Nonprofits must adhere to strict guidelines when it comes to their financial information. This includes following GAAP standards. This means they must use a system of accounting called fund accounting, which divides their expenses into different categories or “funds.” It also requires them to follow non-distribution rules. This keeps donors and grant funders accountable for how their money is spent so even as a non profit organization you might need to speak to an accountant to get your work done properly
They Prepare Financial Statements.
Nonprofits are accountable to their supporters and grant funders, so they must be able to explain how all of their funds and resources are being used. This is why nonprofit accounting involves using different financial statements than for-profit businesses.
A statement of activities is unique to nonprofits because it breaks down expenses by entity function (such as fundraising, administrative, or program). The resulting report can be broken down further to show what proportion of each expense is directly related to a particular mission-related activity. Another critical component of accounting for non profit organization is a statement of cash flows, which provides a snapshot of all incoming and outgoing funds. The statement of cash flows can be used to identify trends in funding, such as seasonal patterns, and allow the organization to plan accordingly.
Lastly, nonprofits also use a statement of net assets to provide donors with a complete picture of the organization’s total assets and liabilities. Like the balance sheet that for-profit companies use, a statement of net assets can be broken down by restrictions (temporarily restricted, permanently restricted, and unrestricted) so donors can better understand how their money is being spent.
They Prepare Budgets
From the lengthiest capital campaigns to the shortest giving days, your nonprofit’s fundraising team works tirelessly to bring in the funds that cover your organization’s expenses. But bringing in the money isn’t enough; the incoming funding needs to be properly allocated and reported on according to Generally Accepted Accounting Principles (GAAP) standards.
Your budget will be a major component of this process, showing your estimated yearly revenues and expenses. Your budget should be checked monthly, comparing expenses and revenue results against your projected numbers. This will help your accounting team determine whether you are on track to achieve your goals for the year.
A budget is also important for tracking your nonprofit’s cash flow, which will be necessary for planning future spending and fundraising initiatives. This will also give you an idea of which financial trends your nonprofit can capitalize on, such as that many donors give less during the summer. Nonprofits can track cash flow using either a cash basis of accounting or a modified fund accounting method. The former tracks incoming and outgoing cash as it moves through your organization’s accounts. At the same time, the latter uses a separate set of rules for recording different buckets of money, like grants, endowments, and operating expenses.
They Prepare Audit Materials.
While the IRS does not require nonprofit organizations to undergo audits like they do for-profit businesses, some state and federal agencies do. Plus, grant funders often ask to see audit materials before granting money. And a well-prepared audit can help nonprofits improve their financial systems and practices while giving donors greater confidence that their money is being used properly. A nonprofit accountant will pull statements and reports of their organization’s financial data from their accounting software to prepare for an audit. For example, they may need to create a statement of activities, similar to a business’s income statement but organized by restrictions rather than revenue and expenses. Then they might need to reconcile bank accounts and analyze their financial data to identify areas that could be improved or manipulated. Nonprofits use several different types of funds to manage their finances so that they can use donations and other sources of income most appropriately for their mission. In addition, they must show their donors that their money is being spent wisely and that their organization follows accounting best practices.
They Prepare Tax Returns.
Nonprofits must record all of their income and expenses in an organized manner. This can be done using a physical ledger, nonprofit accounting software, or an Excel spreadsheet. In addition, they must prepare their tax returns by filing IRS Form 990 each year. This report shows how much the organization received and spent during the year and how that compares to its budget. It also reports on the organization’s assets and liabilities and discloses this information.
Nonprofit accounting differs from business accounting in that nonprofits are not required to distribute their profits to shareholders or owners. Instead, these funds must be used for the organization’s charitable purpose. This is why separating these funds from other general operating funds is important. This way, donors can see that their money is being put toward the organization’s mission, not overhead or administrative costs.
This is accomplished through a nonprofit’s statement of activities, which organizes the organization’s revenue and expenses into three functional categories: program, administrative, and fundraising. This allows the accountant to review the organization’s net assets more effectively and helps donors understand how their donation is utilized. It also allows the accountant to easily track budget variances, forecasts, burn rates, and pipelines.
