Ac­count­ing for non-profit or­ga­ni­za­tions

Non-profit or­ga­ni­za­tions are formed to pursue a goal, not for profit or for any of the proceeds to go to its members or leaders. These or­ga­ni­za­tions don’t have com­mer­cial owners and must rely on funds from con­tri­bu­tions, mem­ber­ship fees, events, and in­vest­ment income among other things. The money made is spent solely on the or­ga­ni­za­tion’s aims (and running costs…) to make sure it achieves what it set out to do.

Non-profits issue a 's­tate­ment of ac­tiv­i­ties' instead of the usual income statement that regular busi­ness­es need to take care of. Non-profit or­ga­ni­za­tions don’t have owners and so there is no owner’s equity, stock­hold­ers’ equity, and no dis­tri­b­u­tions to owners.

It’s falsely presumed that these or­ga­ni­za­tions can’t earn profits, but this is a must for non-profits in case of un­fore­seen cir­cum­stances, un­ex­pect­ed expenses, decrease in revenues, increase in staff, equipment re­place­ment, etc.

Non-profit ac­count­ing is simpler than ac­count­ing for for-profit or­ga­ni­za­tions since there are fewer forms to fill in. Our article on non-profit ac­count­ing will explain the process better, as well as which forms need to be filed. We will conclude with detailing what you should look for in non-profit ac­count­ing software programs should you choose to use one.

In order to be exempt from paying federal income taxes, these or­ga­ni­za­tions must contact the Internal Revenue Service (IRS). Non-profits can file Form 990 or Form 990-EZ along with Schedule A if their gross receipts are $25,000 or less. Form 990 is an 'in­for­ma­tion return' and needs to be filed under the pro­vi­sions of Internal Revenue Code Section 6033 although religious or­ga­ni­za­tions are exempt and don’t need to fill out this form. Form 990-EZ should be filled in by busi­ness­es that have less than $100,000 in gross receipts and less than $250,000 in total assets at the end of the tax year. A Schedule A form is for reporting in­for­ma­tion that isn’t disclosed to the public. It needs to be attached to Form 990 or Form 990-EZ but if the or­ga­ni­za­tion isn’t required to fill out one of these two forms, then the Schedule A form also doesn’t need to be filled out.

There have been dis­crep­an­cies about whether a donor can use their con­tri­bu­tion as a char­i­ta­ble deduction on their income tax return. This is def­i­nite­ly the case with schools and churches, for example. This may seem rel­a­tive­ly straight forward, but there are non-profit companies that don’t have to pay taxes, however, con­tri­bu­tions from donors don’t qualify as char­i­ta­ble de­duc­tions. Examples include college fra­ter­ni­ties, amateur sports clubs, social or­ga­ni­za­tions, etc.

The principal financial state­ments required by U.S. generally accepted ac­count­ing prin­ci­ples (US GAAP) for non-profit or­ga­ni­za­tions are:

• Statement of financial position
• Statement of ac­tiv­i­ties
• Statement of cash flows
• Statement of func­tion­al expenses (for some or­ga­ni­za­tions)
• Notes to financial state­ments

The statement of financial position

The statement of financial position is another name for a balance sheet. The purpose of this statement is to list the or­ga­ni­za­tion’s resources, oblig­a­tions, and ownership details of a company on a specific day.

A non-profit or­ga­ni­za­tion doesn’t have owners so instead of one part of the statement being owner’s equity or stock­hold­ers’ equity, it’s known as 'net assets', which is where this equation comes in:

The equation should always remain in balance due to double-entry book­keep­ing so if the or­ga­ni­za­tion receives $1,000 from a donor, the net assets should be the same amount:                                                                                      

The balance rule also applies if some of the donation is used straight away for equipment or fees, for example:

The statement of ac­tiv­i­ties

This report is also known as the income statement or the profit and loss statement. The statement reports the revenue, expenses, gains, and loss of an NFP for a specified period, usually one year. This statement is mandatory since the aim of a non-profit or­ga­ni­za­tion is to provide for society. It must declare which programs it provides. The statement of ac­tiv­i­ties is like the income statement that profit-making busi­ness­es issue.

The sum­ma­rized trans­ac­tion amounts are declared in the revenues and expenses part of the statement. Mem­ber­ship fees, program fees, fundrais­ing events, grants and con­tri­bu­tions all count as revenues that should be reported in the ac­count­ing period that they were earned, not when they were received (if this differs).

Expenses can be divided into two cat­e­gories: program expenses and sup­port­ing services expenses. The former refers to the amounts directly incurred by the non-profit while carrying out its programs. If the company has four programs, then each one will be listed sep­a­rate­ly as well as the expenses for each one. The latter has two subgroups: man­age­ment, general, and fundrais­ing. The amount reported for each of the subgroups depends on how much time each employee spends per­form­ing these ac­tiv­i­ties.

The statement of cash flows

This statement (also known as cash flow statement) is similar to that of a for-profit or­ga­ni­za­tion since it reports the business’ change in its cash and cash equiv­a­lents during the ac­count­ing period. The three different sections are:

1. Net cash from operating ac­tiv­i­ties (which reports the changes in cash aside from those reported in the investing and financing sections).
2. Net cash from investing ac­tiv­i­ties (which reports the amounts spent pur­chas­ing long-term assets such as equipment, vehicles, and long-term in­vest­ments).
3. Net cash from financing ac­tiv­i­ties (which reports the amounts received from anything that was borrowed or any re­pay­ments).

The statement of func­tion­al expenses

The statement of func­tion­al expenses reports the expenses by their function (programs, man­age­ment and general, fundrais­ing) as well as the type of expense (rent, salaries). State­ments of func­tion­al expenses aren’t com­pul­so­ry, but you are rec­om­mend­ed to issue one.

Notes to financial state­ments

These notes are an essential part of the statement of financial position, the statement of ac­tiv­i­ties, and the statement of cash flows. They consist of several pages of in­for­ma­tion ex­plain­ing the nature of the or­ga­ni­za­tion’s ac­tiv­i­ties and also a summary of the sig­nif­i­cant ac­count­ing policies

The general ledger is where the or­ga­ni­za­tion’s trans­ac­tions are recorded. The accounts are organized like this:

• Statement of financial position accounts
  • Asset accounts
  • Liability accounts
  • Net asset accounts

• Statement of ac­tiv­i­ties accounts
  • Revenue and gains
  • Expenses and losses

The number of accounts in a company’s general ledger depends on the number of programs the non-profit has, the kind of revenue it earns, and the amount of detail that’s required for planning and con­trol­ling the or­ga­ni­za­tion. It’s normal for a non-profit or­ga­ni­za­tion to have a separate general ledger account for each of its bank accounts. There might be hundreds of accounts in the general ledger, but all the balances will be sum­ma­rized in the financial state­ments.

Dealing with non-profit ac­count­ing can prove tricky so if you don’t want to go it alone, you can count on the numerous software available on the market. Many small busi­ness­es don’t have the budget for pricey software, but luckily there are lots of free or af­ford­able options out there.

The software needs to be able to deal with con­tri­bu­tions from donors, grants, in­vest­ments, and fund raising events as ac­cu­rate­ly as possible. It should also make it easier for you to collect in­for­ma­tion to submit your IRS Form 990 (mentioned above in this article).

Non-profit or­ga­ni­za­tions are always hoping to attract new people and software can help you out with this task. Readable reports for funding sources are necessary so that others can see where their con­tri­bu­tions have gone/are going. Non-profit ac­count­ing software can also help you plan future ini­tia­tives.

It is es­pe­cial­ly helpful if this software can predict cash flow so you know what to expect fi­nan­cial­ly and can be more prepared for how un­pre­dictable funding can be. It is of utmost im­por­tance that non-profit or­ga­ni­za­tions organize their spending since there’s always the risk of un­fore­seen cir­cum­stances and the more prepared you are, the less dis­rup­tive this will be.

The software program needs to be easy to use and flexible since many different users will be operating it. Non-profits are often staffed by vol­un­teers, who might not nec­es­sar­i­ly have non-profit ac­count­ing training so it helps if the software is un­com­pli­cat­ed and doesn’t need much fa­mil­iar­iza­tion time.

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