks.
Narrow Your Focus On Most Risky Activities
A detailed internal controls list potentially contains hundreds of items related to everything from
governance to financial statements to payroll to information technology. If your school has never
drafted such a list, talk to your auditors or other financial advisors about doing so. However, most
schools engage in far fewer risky activities compared to other entities and organizations and
should, therefore, focus on a smaller group of controls. For example, a startup that’s putting
donations to work as quickly as they come through the door probably doesn’t need to worry about
investment and property management policies — at least not yet.
But such a nonprofit would benefit from implementing rules regarding cash receipts and
disbursements. These include segregating duties (for example, the same staffer who accepts
donations shouldn’t also record or deposit them), requiring dual signatures on checks and
performing monthly bank reconciliations. Sometimes even segregation of duties isn’t practical, so
you then have to rely on monitoring by someone outside of the process.
Cash and bank accounts have the greatest exposure to theft. Therefore, they require the greatest
scrutiny and controls. Making sure receipts are recorded is important, meaning you need to have
good controls to ensure that all of the efforts to raise funds pay off, with the money making it to
the bank. Once in the bank you need to make sure disbursements are for legitimate organizational
purposes.
Electronic banking can make it harder to enforce controls, but reviewing the transactions after they
have posted is just as important as approving the disbursement. Whether the controls are done by
segregation of duties or by compensating monitoring controls with additional review after the fact,
one or the other is essential to avoid a terribly negative surprise that can prove to be a public
embarrassment for any nonprofit.
Don’t Let Foxes Watch the Henhouse
Even the best internal controls can’t protect your nonprofit from fraud if managers override them.
Although auditors review internal controls, audits aren’t designed to detect every fraudulent act
that could occur, especially management overrides. It’s a good idea to ask your auditor or someone
experienced in fraud prevention to observe how well your organization is adhering to controls and
to identify any potential risks. One of your best lines of defense is your school’s board of directors.
Your board can help prevent management-perpetrated fraud by:
 Overseeing annual audits
 Ensuring that material weaknesses identified by auditors are addressed
 Reviewing monthly bank reconcilements, investments reconciliations and analysis of other
material accounts
 Regularly reviewing financial statements
 Signing off on completed IRS forms
Your board might also stipulate additional policies, such as requiring the approval of at least one
board member on the rare occasion a manager needs to override controls. Your board also should
look for signs that managers aren’t following internal control policies to the letter — for example,
failing to report risks and actual management overrides in a timely manner. Sloppy accounting and
reporting errors and disputes with auditors and outside advisors are possible signs that a manager
might be committing fraud.
Regularly Review Internal Controls
You and your staffers probably have a lot on your plates — so it’s understandable if internal
controls occasionally get lax. Remedy such lapses as quickly as possible by reviewing with
employees and managers alike the policies designed to control fraud.
REFERENCE:
Lisa Johnson, CPA, Private School Accounting & Finances: Best Practices Guide, Sep 2021
https://www.gma-cpa.com/private-school-accountingguide?fbclid=IwAR3Bwa3PIfaAw7gxwL4gAllT2tAGqPdc90-3JfxyJ75W7hcfB5XyzcxP-AY