Nonprofit Accounting Resources

Nonprofit accounting is based on a different set of principles and regulations. Nonprofit accounting is socially responsible, while for-profit accounting focuses on generating a profit for investors. An accountant working for a nonprofit must understand the organizational structure, mission, goals, and objectives, as well as relevant laws and regulations governing the organization’s operations.

Nonprofit accounting focuses on how an organization executes its programming and operations. In comparison, for-profit accountants focus on revenue. Taxes are also very different for both. Nonprofits are not required to file financial statements or tax returns with the government, while businesses had more complex tax protocols.

For effective nonprofit accounting, you have to do both budgeting and forecasting. Budgeting is considered a plan of predicted revenues that an organization will achieve in the future. Financial forecasting, on the other hand, anticipates the amount of revenue or income that will be generated at a future time.

Ever had a plan that didn’t go exactly how you wanted it to? We all have…

A nonprofit must implement a budget to achieve its goals and missions, as well as manage its cash flow for sustainability and growth, and for the board of directors to meet their fiduciary responsibilities. Forecasts make it easier to deploy working capital in response to new opportunities and anticipate change.

A chart of accounts (COA) serves as the foundation for your organization’s financial statements. A COA informs stakeholders, funders, and executives of an organization’s financial position. It can also serve as a financial literacy tool for program staff and assist management in creating an effective budget for their programming.

Nonprofits can use one of two accounting methods– cash basis or accrual basis. Cash basis accounting is often used by smaller nonprofits that have low levels of activity in their operations. This method records income when an organization receives cash. Expenses are reported the moment they’re paid. Cash basis accounting keeps track of working capital, which can be useful in planning operations and future programming.

Accrual accounting is a type of accounting in which income and costs are recorded when earned or incurred rather than received or paid. Oftentimes, the expectation is that money will be paid in the future. Expenses are reflected on the period that best matches the funding they helped create. Accrual basis accounting can provide an organization with a complete financial picture by understanding its different assets.

An income statement presents a snapshot of a nonprofit’s financial performance. It shows how much money is actually coming in and going out during a specified period of time. A Statement of Activities compares revenue and expenditures for a fiscal year, breaks down expenses by function and net assets released from restrictions, and lists an organization’s net assets at the beginning and end of the year.

Consequently, the method by which a nonprofit organization’s accountant or bookkeeper classifies each expense according to its functional classification is known as functional expense allocation.

The functions typically seen in nonprofit financial statements are each of the programs, and the supporting services such as Administration and Fundraising. Review the sample statement below to see how this might apply to your nonprofit.

A complete set of nonprofit financial statements includes 3 statements– a Statement of Financial Position, a Statement of Activities, and a Statement of Cash Flows.

A Statement of Financial Position shows total assets, total liabilities, and net assets (broken down into net assets with and without donor restrictions). It analyzes the financial health of your nonprofit.
A Statement of Activities that details recognized revenue and expenses
A Cash Flow Statement discloses how much money has been raised and how much money has been spent during a specific period, and breaks those flows down into operating, financing, and investing sections.

Fund accounting refers to the process of tracking and reporting your expenses against the associated funding raised for that purpose.

When a donor donates, they can specify whether the money is restricted or unrestricted. When a donation is unrestricted, it means that a nonprofit entity can use it for whatever it wants. When a donation is restricted, the nonprofit must use the funds for the purpose designated by the donor.

Fund accounting is used for increasing financial transparency, ensuring accurate financial records, and tracking the organization’s performance to provide a clear picture of its financial position.

According to Charity Navigator, a popular site used by many funders to evaluate nonprofits on their financial efficiency, 7 out of 10 charities evaluated spend at least 75% of their budget on the staff that executes the programs and services they exist to provide. Charity Navigator has metrics for fundraising efficiency. Based on the size of your organization, it should be between 3-10%. Therefore, it is advised that you review your expenses while taking this criterion into account.

Internal controls are procedures that a nonprofit has in place to ensure that all its financial activities are compliant with the organization’s mission, goals, and objectives. They help control financial transactions; prevent fraud, errors, and overspending; track assets and liabilities; and simplify administrative tasks.

All nonprofits should implement an adequate internal control system. The best way to ensure that you have strong internal controls is to start with a solid plan. First, identify your organization’s goals and objectives with regard to internal controls. Next, determine your organization’s strengths and weaknesses such as the size of your staff. After understanding these two things, you can create a detailed internal control plan to support your organization’s financial goals.

QuickBooks, Xero, or Aplos, work well for smaller nonprofits that have simple accounting needs. We recommend Quickbooks Online.

Larger organizations require a more advanced software like Blackbaud. Deciding on which software to use (and pay for) is an important decision. If you’re having trouble deciding which to move forward with, let’s chat!

By outsourcing accounting, you are giving a third party the responsibility of managing your organization’s financial records. Outsourcing is a great way to free up valuable time and resources so that you can focus on other important tasks. Another benefit of outsourcing is that it gives you peace of mind knowing that your books are being properly kept and maintained by a professional.

If you outsource your nonprofit’s accounting to Velu, you will benefit from years of experience and collective expertise. You will receive accurate and timely information to keep you informed about your financial health by creating a services package tailored to your nonprofit’s needs.

GAAP, or Generally Accepted Accounting Principles, are guidelines that cover the best practices of commercial, corporate, and nonprofit accounting. Both businesses and nonprofits follow GAAP standards.

The purpose of GAAP is to ensure that financial statements are easier to read for investors, funders, and the government. Nonprofit GAAP requirements provide transparency for funders and assist the government in determining whether an organization should keep its tax-exempt status.

A nonprofit’s financial audit is an important part of ensuring that the organization has accurate accounting records and is legally compliant. A yearly audit ensures that the organization can accurately track its financial activities and comply with changes in laws and regulations. The frequency of audits depends on several factors, including the size of the organization, the type of activity it undertakes, and how it distributes its financial data. In general, most nonprofits should conduct an annual audit when their budget and operations support it.

Audits can uncover a wide range of problems, from errors in accounting records to violations of fundraising and spending limits. Auditors can also help nonprofits identify opportunities to improve their operations and fundraising. Finally, audits are an essential tool for nonprofits seeking to build public trust and confidence. By demonstrating fiscal responsibility, nonprofits can earn the trust of donors and strengthen their ability to further their mission.

An audit is the highest level of attestation services an independent CPA firm will provide that includes an examination of an organization’s financial operations, management controls, and tax compliance. In a standard audit, auditors will produce
a report of all the organization’s financial information (for example, a Statement of Financial Position, Statement of Activities, Statement of Cash Flows, and related footnotes) and attest they are free from material misstatements. Medium-sized to large nonprofits typically want an audit done every year for external stakeholders such as funders to show financial accountability.

A review is like an audit. It is an objective evaluation of an organization’s financial records and management processes. Unlike an audit though, a review may focus on a certain area or program within the organization. The reviewer must perform analytical procedures and make inquiries concerning the financial statements and accompanying footnote disclosures. This is a lower level of attestation service (and thus provides lower assurance) than an audit but conducts more testing than a compilation to ensure accurate financial reporting. A review may be a better option for smaller to medium-sized nonprofits whose budgets may not support a full audit, but want to show financial accountability to potential funders or other external stakeholders.

A compilation is one of the lowest levels of attestation services a CPA can provide and provides essentially no assurance as to the accuracy of the financial reports. Typically, the CPA won’t do any testing or analytical procedures but will examine details such as bank statements and loan documents. Your nonprofit may have a CPA perform a compilation if formal financial statements are needed for internal purposes or a bank loan.

• Accounting Standards Update (ASU) 2016-14, Presentation of Financial Statements of Not-for-Profit Entities: This statement provides guidance on how nonprofits should present their financial statements.
• ASU 2016 – 18 Restricted Cash: This statement requires that restricted cash and restricted cash equivalents be included as components of total cash and cash equivalents as presented on the statement of cash flows.
• ASU 2018 – 08 Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made: This statement provides guidance in evaluating whether transactions should be accounted for as contributions or exchanges. It also introduced the concept of barriers in providing additional guidance on identifying conditions that would preclude the recognition of a contribution as revenue.
• FASB ASC Topic 842, Leases: Does your organization lease its space? If so, this is an important standard to adhere to. Organizations must now report the assets and liabilities associated with their leases each year.