Nonprofit Accounting: What Is It?
Nonprofit organizations help make the world go round, but when it comes to earning profits, they are often misunderstood. Some people believe that nonprofits can’t turn a profit because of this idea that only for-profit organizations should ever generate any income at all – even if it means bringing in revenue from donations or other sources outside their operations
It is not whether they make a profit that matters, but what they do with that profit. In nonprofit accounting, revenues that are collected above what is needed to cover expenses must be used for the organization’s purpose.
Basic accounting strategy tells us that revenues minus expenses will give you the profit. Using nonprofit accounting basics still allows us to use the same simple equation. However, when accounting for a nonprofit organization, accountability of that profit becomes the focus.
What type of accounting is used for nonprofits?
Fund accounting is used when accounting for nonprofit organizations. This type of accounting allows the users to account for resources where the use of funds is specified. Fund accounting is a method that creates a clear picture of how money was spent.
Accounting For Nonprofit Vs. For-Profit
A for-profit company’s purpose is to earn a profit. Ownership has governance rights to control what happens within the organization and the right to do as they please with the profits. The owner of a for-profit organization is its stockholders.
In a nonprofit organization, the purpose is to provide services. There are no owners. A board of directors can control what happens within the organization, but profits must stay within the organization.
Both types of companies receive revenues, but funds received by a nonprofit may come with restrictions dictating what they may be used for. Fund accounting helps to track the revenue.
Using Bookkeeping Systems
Since the accounting requirements are different for nonprofit organizations, it only makes sense that there are differences in available bookkeeping systems.
There are many available software options that work well with nonprofits, or you may choose to manually keep the books. Some companies choose to do both by handling their day-to-day bookkeeping and outsourcing their year-end accounting.
It is helpful to speak with a nonprofit accounting expert for guidance on this decision.
Recording Financial Statements
Financial responsibility ensures that a nonprofit organization can remain functional and continue fulfilling its mission. An important part of being financially responsible is providing reports to people both inside and outside of the organization, like donors or taxing authorities.
Not-for-profit accounting includes the preparation and analysis of a group of financial reports. Specific reporting and audit or review requirements may vary.
- Nonprofit Budget
A budget is a necessary planning tool. A well-prepared budget will provide a prediction of the financial health of any organization. Budgeting for all nonprofit accounts is especially important because revenue from all sources has to be planned for in detail.
- Statement of Financial Position
The statement of financial position, similar to a for-profit corporation’s balance sheet, shows what the organization owns (assets) and owes (liabilities) as of a certain date. The assets must equal the sum of liabilities and net assets. Net assets in nonprofit accounting differ from owner’s equity that you may see on a for-profit’s balance sheet. The not-for-profit accounting basics give direction as to how the net assets may be classified to indicate restrictions.
- Statement of Activities
The statement of activities, like an income statement, tracks activity over time. It shows, in detail, what money is flowing into the company. When accounting for nonprofit organizations, this money coming in may come from grants, fees, contributions, or other sources. This report will also show the money flowing out of the organization in the form of expenses.
- Statement of Functional Expense
While the statement of activities may show expenses, the statement of functional expense in nonprofit accounting breaks those expenses down in more detail. It shows both the nature and the function of each expense.
- Statement of Cash Flow
The statement of cash flow shows changes in cash over time. The report breaks down cash activities into operating, investing, or financing activities and shows how cash is affected within those activities.
- Form 990
The 990 is required by IRS for nonprofit organizations, although some may be exempt. The form gathers information regarding the mission of the nonprofit, the programs and services provided, and the finances. Form 990 becomes a public document available to anyone who may be researching the organization.
Taxes for non-profits
The nonprofit status of an entity is regulated by the state, but tax exemption is governed by the IRS. Most nonprofit organizations are eligible for the 501(c)(3) designation. This means that the organization is exempt from paying income taxes and that its donors receive a tax deduction.
Accounting for nonprofit organizations can seem daunting, but we here at JWF Accounting Services can help! Let us help you and your staff on how to handle these things so you can get back to focusing on the heart of your mission.
Jo-Anne Williams Barnes, is a Certified Public Accountant (CPA) and Chartered Global Management Accountant (CGMA) holding a Master’s of Science in Accounting (MSA) and a Master’s in Business Administration (MBA). Additionally, she holds a Bachelor of Science (BS) in Accounting from the University of Baltimore and is a seasoned accounting professional with several years of experience in the field of managing financial records for non-profits, small, medium, and large businesses. Jo-Anne is a certified Sage Intacct Accounting and Implementation Specialist, a certified QuickBooks ProAdvisor, an AICPA Not-for-Profit Certificate II holder, and Standard for Excellence Licensed Consultant. Additionally, Jo-Anne is a member of American Institute of Certified Public Accountant (AICPA), Maryland Association of Certified Public Accountants (MACPA), and Greater Washington Society of Certified Public Accountants (GWSCPA) where she continues to keep abreast on the latest industry trends and changes.