Written by Eddy Hood
Nonprofits are organizations that exist primarily to improve society and provide specific services to the public. These organizations differ from for-profit businesses in many key ways. Nonprofits do not have owners, for instance, and while most businesses are subject to federal income tax, nonprofits can apply to the Internal Revenue Service (IRS) to become tax-exempt. While making a profit is not a nonprofit's primary function, it is important to an organization's health and continued success that revenues consistently exceed expenses. Therefore, non-profit accounting is an important part of any organization's operations. However, because accounting for non-profit organizations can be confusing to someone who isn't a certified non-profit accountant, many organizations choose to use outsourced financial reporting services similar to those offered by Ignite Spot.
The United States Generally Accepted Accounting Practices, or US GAAP, put into place and occasionally updated by the Financial Accounting Standards Board (FASB), require that nonprofits issue certain kinds of financial statements. Whereas accounting for a small business or firm typically involves a balance sheet, in nonprofit accounting, there is something called a statement of financial position. Just like a business's balance sheet, the statement of financial position lists an organization's assets and liabilities. The structure of the statement is based on the basic accounting equation, expressed as Assets = Liabilities + Net Assets.
Another key component of non-profit accounting is the statement of activities. This statement reports revenues and expenses. Under revenues, the nonprofit will list any income from contributions, fundraising efforts, grants, membership dues, and other sources. In addition to a statement of activities, some nonprofits are required by the FASB to issue a statement of functional expenses. This statement reports a nonprofit's expenses, broken down by function and type. For instance, there will be a column listing the expenses for each separate program run by the nonprofit, another column for fundraising expenses, and so on. These expenses are further separated into rows according to what, specifically, the money was spent on, like salaries or rent.
Nonprofits also issue a report called a statement of cash flows. This statement reveals the changes in an organization's cash during a period, broken down into three sections: investing, financing, and operating. The investing section shows the amount of cash spent on purchasing or made from selling long-term investments, such as vehicles and other equipment. The financing section shows the amount of cash gained from borrowing from lenders, as well as the amount of cash used to repay them. The operating section includes any changes in cash that do not fall into the other two categories.
The explanatory notes that typically accompany these other reports are also an important part of nonprofit accounting. These notes could consist of many pages that include further information about the financial statements or the nonprofit itself. Because financial reporting of this sort may have very little to do with an organization's primary mission, they may opt not to hire a full-time accountant or download accounting software. Instead, many organizations choose to save time and money by using outsourced accounting solutions and online nonprofit bookkeeping.
Learn about our non-profit accounting support by clicking Online Bookkeeping Services.
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