NonProfit Accounting Definition

There are some clear differences between working in the private sector and the public sector. From the communities or consumers your organization serves to the way your organization operates, it is important to understand the functionality of your specific sector. Not-for-profit or non-profit accounting differs substantially from accounting for profit-oriented businesses.

In this article, we explain what nonprofit accounting is, explain how to do nonprofit accounting, list five common financial statements used in nonprofit accounting and provide some best practices for nonprofit accounting.

What is nonprofit accounting?

Not-for-profit or non-profit accounting is a style of bookkeeping or accounting that effectively tracks the expenses and developments of a nonprofit organization. Because nonprofits do not make a profit, their accounting practices focus on different metrics and use different evaluation methods than traditional nonprofit businesses.

Generally, not-for-profit accounting focuses on keeping organizations accountable for how funds are used rather than tracking profits or forecasting future earnings.

Some of the specific elements in which nonprofit accounting differs from traditional accounting include:

• Limited funds: Nonprofits must spend limited funds on certain predetermined activities and programs of the organization.
• Temporarily restricted funds: Temporarily restricted funds function as funds that are restricted for a certain period of time, but once that period has passed, nonprofits have more freedom in how they use the funds.
• Unlimited funds: Nonprofit employees can use unlimited funds in any way they want for the organization. Some nonprofits refer to their unlimited fund as their annual fund.

Traditional accounting does not need to detail these different financial designations, which impacts how they track their funding, expenses and income.

How to do nonprofit accounting

If you want to know more about how to do nonprofit accounting, follow these basic steps to learn more:

1. Build a bookkeeping system

The first step in conducting effective nonprofit accounting is to establish a bookkeeping system. Many non-profit organizations choose to use accounting software designed specifically for nonprofit accounting and fund tracking such as Accurate Online

Accurate Online is useful for ordinary people who may not have extensive training in accounting, because they can still carry out the function as bookkeepers of the organization with the help of accounting software.

If you are interested in trying Accurate Online to better manage your nonprofit organization, you can try using Accurate Online for free for 30 days via the link in the image below:

2. Learn fund accounting

Understanding fund accounting is essential for accountants or nonprofit bookkeepers. Unlike in traditional nonprofit businesses, nonprofits must track different sources of money, including limited funds, temporarily limited funds, and unlimited funds. Fund accounting involves tracking these different accounts and making sure the organization is using the available funds appropriately.

3. Set up the organization’s bank account

Make sure you use the appropriate bank account for each of your funds. It is often useful to create separate bank accounts for each type of fund you manage and track payments and deposits for each.

Many banks provide accounts specifically designed for nonprofits, so you can check and see if that’s an option for your organization.

Read also: Recurring Income: A Complete Definition and Examples

4. Reconcile your account

Reconciling your account is the process of comparing the payments and deposits that you have tracked with your bookkeeping software with the payments and deposits that the bank has tracked for your account or accounts.

Reconciling your account regularly, usually once a month, ensures you know how much money you have and haven’t miscalculated any expenses.

5. Use a purchase order

Purchase orders (POs) are a great tool for tracking your organization’s purchases and expenses to complement your books. A purchase order typically includes the name of the vendor, product or service purchased, cost and delivery date. All of this information makes tracking purchases and reconciling appropriate accounts easier.

6. Record donations in kind

Tracking in-kind donations is another responsibility that is specific to nonprofits. An in-kind donation is someone’s contribution of time, service, or product to your organization.

Since these items have traditionally been unaccounted for, you should work with donors to establish a fair market value for in-kind donations and track it with your bookkeeping software.

7. Create a budget

Budgeting for nonprofits is also different from budgeting for traditional nonprofits. A nonprofit budget, like a traditional budget, estimates expenses and income. However, in the case of nonprofits, the income comes almost entirely from donors or profits which the organization then has to reinvest into the nonprofit. Make sure your budget is properly managing and estimating potential donations and expenses.

5 financial statements included in non-profit accounting

The following is a list of five financial statements commonly used by nonprofit organizations:

Statement of financial position

The statement of financial position is the not-for-profit equivalent of the traditional balance sheet for profit. Generally, a statement of financial position shows what a nonprofit organization has, owes, and remains. A traditional balance sheet shows equity in the remaining funds, but because nonprofits have no owners, nonprofits refer to the remaining funds as net assets.

Activity statement

An activity statement, known as an operating statement for some nonprofits, is the nonprofit version of the income statement for profit. An activity statement tracks all of an organization’s expenses and revenue streams over a specific period of time, usually a fiscal quarter or a year. The bottom line, or final calculation, is the change in net assets as opposed to the net income shown on the income statement.

Cash flow statement

A cash flow statement tracks the cash your organization has, typically from three sources—financing, operations, and investments. Generally, these documents look very much like profit equivalents, also called cash flow statements or cash flow statements. Like most nonprofit financial reports, the cash flow statement tracks changes in net assets rather than profits or income.

Non-profit budget

A nonprofit budget is a document that helps your organization allocate funds and plan potential expenses. Nonprofit budgets function similarly to profit budgets, but they feature a large number of funds that are reserved for different purposes, specifically restricted funds, temporarily restricted funds, and unlimited funds.

Functional cost report

Functional expense reports track your nonprofit spending by category to help you reconcile accounts more easily and maintain transparency with your stakeholders. Common categories for functional expense reports include administrative costs, program costs and fundraising activity costs.

The best tips for dealing with nonprofit accounting

Review these best practices for nonprofit accounting to make sure your books are accurate and efficient:

Know your overhead costs

Donors and board members often want overhead costs for your nonprofit to be kept as low as possible to ensure the maximum amount of money possible to fund the organization’s activities and programs.

Keep accurate and up-to-date records of your overhead expenses, so you can share them with internal and external stakeholders as needed.

Review your budget

Review your budget regularly to make sure it’s accurate and properly reflects your fundraising efforts and expenses. Transparency and accuracy are often critical in the not-for-profit sector.

Ensuring you have the most accurate and up-to-date information to share with stakeholders helps build trust and demonstrate the efficiency of your organization.

Maintain internal control

Make sure your organization has internal controls to ensure that there are no fraud or record-keeping errors. Some of the internal controls to consider are asking coworkers to check the accuracy of your work prior to submission, using security programs in other digital software and applications, and regularly taking stock of fixed assets.

If you use Accurate, you can also easily perform asset management and record your assets more easily and better. So what are you waiting for? You can try Accurate Online via this link.

Also read: Current Assets: Definition, Types, How to Calculate, and Examples in Business

Use team

Consider spreading finance assignments across a team of employees rather than a single accountant or bookkeeper. This way, there is more cross-checking of accounts, budgets, and expenses to ensure accuracy and transparency than if one person managed all aspects of a nonprofit’s finances.

Invest in accounting software

Use accounting software designed specifically for nonprofits to help ensure you accurately track and manage your organization’s finances.

Often, bookkeeping software makes it easy for employees with a minor background in accounting or bookkeeping to accurately track the finances of their nonprofit organization.

Know the tax regulations

Nonprofits are subject to certain state and local tax laws. While this varies from organization to organization and country to country, it’s important that you and your accounting team know what applies to your nonprofit. It is always best to consult a tax professional for assistance when evaluating taxation.

Set a fundraising goal

Use your financial documents to help set achievable fundraising goals for your organization. The more money you can make for your nonprofit, the more options you have for development, programming, and activities.