There’s a lot of amazing things we can do in this world if we just put our minds into it. One way people who want to make a change do so is through forming non-profit organizations. These are companies that aim to accomplish missions as opposed to simply making a profit.
Often, these goals benefit the community or the world at large.
The structure of this kind of business is different than that of a standard business, as you would imagine. Accounting for nonprofit businesses will require a bit of a learning curve.
If you’re thinking of starting a nonprofit but aren’t sure how the finances would work, read on. We’ll walk you through some of the basics.
The Basics of Nonprofit Accounting
Despite what the name might imply, a nonprofit organization still needs to make a solid profit each year. This is so that the money can be re-invested back into the organization and it can keep going.
A nonprofit that makes no money and continues to spend will eventually go bankrupt and cease to exist. Turning a profit is still key, at least as sustainability is concerned.
The goal of nonprofit accounting is to see just how much an organization makes and charts how those funds are used to achieve its goals and overall mission.
Most of the money that comes into a nonprofit organization are from donors and contributors. Some might be from revenue from events and programs, other funds might come in from fundraising or member dues.
Typically, a nonprofit organization will attempt to have as little overhead costs as possible. This is because, generally speaking, donors prefer to have their money sent right to the cause at the heart of the organization, not the organization itself.
Main Differences in Nonprofit Accounting
There is some overlap in how for-profit and nonprofit organizations do their business. If you already have a background in business finance, you’ll be starting out on the right foot. However, there are some key differences you’ll need to know about.
You might be familiar with the concept of a balance sheet for a for-profit company. A nonprofit doesn’t have this kind of balance sheet, which typically would layout for shareholders the equity of the company.
Instead, it is more common for a nonprofit to produce a statement of financial position. This is a document that outlines the many assets a nonprofit has as well as any debts. This gives those looking to fund the nonprofit an idea of its current position.
The main form of accounting most nonprofits use is fund accounting. Check it out.
Similarly, a nonprofit accountant won’t produce an income statement as a normal business accountant would. A nonprofit isn’t concerned about the bottom line. It is more vital for them to demonstrate how the money that is coming in is being used to fund the overall mission of the organization.
As such, they’ll create a statement of activities. This is a document that demonstrates what programs they’ve run and the revenues and expenses associated with these programs.
Tax Exemption Basics
There are a lot of benefits to operating as a nonprofit business. For one, most nonprofit businesses are exempt from paying taxes. This is due to their charitable nature. However, a lot of paperwork will need to be filed upfront to ensure that this tax-exempt status is secured.
The nonprofit will need to register with the state it is located early on in its life. There are different forms from the IRS that are applicable to different kinds of nonprofit organizations.
IRS Form 1023 pertains to religious and educational establishments. Form 1024A pertains to social welfare organizations, while Form 1024 is a catch-all for those organizations that don’t fall under the first two categories.
In order to run as a tax-exempt organization, the nonprofit will need to open a dedicated bank account and provide a number of financial statements over the course of its existence.
It should be noted that attaining the tax-exempt status doesn’t make the organization completely non-taxable. These organizations still must pay employment taxes, for example.
Helpful Tips for Nonprofit Accounting
There are a lot of practices those who work at a nonprofit can get into to help ensure proper accounting procedures are followed.
For example, it would greatly benefit a nonprofit to have an organized system to ensure all purchases are budgeted, recorded, and fulfilled properly. Using purchase orders is a great way to do just that.
This is a document that is sent from a purchaser (such as a nonprofit) to a vendor. It confirms the details of a purchase and creates a paper trail for an expense before that expense is even properly charged.
It helps to keep suppliers and purchasers on the same page and essentially works like a contract. Keeping all of these purchase orders on file can help an accountant keep track of expenses and all the details involved in these transactions.
You’ll also want to understand the concept of fair market value. If another entity or individual volunteers their time for your organization, you’ll need to mark it down in your books as a gift.
How do you value such a thing? By looking at the market price of the service or good that was provided.
Understanding Accounting for Nonprofit Organizations
Working in the world of a nonprofit can require learning a lot of different practices. The above information can help guide you through the basics of accounting for nonprofit organizations, which can vary greatly from that of a regular business.
Need more financial information or advice? Keep scrolling our blog for more.