What is a Non-Profit Accounting?
Non-profit accounting is the system of recording and reporting all the business transactions of the business unit that is considered to be a non-profit organization and it involves choosing the best accounting method, understanding of various compliances, tax responsibilities, creating and reporting the figures in the appropriate financial statements.
Components of Non-Profit Accounting
There are certain areas where accounting for nonprofit organizations differs from that of the general organization whose aim is to earn a profit. The following are the different components that are different in the case of non-profit accounting.
- The non-profit organizations receive donations from various individuals and business entities where the donations can be a general donation or specific donation where a general donation can be used for any purpose in the organization whereas the specific donation can be used only for the purposes for which the donor has given the donation. These donations are shown in the statement of the financial position under the head assets.
- The main motive of a nonprofit organization is to provide the services for the welfare of the society and there are certain programs that are conducted by the nonprofit organizations and the accounting for such programs are done separately to know separate surplus/deficit from such program.
- In normal profit-making companies, there is a separate head that reports shareholders’ equity but shareholders and investors are not there in the nonprofit organizations, hence, there is no equity stake in such organizations. Thus in the case of the non-profit organizations, net assets take place of the equity in the statement of the financial position.
- In the case of non-profit organizations, the statement of activities is prepared which calculates surplus/deficit instead of profit and loss account which calculates profit/loss in the profit-making organization and in place of the Balance sheet statement of the financial position is prepared for the non-profit organization. Cash flow statements are prepared in both type of organizations and statement of equity is not prepared in case of a nonprofit organization as equity shareholders and investors are not there.
- Apart from this, in the case of the Non-profit organizations, one extra report known as the statement of the functional expenses is prepared which actually records the funds accounting of the company. This report shows the total expenses incurred by the company along with the details of the expenses spent by the company by diving it into the fund and category wise
Example of the Non-Profit Accounting
Following is the example of sample financial statements in case of the Accounting for the Non-profit organizations are as follows:
Advantages
The various different advantages related to Non-Profit Accounting are as follows:
- In the case of the Non-profit organizations, one extra report known as the statement of the functional expenses is prepared which actually records the funds accounting of the company. This report shows the total expenses incurred by the company along with the details of the expenses spent by the company by diving it into the fund and category wise.
- There are certain programs that are conducted by the non-profit organizations and the accounting for such programs are done separately to know separate surplus/deficit from such a program. This will enable to make the analysis of every program in a proper manner.
Disadvantages
Though a Non-Profit Accounting is useful in the above-mentioned ways, there are certain disadvantages also. The various disadvantages related to Non-Profit Accounting are as follows:
- Non-profit accounting is more immune to the frauds when compared with accounting for the profit organizations. There are chances when the person responsible for the accounting does not account for some of the grants received by the organizations. In order to overcome this problem, organizations should place a better internal control in the organization and assigning the financial duty to multiple persons instead of assigning it to a single person.
- Accounting for the Non-Profit is different from the For-Profit organization so, the person who is responsible for accounting should have proper knowledge of the accounting principles and standards that are applicable to the non-profit organization and ensure proper compliance with that.
Important Points
The different important points related to Non-Profit Accounting are as follows:
- There are three main reports in the financial statement of the non-profit organizations which include a statement of the financial position, statement of the activities and the statement of the functional expenses.
- There are certain programs that are conducted by the non-profit organizations and the accounting for such programs are done separately to know separate surplus/deficit from such a program.
Conclusion
Thus the Non-profit accounting is the unique system followed in the non-profit organization for the purpose of recording and reporting of the business transactions done by them. The main motive of a nonprofit organization is to provide the services for the welfare of the society and not to earn the profit, and thus it receives a huge amount of the contributions from the different parties without any expectations to receive the return on such contributions.
The accounting approach thus followed by the non-profit organization differs from that of the for-profit organizations. There are three main reports in the financial statement of the non-profit organizations which include a statement of the financial position, statement of the activities and the statement of the functional expenses.
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