Accounting for nonprofit organizations requires professionals who not only understand accountancy definitions, but also have solid educational backgrounds. Through earning a relevant graduate degree, such as a Master of Accountancy, students can learn the specific knowledge and techniques to help nonprofit organizations optimize their financial security.
Accounting for Nonprofit
Unlike for-profit companies, which depend on profitability, nonprofits focus on providing services for the community and other nonprofits. Accounting for nonprofits requires professionals to exhibit a certain level of financial accountability to prove how an organization is spending its funds and furthering its cause. While 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.”
Professionals who pursue a career in accounting for nonprofit organizations should have a solid foundational knowledge of the state and federal regulatory laws encompassing the financial accountability of a nonprofit organization. Moreover, these accountants need to uphold the ethical values and code of conduct outlined by the American Institute of Certified Public Accountants (AICPA).
As the National Council of Nonprofits clearly suggests, accounting for nonprofit organizations remains held at the highest ethical standards. Donors want to feel secure knowing their chosen nonprofits are doling out their financial contributions equitably. Accounting for nonprofits requires professionals who value not only integrity, but also full financial transparency.
Financial Statements for Nonprofit Accounting
Other important financial statements necessary in nonprofit accounting include:
- Statement of Cash Flow: This accounting term refers to the inflow and outflow of cash in an organization. Moreover, a statement of cash flow takes into account the inflow of cash an organization receives from outside investments.
- Statement of Functional Expense: The term describes the incurred expenses during the reporting period. These incurred expenses can range from payroll and contractors to bills and even renting equipment or property.
Because of how they receive funding, nonprofits are required by law to provide the public with their annual IRS returns (IRS form 990). The 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.
Differences Between For-Profit and Nonprofit Accounting
Nonprofits and for-profit businesses work under different sets of financial accounting rules. Nonprofits focus mainly on accounting for the funds they receive, while for-profit businesses are concerned with maintaining profitability. 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 .
Some accounting requirements specific to nonprofits 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, fund accounting for nonprofit organizations tracks revenues and expenses.
Fund accounting does not track profits and losses. Instead, it establishes whether an organization is using its funding for its intended purposes. If an organization fails to use the funding appropriately, fund accounting can help it correct course.
In fund accounting, accountants must distinguish between a general fund and special-purpose funds, according to a fund accounting training manual from the U.S. Department of Housing and Urban Development. The general fund accounts for day-to-day operations, such as employee wages, building maintenance and general office expenses. Special funds record how a nonprofit is spending specific funding.
“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 organization’s overall financial position, including its assets and debts. 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).
Work Toward a Career in Accounting for Nonprofit Organizations
Professionals passionate about accounting for nonprofit organizations should consider an advanced degree in accounting. The University of North Dakota’s online Master of Accountancy (M.Acc.), offered through the Nistler College of Business & Public Administration, is available to students with a bachelor’s degree in any field. Furthermore,
The University of North Dakota’s online graduate accountancy program is designed for professionals who want to build a foundation in accounting and learn modern accounting practices in a rapidly changing field. Discover how the program can help you start your career today.
Recommended Readings
Accounting During and After a Pandemic
Diversity in Accounting: Statistics, Benefits and Challenges
Financial Accounting vs. Managerial Accounting: Choosing an Accounting Passion
Sources:
AICPA, AICPA Code of Professional Conduct
AICPA, CPAs in Non-Profit
Internal Revenue Service, Exempt Purposes – Internal Revenue Code Section 501(c)(3)
Investopedia, “Cash Flow Statement”
National Council of Nonprofits, Financial Transparency