Non-profit accounting refers to the particular method of recording and reporting that a non-profit organization uses to keep track of its economic activities. A non-profit organization is defined as one that has no ownership interests, operates for a purpose other than profit, and accepts significant contributions from third parties who do not expect to get back something in return. While for-profit companies are primarily concerned with profit, non-profit organizations are more concerned with accounting accountability. They adhere to a system of regulations and processes that assist them in remaining accountable to their sponsors and volunteers. All charitable organizations are granted tax-exempt status. You are not obligated to pay federal income taxes if you qualify for tax-exempt status.
Non-profits utilize fund accounting to monitor responsibility rather than profitability (in other words, to prove that the money they have is being spent wisely). Fund accounting is the process of categorizing all contributions into one of two groups: limited or unrestricted. This enables a non-profit to understand how much money it has and how it can be spent.
Income statements, balance sheets, and cash flow statements are the three primary financial statements used by for-profit businesses. Non-profit organizations utilize financial statements similar to those used by for-profit enterprises, but they have distinct names and are organized differently. The statement of financial position (balance sheet), statement of activities(income statement), and cash flow statement are all used in non-profit accounting.
The statement of financial status gives you a snapshot of your nonprofit’s financial health throughout time. Your assets, liabilities, and net assets are all listed on the statement. The non-profit version, unlike the balance sheet, substitutes net assets for equity. On the statement of financial status, your net assets + liabilities must equal your assets.
There are two types of net assets: those with donor restrictions and those without donor limits. You must mark donations as “with donor restrictions or reserve funds” if made for a specific purpose. A statement of activities would have a “Net Assets” total at the bottom of the document, but an income statement would have a “Net Income” total.
Finally, the cash flow statement displays how much money enters and leaves your company over a given period. The cash flow statement divides funds into three types of activities: operating, investing, and financing. Your non-profit can have either a positive or negative cash flow.
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