Non-profit Organizations are just that, not for profit. Since non-profits operate on community impact and not sales revenue, their accounting reporting objectives are different. Non-profit accounting is still regulated by government agencies, such as the Financial Accounting Standards Board and the American Institute of Certified Public Accountants. The main difference that exists within Non-profit Organizations, is that they receive funds from the government or donors. This fact alone makes bookkeeping requirements for non-profits completely different from for-profit businesses.
The main goal in non-profit bookkeeping is to prove that granted funds are being used for the organization's community mission. And just like all other organizations, financial records also help leaders make decisions and strategize for the longevity of the entity. It is common for Non-profit leaders to focus on raising funds and winning grant awards, leaving their bookkeeping to fall on the waste side. Here we will share 5-bookkeeping requirements all nonprofits should know and have. 1. Fund Accounting Fund accounting is required for the bookkeeping of non-profits because it tracks accountability instead of profits. With fund accounting, all income must be dedicated to a purpose. Small non-profits may only have one fund, but larger non-profits will have several funds. Types of funds include unrestricted funds, fixed asset funds, restricted funds, endowment funds, etc. Here is the confusing part, each fund is to be tracked as an individual business. So when choosing how many funds your nonprofit should have, keep that in mind. You can use this accounting software for non-profit organizations (https://www.aplos.com/). 2. Purchase Orders Non-profits have tight regulations on what money can be spent on. It is important to organize a bookkeeping system for purchase orders to be ordered, budgeted, and fulfilled properly early on. A purchase order is a document that shows what you ordered from a supplier, how much you agreed to pay, and when you should receive your order. Once this is signed by a vendor, it is a legally binding contract. 3. Tracking In-Kind Contributions and Grants It is common for nonprofits to receive monetary donations. But non-profits also receive goods and services, or in-kind contributions. It is required for non-profits to account for these in-kind contributions at retail value, specifically if the non-profit would have purchased them otherwise.
How you decide to account for In-Kind Contributions will depend on if you are required to follow GAAP, however, you should still properly account for in-kind contributions in your bookkeeping for useful internal management and decision-making. A quick tip: If the value is under $5K, the IRS allows you to assign the value yourself, but anything over $5K needs to be the approximate value. 4. Expenses by Function Reporting expenses by functions means, to report expenses in relation to the activity that caused them to be incurred. Non-profits require a Statement of Activities, which is one of the main Financial Statements.
The Statement of Activities reports expenses within one of the following classifications: 1) each of its major programs, and 2) the supporting services (including management, fundraising, and membership development). Classifying expenses such as salaries, utilities, and rents are referred to as classifying expenses by their nature. The Statement of Activities is similar to the Income Statement since it shows revenue minus expenses.
5. Financial Reports The majority of business owners are familiar with for-profit financial statements, but may not know the similarity and differences of non-profits' required financial statements. Non-profits require 3 main Financial Reports, including the Statement of Financial Positions, the Statement of Activities, and the statement of Cash Flows. The Statement of Financial Position is similar to the Balance Sheet, it highlights assets and money owed; however, it does not include equity. It also breaks assets into unrestricted and restricted assets.
Assets - Liabilities = Net Assets Unrestricted net assets are any funds your nonprofit has received that have no rules or conditions attached to them.
Restricted net assets are donations that have terms and restrictions attached. The Statement of Activities is similar to the Income Statement, but it breaks out by activity. It shows the profitability of your non-profit organization.
Revenue - Expenses - Losses = Profitability The Statement of Cash Flows helps you track the cash, the main three sources are: operating, investing, and financing. The Statement Cash Flow for-profits and nonprofits are very similar. I'm sure you did not start a non-profit to learn fund accounting and stare at excel sheets. But proper bookkeeping is crucial to the survival of your beloved organization. Every non-profit is different but here are some basic tips you can start doing now until you figure out all the rest:
Find a non-profit bookkeeping solution
Open a separate bank account
Focus on learning about in-kind donations
Start making budgets and sticking to them
We hope these bookkeeping requirements for non-profits were helpful for all our non-profit leaders!