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. 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. In contrast, the particular donation can be used only for the purposes for which the donor has donated. These donations are shown in the statement of the financial positionStatement Of The Financial PositionStatement of Financial Position represents the current financial status of an entity in terms of assets and liabilities. This statement is used by the stakeholders and shareholders as it affects their investing decisions. 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 specific 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 standard profit-making companies, there is a separate head that reports shareholders’ equityShareholders' EquityShareholder’s equity is the residual interest of the shareholders in the company and is calculated as the difference between Assets and Liabilities. The Shareholders' Equity Statement on the balance sheet details the change in the value of shareholder's equity from the beginning to the end of an accounting period., but shareholders and investors are not there in nonprofit organizations. Hence, there is no equity stake in such organizations. Thus in the case of the non-profit organizations, net assetsNet AssetsThe net asset on the balance sheet is the amount by which your total assets exceed your total liabilities and is calculated by simply adding what you own (assets) and subtract it from whatever you owe (liabilities). It is commonly known as net worth (NW). take the place of equity in the statement of the financial position.
- In the case of non-profit organizations, the statement of activities is prepared. It calculates surplus/deficit instead of profit and loss accountProfit And Loss AccountThe Profit & Loss account, also known as the Income statement, is a financial statement that summarizes an organization's revenue and costs incurred during the financial period and is indicative of the company's financial performance by showing whether the company made a profit or incurred losses during that period. and profit/loss in the profit-making organization. Also, in place of the Balance sheet, the statement of the financial position is prepared for the non-profit organization. Cash flow statementsCash Flow StatementsA Statement of Cash Flow is an accounting document that tracks the incoming and outgoing cash and cash equivalents from a business. are made in both types of organizations, and the 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 other report known as the statement of the functional expenses is prepared, which records the funds accountingAccountingAccounting is the process of processing and recording financial information on behalf of a business, and it serves as the foundation for all subsequent financial statements. 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 sample example of financial statements in case of the Accounting for the Non-profit organizations are as follows:
The various advantages related to Non-Profit Accounting are as follows:
- In the case of the Non-profit organizations, one other report known as the statement of the functional expenses is prepared, which records the funds accountingFunds AccountingFund accounting is a method used by non-profit organizations and governments to account for funds or grants received from individuals, grant agencies, governments, or other organizations who have placed restrictions or conditions on how the funds from the grants are utilized (condition could be implemented on full funds or part of the funds as per the donor). 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 dividing it into the fund and category wise.
- There are specific 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. It will enable us to analyze every program properly.
Though a Non-Profit Accounting is useful in the ways mentioned above, there are certain disadvantages also. The various difficulties 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. 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 apply to the non-profit organization and ensure adequate compliance with that.
The different vital 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 specific 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.
Thus the Non-profit accounting is the unique system followed in the non-profit organization for recording and reporting of the business transactionsBusiness TransactionsA business transaction is the exchange of goods or services for cash with third parties (such as customers, vendors, etc.). The goods involved have monetary and tangible economic value, which may be recorded and presented in the company's financial statements. done by them. The main motive of a nonprofit organization is to provide services for the welfare of the society and not to earn the profit. Thus it receives a considerable 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.
This article has been a guide to Non-Profit Accounting. Here we discuss components of non-profit organization accounting along with an example, advantages, and disadvantages. You can learn more from the following articles –