What is non-profit accounting?

What is non-profit accounting?

Non-profit organisations primary goals are usually driven by an overarching mission, typically one that’s charitable, religious, scientific or educational, rather than earning a revenue to benefit stakeholders. Because of this, the method of accounting used by non-profit organisations has to be adapted to be based more on accountability, rather than revenue.

Non-profit accounting is a unique process by which non-profits plan, record and report their finances. This type of accounting, also referred to as fund accounting, tracks how a non-profit company spends its funds and achieves its goals.

What is the difference between profit and not-profit accounting?

As non-profit organisations and profit-driven companies have very different objectives and ways of working, their accounting methods also need to be different. They both account for different entities within a business and therefore rely on various approaches and technologies. Profitable companies earn income and are often subject to income taxes, which need to be recorded on their financial statements. Other important documents include balance sheets, income statements and cash flows.

In contrast, non-profit accounting is statement based and consists of various types of documents, including statements of financial position, activities, cash flows and functional expenses. As income isn’t earned, but instead is funded by contributors and donors; money has to be spent in ways that supporters will approve of. Fund accounting therefore helps the organisation allocate their funds into categories to make sure funds are being spent where they should be.

What are non-profit accounting statements and reports?

Non-profit budget

A non-profit budget is a document created by the leader of an organisation. It’s used to plan the financial wellbeing of a company for the year. It defines activities that need to be completed, sets time frames and predicts expenses. It’s essentially the budgeting benchmark that ensures balance between cost and outcome.

Statement of financial position

A statement of financial position is similar to that of a balance sheet and is used to report net assets. In non-profit organisations, there’s variation in the types of assets, or commonly known as funds:

• Restricted funds/net assets: these must be spent on certain projects, often determined by the donor
• Temporarily restricted funds /net assets: these should be spent on a  certain project until a set period of time, after which the funds can be used for other purposes.
• Unrestricted funds/net assets: this is also known as annual fund and can be spent wherever needed by the organisation.

The financial position statement can be summarised into this simple equation:

Net Assets = Assets – Liabilities

Having this statement gives a better understanding of the general financial health of the organisation.

Statement of activities

The statement of activities report is similar to a profitable companies income statement, but is more focused on what the company has achieved, rather than what they have earnt. It includes changes in net assets of the non-profit and characterises the revenue and expenses accordingly. This document helps to organise and categorise your expense and revenue sources and see how the services offered by the organisation are financed.

Statement of cash flows

As recorded by for-profit organisations, cash flows are also required from non-profits. This summarises the funding that’s moving in and out of the organisation within the period. This covers everything from operations, investments and financing activities. It will help to determine where the money is going and can help set future financial plans. 

Statement of functional expense

The statement of functional expenses helps you to allocate expenses to their uses within the organisation. There’s a few different areas to categorise expenses by including, programing, administrative and fundraising but these can be broken down into more detail such as travel, rent and office supplies.

What are the accounting standards for non-profit organisations?

Non-profit organisations must adhere to the standards set by the GAAP. These are general principles accepted by accountants in all sectors. The principles were set by the FASB, who set regulations to prevent errors and discrepancies in financial statements. These standards help non-profits manage and account for their funds properly, as well as making it easier for auditors and those with interest in the company, to understand the activities and relative success.

Tips for effective non-profit accounting

Accounting practices are important for any non-profit organisation, so you’ll want to ensure that you’re being as effective and efficient as possible. Here’s some tips that will benefit your organisation’s accounting practices.

•  Assign financial tasks across different members of the team — not only will it take away a tedious task from one individual, but having multiple eyes will help remove outliers or errors.
• Be realistic with expenses — when setting your budget, ensure you’ve considered all of the expenses and don’t try to disguise these as they will only show up later in the accounting process. Overhead expenses that aren’t related to your mission, but are still essential such as investing money into the workspace should be recorded.
• Create an annual operating budget — similarly to above, ensure you’ve set a realistic budget and frequently reference back to it. Check in on how the business is going each month and see if anything needs to be evaluated to make sure you’re staying on track.
• Invest in a non-profit specific accounting software — this software is designed to handle the tasks needed to complete your accounting needs.

Implementing strong accounting practices will keep your organisation running smoothly, ensuring efficient management, fundraising and organisation.