BITS > JUNE 1998

NAIC Club Accounting Made Easy . . . (Almost!)

'One More Thing . . . Be Sure to Send Some Flowers to Your Treasurer'

Editor's Note: Special thanks to Bob Adams for making the following article available to BITS readers, and soon to all visitors to the NAIC Web Site. Special thanks as well to Computer Group Chairman Herb Barnett for his comments and contributions to the article.

There are many club accounting activities, and many commands to remember when using the NAIC Club Accounting Software. Remembering these commands and the steps to get to the proper data entry screen can be frustrating. This article is meant to help one remember the route to the correct command quickly. After these basic concepts, there is a list of steps to be taken in preparing a normal monthly report for your club and then checking for errors.

This is followed by another list, abbreviated and alphabetized, of other normal activities, and the commands to get to the appropriate areas within the program. To keep the lists easy to use, commands not routinely used are not included. The end of the article deals with withdrawal of a member using a transfer of stock.

The numbered steps are meant to be a guide, or reminder, of the steps necessary for most monthly reports. These steps should be considered as minimal in getting the job done. Each step [within brackets] indicates the series of program commands to be selected to allow entering the appropriate information. Be very careful to enter the correct date with each transaction. Be very careful! Get the point? And, before printing any report, audit! After printing, back up the data!

Some NAIC Club Accounting Concepts to Remember

The Club Accounting program is designed to be used in a very specific way and does not respond well to "creative reengineering." If you decide to do a particular task or record a transaction differently from the way the program was designed to handle it, expect to have a problem somewhere along the line (maybe at tax time).

If any transaction can be identified with a specific club member, it should be entered as a Member Transaction. If it can be identified with a specific security, it should be entered as a Security Transaction. Use Cash transactions ONLY when neither of the first two conditions apply.

Be sure you understand what should and should not be entered as a Petty Cash transaction. If the expense or income item is related to the legitimate investment activities of the club, it should probably not be recorded as a Petty Cash transaction. Check the manual. Most clubs find that they don't even need a Petty Cash account.

When you are entering a transaction and have to select the Account, be sure you identify the actual source of, or destination for, the funds involved. For example, if you are buying stock, don't select the Broker Account just because you bought the stock from a broker who will be holding the shares, if you are actually writing a check from the Bank Account for the exact amount of the purchase. The correct selection in this case is the Bank Account.

You might be surprised at how many club treasurers have needed to be coached through the process of correcting their books after they discovered they had something like a -$15,000 broker balance, and they didn't know why! BE CAREFUL!

Records for withdrawn members, and for securities no longer in the portfolio should NEVER be deleted. They are part of the club's history, and should remain in the records. Instead, go to [Members - Edit/Delete Member] or [Security - Edit/Delete Security], and edit the appropriate record by removing the check mark from the "Active" box.

The Distribution of Earnings should be run ONLY at the end of each year using the 12/31/yy Valuation, and when the club disbands. When keeping the books on paper, a distribution must be calculated before processing a withdrawal. The software makes all necessary calculations automatically when processing a withdrawal, so it is not appropriate to run a Distribution of Earnings before processing a withdrawal.

If you are a new club, or an older club just converting to NAIC Club Accounting and not entering at least two or three years of your old records, it will make life easier for the treasurer to go to [Utilities, Parameters] and temporarily remove the check mark from the box marked "Show Returns." The last two columns on the Valuation Statement and Member Status Report will be omitted and save a lot of unnecessary explanations. Total Return calculations on data covering a relatively short period of time tend to look distorted and are almost guaranteed to generate repeated questions. When the numbers begin to stabilize after a year or two, replace the check mark permanently which will include the last two columns in the reports.

The program has a function for archiving historical records. This was put in the program when computers were much slower and archiving was necessary to make the program run at an acceptable speed. With today's faster computers, it shouldn't be necessary, unless the database is so huge the program runs at an intolerably slow speed. If you have already archived some records, it is recommended that you make a backup of your current records and then restore the archived records to get more accurate calculation of total returns for the club.

Entering the Basic Monthly Data

The first step is gathering the reports and statements. Once the materials are collected, do the entire job at one sitting. As entries are made, check them off on each statement so there is a "trail" of the information already entered. Use the Remarks area on each applicable screen to record information that may be useful in verifying your records (check number, etc.).

1. Collect the following reports or statements.

a. List of checks written since the last accounting statement

b. List of Payments made by members at the last meeting

c. List of any other banking activities since the last accounting statement

d. Bank statement

e. Broker statement

f. DRP reports

g. Current portfolio stock prices

f. Buy/Sell confirmations

2. Enter Payments from members. [Members, Enter New Transaction, Deposits - Multi]

3. Enter Cash transactions. [Cash, Enter New Transaction]

a. Select Bank (Enter Checks, Fees, Interest, etc.)

b. Select Broker (Enter Interest, etc.)

c. Select Petty Cash (Enter Petty Cash expense & income items.)

4. Enter Cash Dividends. [Securities, Enter New Transaction, Cash Distribution]

a. Enter Reinvested Dividends. [Securities, Enter New Transaction, Reinvested Distribution]

5. Enter any Buy/Sell orders. [Securities, Enter New Transaction] then [Buy] or [Sell]

6. Enter current stock prices. [Securities, Enter/Edit Valuations]

7. Audit. [Utilities, Audit] Before printing any reports, ALWAYS run Audit!!!

When all the data are entered, the following steps help find errors and omissions.

8. Checking the Report -- Select: [Reports, Valuation Statement]. Assure that the date fields are correct for the desired time period.

a. Compare the Cash on Hand-Bank with the current bank balance. Note: If Club Accounting is set up to include a Petty Cash Account, and you keep the Petty Cash funds in the same bank account as your investment funds, add the Valuation Statement totals for "Cash on Hand-Bank" and "Petty Cash," then compare that total with the current bank balance. (If the funds are kept in an account with the broker instead of a bank, substitute "broker" for "bank" in the above description).

b. Compare Cash on Hand-Broker with the broker statement.

c. Compare the broker statement and DRP statements to SHARES OWNED THIS DATE shown on the Valuation Statement.

d. Print the Valuation Statement.

e. Open the Members Status Report [Reports, Member Status Report] and compare the PAID IN SINCE column on the Members Status Report with the amount invested by each member at the previous meeting, if the indicated date includes the meeting date.

f. Print the Members Status Report.

9. Backup the data. [Utilities, Backup]

Always keep at least three months data backed up on three separate floppy disks. You never know when a disaster is going to strike. It's also a good idea to install the program on another club member's computer and parallel your books. . . and have that person maintain backups. If you each enter the data separately, then compare the results via a phone call; errors can be caught immediately. It's not likely you'll both enter the same error, and the club has two members comfortable with the job. It's simply good business practice.

More Club Accounting Tasks and the Commands to Perform Them

Audit [Utilities, Audit]

Backup [Utilities, Backup]

Buy a stock [Securities, Enter New Transaction, Buy]

Cash Transaction [Cash, Enter New Transaction]

Cash Transfer [Cash, Transfer Transaction]

Distribution - Year end (See: Year end Distribution)

Dividend - Cash [Securities, Enter New Transaction, Cash Distribution]

Dividend - Reinvested (DRP) [Securities, Enter New Transaction, Reinvested Distribution]

Member - Make Inactive [Members, Edit/Delete Member] and click on "Active" box to remove check mark.

Members - Add New Member [Members, Enter New Member]

Members - Change Member Info. [Members, Edit/Delete Member]

Members Status Report [Reports, Members Status Report]

Payments from Members [Members, Enter new Transaction, Deposits Multi] or [Members, Enter new Transaction, Deposits-Single]

Price Update (See: Securities - Price Update)

Securities - Change [Securities, Edit/Delete Security]

Securities - New [Securities, Enter New Security]

Securities - Price Update [Securities, Enter/Edit Valuations]

Sell a stock [Securities, Enter New Transaction, Sell]

Stock Split - Different Company [Securities, Enter New Transaction, Spinoff]

Stock Split - Same Company [Securities, Enter New Transaction, Stock Split/Div. In Same Co.]

Transfer of Cash (See: Cash Transfer)

Valuation Statement [Reports, Valuation Statement]

Withdrawal of Member [Members, Enter New Transaction, Withdrawal] Also see Member - Make Inactive

Withdrawal Report [Reports, Withdrawal Earnings Report] print

Year end - Balance Sheet [Reports, Balance Sheet] print

Year end - Distribution [Utilities, Distribute]

Year end - Distribution Report [Reports, Distribution of Earnings Statement] print

Year end - Income/Expense [Reports, Income/Expense and Balance Sheet] print

Member Withdrawal Involving the Transfer of Stocks

The greatest advantage to the club occurs when there's a large capital gain in one or more of the stocks in the club portfolio. According to the NAIC Guide, both the club and the partner win when stock is transferred under these conditions. Note: Don't transfer a stock to a withdrawing partner when there's a loss -- as the club won't be able to take advantage of the tax write-off.

In order for this to work, the withdrawing partner should have a brokerage account to which to transfer the stock, although a stock certificate could be issued to the withdrawing partner. There may be a transfer fee from the broker, so be aware of it before completing step 5 that follows (and if there is a fee, the withdrawing member is normally charged for it. Check your Club Agreements for guidance). Since the club didn't sell the stock, there is no capital gains tax to the club -- and the stock is transferred at today's price, paying off the member with today's appreciated price. Normally, one should transfer stock that has grown greatly in price (big capital gains) and especially if the runup in price has put the club's portfolio diversification out of balance.

From the withdrawing partner's standpoint, receiving stock isn't a bad deal either, as the cost basis to the partner is equal to the invested interest of the partner. In other words, when the partner sells the stock, the cost basis isn't what the club paid for the stock, but rather what the member's interest in the club was. If the person desires cash, once the transfer is completed, he/she orders the stock sold. Of course that triggers a broker fee and capital gains, but to the withdrawing partner, not to the club. And, the partner pays capital gains on a stepped-up basis, so the advantage goes both ways. Page 217 in the Guide goes over this, but does give assurance that the withdrawing partner is not getting "ripped off."

Please remember that the tax treatment of stock issued in a partial withdrawal is different from stock issued in a full withdrawal. In the case of a partial withdrawal, the tax treatment may not be advantageous to either the club or to the withdrawing partner. One way to check out the possible effects is to do a "What If?" (AFTER making a backup of the datafiles!). Enter an all-cash withdrawal and print the Withdrawal Earnings Report. Go to the withdrawing member's record, highlight any one line of the withdrawal record and delete it. The entire withdrawal transaction will be deleted. Enter a new withdrawal as if stock was to be transferred, and print a new Withdrawal Report. Compare the two reports and decide which is more advantageous. After deciding which type of withdrawal is to be used, restore the datafile from the backups, if necessary, and process the withdrawal.

Steps Required

Write a letter to your broker, or check to see if the firm has a stock transfer form. Date it the same day as the withdrawal action, explaining which company and how many shares to transfer. A Securities Valuation must be done on that same date, so most of the time the transfer would be made on the normal evaluation date for the next meeting. (Just saves work -- and confusion.) Get all the broker paperwork ready, then do the evaluation and transfer by using the following NAIC Club Accounting steps.

These steps can be used for either a full or partial withdrawal.

1. Click on "Members," "Enter New Transaction," "Withdrawal."
2. Select the withdrawing person's name.
3. Enter the date of withdrawal -- same as the date selected above.
4. Press Tab and "Value to be Withdrawn" will be automatically filled in by the program.
5. Press Tab and enter withdrawal fee amount. (Check your Partnership Agreement or Bylaws) and press Tab. If the withdrawal fee is expressed as a percentage instead of a fixed amount, press TAB again and enter the percentage. The dollar amount will be calculated and entered automatically.
6. Click on "Stock," then select account cash balance is to be paid from. Enter notes such as the check number for the cash balance in Remarks, as appropriate.
7. Click OK, then SAVE.
8. Locate the company you wish to transfer shares from by scrolling the window. Select the shares to be transferred (Holding left mouse button down dragging the cursor across the zeros in the right column). The zeros will be highlighted.
9. Type in the number of shares to be transferred.
10. Press Tab (The Value Selected and Value Remaining will be updated).
11. Select another company to be transferred, if needed or desired, and repeat steps 8, 9 & 10. (Repeat until enough shares are selected so that "Value Remaining" is near zero or is equal to whatever cash balance you wish to pay to the partner.)
12. Unless all of the club's shares of a stock are being transferred, the next job is to select the specific shares to be transferred. Click on OK and select the block(s) of shares to be transferred (Same action as in Step 8).
13. When finished, click OK.
14. If this is a full withdrawal, Click "Members," then "Edit/Delete Member," and select the member withdrawing. Click on the small box marked "Active" to remove the check mark, thus making the member inactive. Do NOT delete the member. Click on "Reports," then "Withdrawal Earnings Report," select the withdrawing partner, print the report and give a copy to the partner.

Whew! . . . One consolation, you could be doing this without the aid of the computer program. Now, that's scary.

One thing more . . . be sure to send some flowers to your treasurer.

Bob Adams served for 13 years as a BetterInvesting Puget Sound Chapter Director, and he currently is an Associate Director. He is a member of the Up the Ante Investment Club, and the advisor to the Treasurer. Bob is retired from 26 years in radio and television broadcasting, and 13 years as a college professor.

Bob Adams is Director and Vice President, Administration, BetterInvesting Computer Group