What’s So Different About Nonprofit Accounting?
If you’ve never worked in the nonprofit environment, you might assume that the accounting is fairly simple and straightforward. In actuality, proper accounting for a nonprofit is much more complex than accounting for a for-profit business. Why?
For starters, most nonprofits operate on an accrual, not cash, basis. This means that rather than record money in and out on the date of the cash transaction, revenue must be recorded to the period in which it was earned, and expenses must be recorded to the period the cost was incurred.
To further complicate things, nonprofits are required to follow Generally Accepted Accounting Principles (GAAP), as well as additional standards set forth by the FASB (Financial Accounting Standards Board). Failing to maintain the nonprofit’s books according to these guidelines (and/or state regulations) could jeopardize the organization’s tax-exempt status and potentially lead to legal liability for board members, officers, and staff.
Some other differences in nonprofit accounting include:
- Ownership: A nonprofit isn’t owned by anyone, so there’s no “owner’s equity” or “retained earnings” recorded on the books. Instead, the difference between what the organization owns and what it owes is referred to as “net assets.”
- Income & Expenses: A nonprofit’s revenue is typically made up of member dues, donations, and grants. Many donations and grants are restricted in their use, so it’s essential to ensure that the donor’s intent is honored.
- Financial Reporting: Reports differ in content and format, as for-profit reports often focus on profitability, while nonprofits focus on programs, research, and services provided by the organization. Terminology also differs. For example, for-profits have Balance Sheets, which are the equivalent of a nonprofit’s Statement of Financial Position.
- Annual Audits: Most for-profits don’t need annual audits, whereas government agencies, funders, and nonprofit boards may require that nonprofits conduct annual audits. That makes it critical that the accounting is done properly throughout the year, with the independent audit in mind.
- Board of Directors: Nonprofits face a great deal of scrutiny from the public, potential donors, regulators, and, internally, from the board of directors. It is important for nonprofits to communicate frequently and clearly with the board and its various committees on financial matters. That typically means providing regular, accurate financial reports and additional information that board members—some of whom probably are not well-versed in accounting—can clearly understand and use to make critical decisions.
Work with a Firm that Knows Nonprofits
At Chazin & Company, accounting is our business, but nonprofits are our passion. We provide outsourced accounting, CFO, and advisory services that empower nonprofits to fulfill their missions and achieve their strategic goals.
Contact us to talk about your current finance and accounting challenges and how we might be able to help you.