As your nonprofit organization attracts dedicated workers and supporters who share your mission’s value, you’ll need to become well-versed in nonprofit accounting. This differs from for-profit accounting in several key ways, with a focus on accountability rather than profit.
To ensure that your accounting department is well-organized, consider utilizing tools like Raiser’s Edge NXT accounting and fundraising software, which can help streamline the process. But first of all, you should know the fundamentals of nonprofit accounting. This article lets you in on what you should be aware of as you start your organization.
- What Is Nonprofit Accounting?
Nonprofit organizations must handle accounting that makes them accountable to their donors, contributors, and recipients. They must develop a careful plan and follow strict procedures. Donors can also set rules and restrictions regarding donations, allowing them to pick the programs they want to provide their funding. The organizations must ensure that the funds are spent in ways that the donors have agreed upon. They also keep these funds organized by distributing them in different groups. It is called fund accounting, where the funds are only used for specific purposes.
- Who Does The Accounting For Nonprofit Organizations?
A nonprofit organization has a specific accountant that maintains and keeps track of the financial data that helps them make informed decisions. Nonprofit accountants provide bookkeeping services while upholding the Generally Accepted Accounting Principles (GAAP), the accounting standards adopted by the U.S. Securities and Exchange Commission. The GAAP ensures that financial statements across various companies follow 10 criteria that make them easier to assess in a business or for comparing two entities. It becomes easier to analyze the financial health of a company.
Nonprofit accountants are responsible for resolving all account discrepancies, compiling statements and other documents, and handling financial transactions. They organize the financial information of your nonprofit organization. They can determine the budget for the upcoming year by analyzing the fundraising plans of the previous year. The accountant also helps the nonprofit organization maintain its financial health and shows that the budget can survive after emergency expenses.
The nonprofit accountant is responsible for filing Form 990 and providing other necessary paperwork to the IRS. The accountant will also perform the auditing process if the organization requires auditing according to its bylaws by the state or federal government. They will organize all the reports and ensure the financial information is correct and complete.
A professional nonprofit accountant is responsible for maintaining organizational financial systems and understanding relevant financial data. Organizations can choose to depend on executive roles for these tasks, hire a dedicated accountant, or outsource the responsibilities.
- What Are The Differences Between Nonprofit Accounting And For Profit Accounting?
Nonprofit accounting has other specific differences compared with the for-profit sector in terms of financial reporting, auditing, and tax filing.
- Financial Reporting
Nonprofits use a statement of financial position containing the organizational assets allocated to future missions. On the other hand, for-profit organizations have balance sheets where companies list their assets or earnings. The earnings are distributed among the stockholders.
For-profit organizations also use income statements that detail the company’s gains, losses, revenue, and expenses for a specific period. But since nonprofits don’t focus on generated income, they utilize a statement of activities that details the shifts that occurred in the entire year related to the assets, earnings, and expenses from fundraising.
Nonprofit financial reporting specifically focuses on pursuing their community service goals, utilizing the funding they receive rather than prioritizing income or revenue. Nonprofit organizations can reap numerous benefits by utilizing digital tools. These tools can help you leverage your database, provide customized services, and assist with programming, among other advantages.
- Auditing
For-profit organizations submit to the review of the Internal Revenue Service (IRS) by allowing them to go through various documents and financial records. Businesses must meet tax and legal obligations to avoid penalties. But nonprofit organizations are audited to prevent fraud and ensure they use the funds appropriately.
Nonprofits are also tax-exempt entities and must follow specific requirements by the state. These organizations only need auditing if their bylaws and donors also require it and if they receive over USD$750,000 of federal funding annually.
- Tax Exemption
Nonprofit organizations don’t pay federal taxes but must annually file a Form 990. A state requirement establishes the organization’s 501(c)(3) tax status and allows you to use funding strictly for charitable purposes. While tax-exempt, nonprofit corporations must still follow filling requirements and the submission of informal documents. Failure to comply will endanger their tax-exempt status. Filing the 990 forms is also an act of transparency because it allows the IRS to monitor nonprofit organizations. The tax-exemption status is sometimes exploited by people with unpleasant intentions by forming a nonprofit.
Takeaway
The basics of nonprofit accounting cover its differences as an entity that uses accounting to focus on the organization’s accountability to its donors and supporters. Financial reporting and auditing are also different in that they use statements of activities to provide information on the organization’s annual changes in funding received and expenses.
Auditing is only necessary if it is required by the federal government, state, or stated in the bylaws. Nonprofit accounting is performed by a licensed accountant who understands the nonprofit accounting legalities and responsibilities, such as filing tax forms for tax-exempt organizations.
