Nonprofit accounting can make or break your nonprofit operations. No matter how successfully you meet all of your other goals, accounting is what helps you understand your potential for development.
To smoothen your experience, we have put together this article aimed to help you maintain the financial health of your nonprofit.
Nonprofits use a special planning, recording, and reporting process called nonprofit accounting to manage their finances and develop their financial position. Nonprofits prioritize accounting’s accountability component, whereas for-profits prioritize making a profit.
Nonprofit organizations adhere to a particular set of guidelines and practices that aid in keeping them answerable to their contributors and donors.
Oftentimes, nonprofit accounting is called fund accounting, as funds are the main source of revenue for non-profit organizations. In fact, one of the biggest difficulties you’ll have when establishing a nonprofit is managing donor funds. This happens because contributors can restrict their donations, giving them control over how they are utilized. However, this is where things can get tricky.
The majority of donations are unrestricted, which means they can be put to any use the organization sees fit, be it paying for management expenses or providing financial assistance for a specific program. If a donor does place limitations on the cash they give, they must be accurately recorded.
To get a better perspective, typically, nonprofits will divide their funds into three categories:
- Restricted funds: This is the cash that must be used for specific tasks and endeavors within your company.
- Temporarily restricted funds: This money must be used for a certain set of tasks and initiatives at your nonprofit up until a particular date. They then turn into unlimited funds.
- Unrestricted funds: In nonprofit accounting, you may also refer to this as your annual fund. You can use it to fund whichever parts of your business are most necessary.
The primary distinction between nonprofit and for-profit accounting is that the financial position of the former is governed by the concepts of profit and loss, whilst the latter is governed by social welfare. As such, besides the tax-exempt status of nonprofit organizations, differences arise at multiple levels, so we will analyze them punctually.
Nonprofit accounting places more emphasis on the organization’s ability to manage its funds than for-profit accounting does on the business’s ability to generate profits.
Here are a couple of changes taking place when you do accounting for a nonprofit compared to a simple for-profit business:
- Tracking all of your funding sources is one of the most difficult aspects of nonprofit accounting because each program (or service) your nonprofit offers must be properly accounted for.
- On the balance sheet, “net assets” is used in place of equity.
- These programs’ operating expenses should be classified as “management and administration”.
- Your non-profit organization’s expenses for marketing and raising money for its programs should be classified as “fundraising.”
- Promised assistance that hasn’t been paid for yet can be classified as “resource development.”
Nonprofits’ necessary financial statements are also different from those of for-profit companies. Even while financial statements for nonprofit organizations have a slightly different function, the board of directors and contributors can still benefit from reading them in order to understand the nonprofit organization’s financial position.
Here are the financial statements you need to prepare for your nonprofit organization:
- Statement of Cash Flow: This displays changes in cash and cash equivalents and is comparable to a statement of cash flows for a for-profit business.
- Statement of Activities: This resembles an income statement for a for-profit business and records changes to the organization’s net assets.
- Statement of Financial Position: This report, which lists sources of income, costs, and net assets, is similar to the balance sheet of a for-profit company.
Differences also arise in the way nonprofit organizations record their revenue and expense financial data. Here are some of the major changes:
- Nonprofit organizations are exempt from this obligation, but for-profit businesses must declare their income and expenses monetarily.
- For-profit businesses must submit annual financial statements that meet the locally used standards, but nonprofit organizations are not obligated to do so unless they choose to.
- Most organizations are free from paying taxes on their net earnings, but for-profit businesses are required to do so. If their revenue surpasses a particular level, the taxes on their profits might be substantial (after expenses are paid).
In short, for a nonprofit organization:
- Revenues include donor contributions, membership fees, fund-raising activities, grants, and other sources of income.
- Expenses include fees for managing the program, paying employees, conducting fundraisers, and other costs.
Hopefully, by now, you have understood what makes nonprofit accounting distinct from for-profit accounting. Yet, when talking about accounting for nonprofit organizations, there is one more distinction we must make: the separation between nonprofit accounting and bookkeeping.
They are frequently mixed up in discourse and even in practice. However, nonprofit accounting and bookkeeping are not exactly the same thing, and being aware of them will make it easier for you to distribute responsibilities among your team members.
The maintenance of your nonprofit’s regular financial operations is known as nonprofit bookkeeping. The bookkeeper for your nonprofit performs a variety of tasks, such as:
- logging data
- recording transactions
- calculating payroll
- distributing costs
- writing checks
- making deposits
On the other hand, nonprofit accounting is the procedure of gathering data and performing analysis to help make strategic decisions. Your nonprofit accountant performs a variety of tasks, including:
- examining the accounts
- defining the rationale behind financial decisions
- creating financial reports
- using nonprofit accounting software for account management
- audit preparation
- completing financial forms
- account reconciliation
- ensuring that IRS and generally accepted accounting principles are met
However, both can be digitized with the help of bookkeeping and accounting apps.
Your organization may experience difficulties with nonprofit accounting at first, but don’t worry—you’ll be able to manage it. If you are familiar with the foundational ideas of accounting, your nonprofit will be better prepared to evaluate its financial situation.
At Zivo, we believe that there is already enough pressure on business owners to succeed and grow their organizations while seeking to maintain a healthy work-life balance. We are here to assist you with your nonprofit bookkeeping because of this.
If you need a Canada-based expert to glance at your finances before you decide to move forward with a CFO or on your own, book a free consultation with Zivo.