Accounting for Nonprofit Businesses
Nonprofit organizations are created to help achieve a goal or mission. They rely on donations, grants, and program revenue as funding sources. Nonprofit accountants must document their earnings and expenses to ensure financial transparency (accounting for nonprofit business).
Nonprofits are not dependent on profitability like for-profit businesses that depend on profits. They focus on financial accountability so they can prove their funds have been spent and help their cause. Nonprofits can be exempt from tax by being IRS 501(c), but they can make profits under the law.
The National Council of Nonprofits stated that leaders of charitable nonprofits understand that financial transparency can help preserve the trust donors place in a nonprofit for each donation. Conduct that is transparent and accountable earns trust from employees and fosters a positive work environment. Trust is earned through financial transparency and accountability. This goes beyond the requirements of the law. Let’s begin by saying that nonprofits must disclose certain financial information to the public upon request. Board members have access to financial information to fulfill their fiduciary duties to the nonprofit.
Nonprofits need accountants who can help them succeed. Accounting for nonprofits requires accountants who are familiar with accounting definitions and have strong educational backgrounds. This includes a master’s and an in accountancy online business consulting services Maryland.
Differences between For-Profit and Nonprofit Accounting
Nonprofits operate under different financial accounting rules from for-profit companies. Nonprofit accountants are required to ensure that the organization’s books comply with federal and state laws. The organization could lose its tax-exempt status if it fails to adhere to the legal requirements. This could also lead to potential legal liability.
Some accounting requirements are specific to not for profit organizations:
- Fund accounting
Donations and grants are the most common sources of revenue for nonprofits. Many grants and financial contributions have restrictions. Fund accounting allows nonprofits to track income and expenses. Fund accounting does not track profits or losses. It establishes whether an organization is using its funds for its intended purposes.
According to the U.S. Department of Housing and Urban Development, fund accountants need to distinguish between special-purpose and general funds in fund accounting. The general fund is responsible for daily employee wages, building maintenance, and general office expenses. The particular funds track how specific funding has been spent.
James Willis, a nonprofit finance and operations executive, stated that by segregating revenues from expenses, the accounting staff could provide programmatic staff with more up-to-date spending information, forecasts, and burn rates and monitor program spending against donor-imposed restrictions.
- Statement of Financial Situation
The statement of financial situation is similar to a balance sheet for for-profit companies. It shows the overall financial position of an organization, including assets, debts, and liabilities. Further, the assets are divided into restrictions (temporarily restrained, permanently restricted, or unrestricted), which indicate limitations on how support can be spent.
If a donor restricts the use of funds for a specific purpose, such as limiting the amount spent by the organization, the money will be considered restricted. These funds can be permanently restricted (such endowments that can not be consumed) or temporarily banned. Willis explained in Nonprofit Information. On the other hand, funds donated by an individual to an organization without stating how or what they can be used for are considered ‘unrestricted.’
- Statement Of Activities
Profit and loss statements are used by for-profit businesses to report income and expenses. Nonprofits use a Statement of Activities to show income (usually derived through grants, donations, and fundraisers) and costs (such s salaries, utilities, rent, and office supplies).
Accounting for Nonprofits
The following financial statements are also crucial in nonprofit accounting:
- Statement on Cash Flow
Details the cash flow and cash outflow
- Statement of Functional Cost
Defines the expenses incurred during the reporting period
Nonprofits must provide the public their IRS Form 990 annually because of how they receive funding. American Institute of CPAs (AICPA) recommends that all nonprofits hire Certified Public Accountants to ensure financial accountability.
The AICPA stated that CPAs could be either on staff at a nonprofit organization or serve as advisors. They can solve tax problems, set up internal control systems, budget resources, and prepare financial data to support fundraising.