Introduction to Nonprofit Accounting: The Basics
In the world of accounting, there are rules and regulations designed to ensure consistency, accuracy, and transparency. However, when it comes to nonprofit organizations, there are some unique principles to understand. In this post, we'll delve into the basics of nonprofit accounting and discuss its importance.
Nonprofit accounting is a specialty within the accounting profession. It's the method by which nonprofits record and report on their financial transactions. Unlike for-profit organizations that exist to generate profits for their owners, nonprofits exist to fulfill a mission. This fundamental difference leads to a unique approach to accounting.
What Is Nonprofit Accounting?
Nonprofit accounting refers to the unique system of recordation and reporting that is applied to the organization and business activities carried on by a nonprofit organization. Nonprofit accounting was established to deal with issues particular to nonprofit organizations, and it is governed by a separate set of rules and practices.
Key Principles
Several key principles define nonprofit accounting:
Not-for-Profit Orientation: Unlike for-profit entities that focus on providing monetary returns to owners or shareholders, nonprofits focus on serving their communities or specific causes. Profits are directed back into the organization to further its mission.
Fund Accounting: Nonprofits are often funded by donations or grants, which can come with specific stipulations on how the money can be used. Fund accounting is a system where funds are categorized based on their use and restriction.
Donor-Imposed Restrictions: Donors may restrict the use of their donations, leading to a need for careful tracking of restricted and unrestricted funds.
Board Oversight: Nonprofit organizations are governed by a board of directors. The board is responsible for overseeing the organization's operations, including its finances.
Importance of Nonprofit Accounting
Nonprofit accounting ensures regulatory compliance and financial transparency. The latter is critical because nonprofits rely heavily on public trust. Here’s why nonprofit accounting is crucial:
Compliance: Nonprofits must adhere to specific accounting rules and regulations set by bodies like the Financial Accounting Standards Board (FASB). Failure to comply can lead to penalties and loss of tax-exempt status.
Transparency: Detailed accounting helps nonprofits demonstrate where their funds are going. This transparency can lead to increased public trust, more donations, and overall success.
Management: Proper accounting allows nonprofits to manage their resources efficiently, plan future activities, and measure their financial health.
Key Components of Nonprofit Accounting
Chart of Accounts: A nonprofit’s chart of accounts is the list of accounts that an organization uses to categorize its financial transactions. This list is tailored to the organization's specific needs and is crucial for preparing financial reports.
Financial Statements: Nonprofit financial statements are documents that provide a snapshot of the organization's financial status. They include the Statement of Financial Position (similar to a for-profit balance sheet), Statement of Activities (similar to an income statement), and Statement of Cash Flows.
Functional Expenses: Nonprofits must also report expenses by function. This means expenses are divided into three categories: program services, general and administrative, and fundraising.
Donor Restrictions: Donations can be classified as either restricted or unrestricted, depending on whether donors have specified how they want their funds used.
Form 990: Nonprofits are required to file Form 990 with the IRS. This form provides the public with financial information about a given organization and is often the only source of such information.
Nonprofit Accounting Software
There is a wide array of accounting software that nonprofits can use to simplify their accounting processes. These tools can help organizations manage their funds more efficiently, track donations, generate reports, and ensure compliance with applicable laws and regulations. The right software solution depends on the organization’s specific needs.
We recommend using QuickBooks Online for your nonprofit accounting. (Hint: use www.techsoup.org for an excellent discount on your QuickBooks Online subscription)
The software is easy to set up and can be customized as your organization grows.
If your organization is heavily grant funded or over $3-5 million in revenue, then we would recommend software such as Sage Intacct for your accounting needs. We are happy to help evaluate which software is the best fit for your organization.
Conclusion
Understanding the basics of nonprofit accounting can seem like a daunting task, but it is essential for the successful operation of any nonprofit organization. The unique nature of nonprofit work means that the principles of accounting in this field are different than those in for-profit businesses. With knowledge of these basic principles and the right tools, any nonprofit can accurately and efficiently manage their financial situation, keeping their focus on fulfilling their important mission.
