Accounting for Nonprofit Organizations

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Nonprofit organizations exist to further a mission or goal and rely on funding sources that include donations, grants and program revenue. Accountants who work for nonprofits are expected to document earnings and expenses for full financial transparency.

Unlike for-profit companies that depend on profitability, nonprofits focus on financial accountability to prove how their funds are being spent and furthering their cause. While an IRS 501(c)(3) status allows nonprofits to be tax exempt, they are permitted by law to make a profit.

“Leaders of charitable nonprofits know that financial transparency will help preserve the very-important trust each donor places in a nonprofit with each contribution,” the National Council of Nonprofits said. “Additionally, and no less importantly, conduct that is accountable and transparent earns employees’ trust and creates a positive workplace culture. Earning trust through financial transparency and accountability goes beyond what the law requires, but let’s start there: Nonprofits are required to disclose certain financial information to the public upon request; board members have access to financial information in order to fulfill their fiduciary duty to the nonprofit.”

Accountants who work with nonprofits endeavor to protect an organization’s success. Accounting for nonprofits requires professionals who not only understand accountancy definitions but also have solid educational backgrounds, including a masters in accountancy online.

 

Differences Between Nonprofit and For-Profit Accounting

Nonprofits work under a different set of financial accounting rules than for-profit businesses do. Nonprofit accountants must maintain the organization’s books in accordance with state and federal laws. Failure to keep the books to legal standards puts the organization in jeopardy of losing its tax-exempt status and opens it to possible legal liability.

Some accounting requirements specific to not-for-profits include:

  • Fund accounting

A nonprofit’s revenues typically consist of donations and grants. Some of the financial contributions and many of the grants have restrictions on their use. As a result, nonprofits track revenues and expenses through fund accounting. Fund accounting does not track profits and losses. Instead, it establishes whether an organization is using its funding for its intended purposes.

In fund accounting, accountants must distinguish between a general fund and special-purpose funds, the U.S. Department of Housing and Urban Development said in a fund accounting training manual. The general fund accounts for day-to-day operations such as employee wages, building maintenance and general office expenses. Special funds record how specific funding is being spent.

“By segregating revenues and expenses into separate funds, the accounting staff can more easily provide programmatic staff with updated spending information, budget variances, forecasts, burn-rates, and pipelines, as well as monitoring program spending against donor-imposed restrictions (such as restrictions on budget line-item flexibility) – all of which is essential to program managers and to ensure overall programmatic success,” James Willis, a nonprofit finance and operations executive, said in the periodical Nonprofit Information.

  • Statement of Financial Position

Like a balance sheet used for for-profit businesses, the statement of financial position reflects the overall financial position of the organization, including the assets and debts owned by the nonprofit. The assets are further divided into restrictions (temporarily restricted, permanently restricted or unrestricted net assets) that identify the limitations on how assets are spent.

“For example, if an individual donates money to a nonprofit organization and limits how the organization can use the funds, that money is considered restricted solely for that purpose. Depending on the nature of the donor-imposed restriction, these funds may be permanently restricted (such as endowments that cannot be spent) or temporarily restricted (such as funds that are to be spent, not held, on a specific project),” Willis wrote in Nonprofit Information. “On the other hand, if an individual donates money to an organization but never specifies on what or how the organization can use the funds, these funds have no restrictions and are therefore classified as ‘unrestricted.’”

  • Statement of Activities

For-profit businesses use profit and loss statements to show income and expenses. Nonprofits use a statement of activities to show income (usually derived from grants, donations and fundraisers) and costs (such as utilities, salaries, rent and office supplies).

 

Accounting for Nonprofits

Other important financial statements necessary in nonprofit accounting include:

  • Statement of Cash Flow

Details the inflow and outflow of cash

  • Statement of Functional Expense

Describes the incurred expenses during the reporting period

Because of how funding is provided, nonprofits are required by law to provide the public with their annual IRS returns (IRS form 990). The American Institute of CPAs (AICPA) suggests all nonprofits use Certified Public Accountants for financial accountability.

“Whether a CPA is on the staff of a not-for-profit organization or serves in an advisory capacity, he or she can help the organization solve tax problems, set up an internal control system, budget resources and prepare financial data for fundraising,” the AICPA said.

 

About the University of North Dakota’s Master’s in Accountancy Online Program

A vital component to working as an accountant in a nonprofit is earning a master’s degree in accounting. The University of North Dakota’s master’s in accountancy online is offered through the university’s College of Business & Public Administration.

UND’s online M.Acc. program is designed for professionals who want to learn modern accounting practices in a rapidly changing field. The program offers two tracks. The fundamental track is intended for students who have not completed significant amounts of undergraduate accounting coursework. The practitioner track is for those holding an undergraduate accountancy degree. Both tracks prepare candidates for the CPA exam.

UND’s program has been recognized in the top 5% of business schools worldwide and is accredited by the Association to Advance Collegiate Schools of Business (AACSB). For more information, contact UND now.

 


Sources

Exempt Purposes – Internal Revenue Code Section 501(c)(3): IRS

Fund Accounting Clinic: HUD

Fund Accounting for Nonprofits: What Is It and How Does It Work: Nonprofit Information

Understanding Nonprofit Financial Statements: Nonprofit Information

CPAs in Non-Profit:  AICPA