The Basics of Nonprofit Accounting

Why You Need Nonprofit Accounting

Instead of the goal of making a profit, non-profits strive to achieve social, charitable, educational, and other goals, act to meet the needs of citizens, protect the rights and legitimate interests of citizens and organizations, provide legal, emotional, financial, and other assistance, as well as work for other purposes aimed at achieving public goods. All the funds that an organization receives are used to cover the costs and achieve these goals.

For any non-profit organization, accounting is just as important as it is for a for-profit business. Well-organized accounting allows not only to reveal hidden reserves, to detect issues with planning and financial and budgetary discipline, but also to prevent and promptly eliminate possible losses and unreasonable costs.

Organizations have to follow Generally Accepted Accounting Principles, which serve as a guide for nonprofit accounting. These rules and principles are set by two entities: FASB and AICPA. It should be noted that FASB pronouncements are considered to be on top of the AICPA pronouncements. Also, some of the principles are not applicable to nonprofits, while others are set specifically for such organizations.

As you are probably aware, there is no owner or shareholders who expect to get profits, so nonprofits focus more on ensuring that revenue exceeds costs. This guarantees that the organization can fulfill its mission and provide services needed by society. In fact, if the revenue exceeds the costs, it might look down upon because the entity is not doing everything it possibly could with the money (unless it is a specific fund kept for unexpected expenses). In addition, they might be eligible for a tax-exempt status, which is a whole other topic.

The activities of such organizations significantly complicate accounting. Nonprofit accounting requires a professional approach, knowledge of the legal and accounting specifics, strict control of the income and expenses to ensure that every activity is within the limits set on the funds provided and its nonprofit tax-exempt status.

The specific features of accounting in nonprofit organizations make it necessary to supplement general accounting tasks with more specific ones, such as the exact execution of the approved budget, compliance with legal requirements, allocation of funds for various projects within the limits set by the restrictions set on the funds, and identification of additional, unnecessary costs and expenses.

The Basics of Nonprofit Accounting

Distinct Features of Nonprofit Accounting

The activities of non-profit organizations, as discussed above, require a special approach to accounting. What is so special about nonprofit accounting? Here are just a few things you should keep in mind:

Ø Grants and donations are some of the first things that you would notice on the accounting reports of nonprofits. As you might be aware, there are grants/donations that have restrictions and grants that do not have any restrictions. These restrictions can be valid only for a specific period of time or apply for the whole time the organization uses the funds received. For instance, an organization might receive a donation that it can spend only to provide resources for military families. In other cases, the donor might donate money for a specific project and when it is over, any leftover money can be spent for other goals of the nonprofit organization.

Ø Along with properly accounting for grants, donations, and other income, nonprofit accounting requires that the individual responsible for it can provide advice on whether the organization is spending too little or too much if this is a grant that should be used over a specific period, and if it is spending the money effectively (i.e. spendings help it achieve its goals in the best possible way).

Ø Nonprofit accounting also involves slightly different reporting. Although it is much easier to get a hang of as there is specific information that should be shown in each report. The titles of these reports slightly differ, but you can trace most of the contents to a similar statement prepared by regular businesses. For example, there is no Income Statement because the non-profit organization is not operating to receive profit. Instead, you will prepare a Statement of Activities which will show Net Assets instead of Net Income as the bottom line. There are also no owners or shareholders, so you would prepare a Statement of Financial Position. The Equity section is replaced with the Net Assets section.

The Basics of Nonprofit Accounting

Bottom line

Without accounting, it is hard to accurately tell if the entity can afford to purchase or replace equipment or hire new staff, if it raised enough money for a project, and how much cash is coming in and going out in general. At the same time, accounting for a nonprofit organization is rather complicated. Errors in it can lead to serious negative consequences, both legal and financial. To minimize risks, modern nonprofit organizations increasingly entrust accounting to specialists.

Having a professional accountant who knows all the rules, requirements, and best practices, both legal and accounting, is ideal. However, a good specialist also requires adequate wages, but here, taking into account the situation with the financing of the nonprofits, problems may arise.

There are a couple of ways out of this situation. The accountant can obviously be a volunteer. Outsourcing of accounting is also a rational solution for any nonprofit organization, regardless of specialization, goals, and ways of funds receipt.

The Basics of Nonprofit Accounting

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