Non Profit Accounting

Updated on January 3, 2024
Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Non-Profit Accounting?

Non-profit accounting refers to the accounting arrangement that helps record and retrieve the financial details of a not-for-profit organization. Such organizations run not for profit but for the betterment of society. Hence, recording accounts used in favor of relevant causes is significant.

What Is Non-Profit Accounting

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The accounting process, in this case, doesn’t remain confined to checking the profits made but to ensuring that the businesses have been operating in compliance with the rules and industry standards. In addition, accountability with non-profit accounting enables contributors and donors to get details of the utilization of their resources.

Key Takeaways

  • Non-profit accounting is about recording and reporting a non-profit organization’s transactions.
  • It involves choosing the best accounting method, understanding various compliances and tax responsibilities, and creating and reporting the figures in the appropriate financial statements.
  • Non-profit organizations have a separate statement of the functional expenses to record the funds accounting of the company. 
  • Funds accounting, restricted distribution, acceptable guidelines, and proper documentation must achieve the best non-profit accounting results.

How Does Non-Profit Accounting Work?

Non-profit accounting makes a non-profit organization reliable and trustworthy. The firms prepare financial statements that let the individuals have details regarding the utilization of the funds. If donors find any tampering with the records, they suspect the misutilization of the funds and resources. On the contrary, if the records are accurate, they continue donating or contributing money and resources to noble causes. 

Accounting for non-profit organizations is not about financial statements depicting profits but about the entities utilizing the contributed and donated resources properly. If the financial statements indicate discrepancies, the organizations lose trust. Thus, a non-profit accounting firm must be careful enough to make computations thoroughly to present the figures accurately. For one to perform this type of 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.read more, completion of the required non-profit accounting certification is recommended.

However, there are three main reports in the financial statement of non-profit organizations:

  • A statement of the financial position
  • A statement of the activities
  • A statement of the functional expenses

In addition, there are specific programs that non-profit organizations conduct, and the accounting for such programs are done separately to know separate surplus/deficit from such a program. Today, organizations use non-profit accounting software that operates efficiently and per all requirements.

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Components

Not-for-profit organizations involve several components for recording and presenting financial details. Some of them include the following:

1. Assets

The organizations receive donations from various sources. These funds or resources can be general and used for general purposes of the organization or specific donations offered for a specific cause. The donations enter the statement of the financial position as assets. 

Non-Profit Accounting Components

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2. Surplus/Deficit

These organizations work for the welfare of society. The specific programs for social welfare fall under a separate category and do not form part of the firm’s surplus/deficit. In a profit-making organization, there is a 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.read more section, given the presence of the stakeholders in the companies.

3. Net Assets

In a non-profit organization, no stake in equity is there. Hence, such organizations record 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).read more in the financial position statement.

4. Statement of Financial Position

In non-profit organizations, the accounts department prepares a statement of activities. 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.read more and prepares the statement of financial position in place of the balance sheet. 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.read more are, however, common for all.

Principles

The policies, procedures, and best practices differ based on the nations and states in which the not-for-profit organizations operate. Thus, one of the non-profit accounting jobs is to understand the state-specific basics related to conflicts of interest, reasonable compensation, financial transparency, nonpartisan activities, and outcomes and effectiveness of the not-for-profit firms.

1. Funds Accounting

In non-profit organizations, the statement of the functional expenses is prepared to record 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).read more. Using fund accounting, not-for-profit organizations segregate donations and expenses into restricted, temporarily restricted, and general categories and accordingly use them.

Non-Profit Accounting Best Practices

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2. No Distribution

In non-profit accounting, accountability in terms of laws and usage of funds is prime. Thus, no organization leader can use the extra funds gathered for noble causes. In short, the extra funds are preserved for future use and cannot be distributed to anyone in the organization.

3. Accounting Guidelines

Non-profit organizations must follow certain accounting guidelines to ensure accuracy and reliability. The Financial Accounting Standards Board (FASB) has set general guidelines for all organizations. These rules are commonly known as the generally accepted accounting principles (GAAP).

4. Documentation

Last but not least is the documentation. It includes preparing the budget, considering the revenue, and creating the balance sheet, known as 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.read more for not-for-profit organizations.

Example

Below is an example of how to do non-profit accounting:

Non-Profit Accounting Statement 1
Non-Profit Accounting Statement 2

Non-Profit Accounting vs Profit Accounting

Non-profit and profit accounting differ in various aspects, including the involved intentions. For example, while profit accounting checks the exact profit figures, non-profit accounting ensures the proper utilization of donations and funds. The other differences are as follows:

CategoryProfit AccountingNon-Profit Accounting
TypeIncome statement and statement of operationsStatement of operations
Final DocumentBalance sheetStatement of Financial Position
Income CredentialStatement of retained earningsStatement of changes in net assets

Frequently Asked Questions (FAQs)

How is non-profit accounting different?

Non-profit accounting does not focus on deriving the revenue generated or the profit earned. Instead, it emphasizes the compliance of the not-for-profit organizations with the regulations. Plus, this helps check the proper utilization of money and resources donated or contributed by individuals and entities. In short, it is not an income statement but only a statement of operations.

Does non-profit accounting use GAAP?

Yes, the accounting for non-profit organizations uses GAAP, i.e., generally accepted accounting principles. These guidelines are mandatory for any profit or non-profit organization to follow while accounting for their transactions and preparing the required financial statements.

Do non-profits use cash or accrual accounting?

Normally, the accounting done for not-for-profits organizations uses accrual accounting as a better or more effective form. However, small non-profit organizations might go for cash accounting.

This article has been a guide to What is Non-Profit Accounting. Here, we explain its components, principles, an example, and a comparison with profit accounting. You can learn more from the following articles –

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  1. DIGVIJAY KUMAR says

    MY NAME IS DIGVIJAY KUMAR

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