Accounting for Non-Profits and How to Manage Your Finances
Accounting for any organization is always complex if not done by qualified and experienced people. If accounting standards are not followed, this could lead to fines and losses. Accounting for non-profits is a slightly different ball game which makes it difficult to navigate without a professional.
Tax preconditions set by law to govern Non-profit organizations are strict. Nonprofit organizations handle tax payments, financial statements, and recordkeeping differently than other businesses. However, with the correct accounting practices, complete compliance, and transparency are ensured.
Accounting needs differ based on the size and programs of the organization.
For instance, a large Non-Profit might maintain in-house teams that handle the majority of the bookkeeping functions. However, for small to medium running on tight budgets, outsourcing accounting, bookkeeping, and financial management can be a valuable strategy.
In this article, we will discuss what accounting for Non-profits is, and why it’s important.
What is Accounting for Non-Profits?
Non-Profit accounting is the systematic management of the organization’s finances. It is the recordkeeping, and reporting that is uniquely designed for Non-profit organizations.
Non-profit organizations are identified by the following characteristics:
- No ownership interests
- Receive third party funding/ contributions or donations
- The purpose is not profit-driven
What is the difference between Accounting for Non-profit and for-profit organizations?
The similarities of accounting systems are uncanny, but the purposes of these systems usually differ.
Both accounting for non-profit and for-profit organizations must produce regular reports detailing their financial activities. They use many of the same accounting principles.
However, the different goals of the two types of organizations result in significant differences in these reports.
Balance sheet vs. statement of financial position
A for-profit company produces a balance sheet that details its net equity for owners and shareholders.
Simply put, the balance sheet shows what the organization is worth. However, a nonprofit does not have shareholders or owners.
Instead, it produces a statement of financial position that outlines its assets and debts.
Net assets vs. equity
For-profit accounting, the stockholders’ equity is equal to a company’s assets minus liabilities, sometimes called net assets.
A nonprofit doesn’t have equity, so this line item is always referred to as net assets. Net assets are labeled as restricted or unrestricted.
Income statement vs. statement of activities
When a company is trying to generate a profit, it produces an income statement showing its revenues, expenses, losses, and gains.
A nonprofit doesn’t have a bottom line since it is driven by a mission rather than the need to make a profit. Instead of an income statement, it produces a statement of activities that outlines the revenues and expenses associated with each program.
Statement of cash flow
Both nonprofits and for-profits must track and report their cash flow.
Do Non-profits need accountants?
Like any organization that handles cash flow and pays taxes, nonprofits should invest in professional accounting.
Many Non-profit organizations don’t allocate resources for a professional accountant to manage their finances. Instead, they assign the task to an untrained staff member or volunteer.
Non-profits run the risk of fraudulent activity if the bookkeeping and accounting are not carefully managed. Getting a professional accountant to make sure that someone with training and experience is always paying attention to the accounts and may notice something that an untrained employee would miss.
For instance, many organizations meet the requirements that release temporarily restricted funds but don’t realize it because no one is keeping track.
Accounting for Non-profits needs to be a top priority, here’s why.
Accounting for Nonprofits Ensures Sustainability
To be able to achieve your financial goals, you will at least need to understand double-entry bookkeeping.
This knowledge accomplishes so much on different levels. Not only will it help you see your revenue by balancing debits and credits, but it will also make you are more accountable by understanding the process of balancing the books in a moral sense.
Typical Accounting functions for Non-profits
Appropriate bookkeeping and accounting systems ensure that a nonprofit uses its financial resources according to its mission. They support an organization’s goals, maintain its financial health, and ensure compliance with essential statutory requirements.
Bookkeeping for Non-profits
Ensuring that an organization is financially healthy starts with healthy books. Bookkeeping sounds relatively straightforward and easy, it can involve numerous activities and responsibilities, depending on the size of the Non-profit and the volume and types of transactions.
The books or journals, for example, that need to be maintained may include cash receipts journal, cash disbursements journal, accounts receivable and pledge ledgers, accounts payable register, payroll ledger, and investment ledger.
Typically, the bookkeeper is also responsible for reconciling the bank statement to the journals each month and transferring relevant financial information to a general ledger, which is the foundation of the financial statements. Duties vary widely, however, from one organization to another, and may also include preparing cheques, making bank deposits, performing accounts payable and accounts receivable, calculating payroll, compiling budget data, and drafting financial reports and statements.
Every Non-profit organization needs a reliable system of financial controls. These are procedures and verifications that protect assets, detect errors, prevent mistakes or the misuse of funds, and provide protection from liability for management and the board.
Controls typically involve procedures for authorization and approval, as well as proper documentation and the physical security of assets. Every non-profit – no matter how small – should seek qualified accounting expertise to assist in developing, implementing and monitoring an appropriate system of financial controls.
A budget serves as a non-profit’s financial plan for carrying out its mission. Analyzing income and expenses enables management and the Board to make decisions that will maintain the financial health of the non-profit organization. It also serves as an important internal control. Regularly comparing the budget with results will point out any irregularities.
At least quarterly, management and the board should compare the previous year’s budget, the current budget, and actual revenues and expenses. Any significant differences need to be evaluated and if necessary, plans adjusted to address these differences.
If management and the board have limited experience with budgeting and monitoring of results, or if the organization’s finances are becoming more complex, an accounting firm with non-profit experience can provide assistance with designing and evaluating a budget and educating staff regarding how to carry out the process.
In order to make informed decisions, management and board members need detailed financial information. For this, they rely on timely, accurate financial statements such as the balance sheet, income statement, cash flow statement, and statement of changes in net assets. Comparing these documents with the budget as well as with the same documents from the previous year identifies important trends and differences that facilitate astute decisions.
Reliable financial reports are also essential for strategic planning. Nonprofit leaders require accurate financial projections to assess the feasibility of planned activities or projects as well as timely financial information to monitor those strategies.
If the staff does not have an in-depth understanding of financial statements, management should secure external accounting expertise to prepare financial statements or to train staff in their preparation and interpretation.
When it comes to financial transparency and accountability, funders, the government, lenders, suppliers, even board members, are becoming more demanding of the organizations they support. Audited financial statements are one way of providing reassurance of an organization’s financial integrity to these stakeholders.
When it comes to crunching numbers, shortcuts can be costly; instead, invest in the best accounting expertise available to reduce risks and costs.
We Support Ministries helps you get the best team members for you to grow your reach and scale as a Non-profit.
We Support Ministries is a leading Texas-based insourcing company that provides virtual assistants and administrative support for Churches and Non-profit organizations. Moreover, we provide both short and long term virtual outsourcing services customized to suit your business process needs. We provide trained and qualified personnel to help you scale your Non-profit organization.