Nonprofit Accounting FAQs: Your Questions Answered

Working at a nonprofit is a balancing act. From marketing to fundraising to programming, you may take on different roles at any given time—even if they’re not necessarily your assigned position.

While you may easily be able to step into different areas of your nonprofit’s operations, helping with accounting tasks may not be as simple. Whether you’re working at a small nonprofit with your executive director handling financial responsibilities, a large organization with full-time accounting staff, or anything in between, you should have a basic understanding of nonprofit accounting. This way, you can make well-informed financial decisions and work well with other team members.

This guide will answer your most pressing questions about nonprofit accounting, empowering you to manage your organization’s finances effectively and understand your accounting staff’s responsibilities.

What is nonprofit accounting?

At its core, nonprofit accounting refers to the processes of recording, tracking, summarizing, and reporting financial transactions.

Instead of focusing on generating a profit, nonprofit accounting ensures charitable organizations use their resources responsibly to fulfill their missions and stay accountable to stakeholders like donors, sponsors, and grantors. Additionally, maintaining financial health allows nonprofits to boost their stability and longevity so they can accomplish more for their causes.

How does nonprofit accounting differ from for-profit accounting?

Since nonprofit and for-profit organizations have different goals, their accounting practices also differ. YPTC’s nonprofit accounting guide explains these key differences between nonprofit and for-profit accounting:

• Equity vs. Net Assets. For-profits classify the difference between their assets and liabilities as equity. Equity represents the ownership interest or stake shareholders have in a company. Since nonprofits don’t have owners, they instead label this term as net assets and must report whether net assets have donor-imposed restrictions.
• Net Income vs. Change in Net Assets. Similarly, for-profit organizations call the difference between revenues and expenses their net income, but nonprofits refer to it as the change in net assets.
• Report titles. Although both nonprofits and for-profits compile financial reports, the names for these statements differ. What for-profits call a balance sheet is a Statement of Financial Position in the nonprofit world, and a for-profit income statement is the equivalent of the nonprofit Statement of Activities.
• Contributions. Since nonprofit contributions may have donor-imposed restrictions, the process of receiving and recognizing them differs from that of for-profits. Nonprofits may also receive contributions through pledges or challenge grants, which can delay revenue recognition.
• Expenses. The IRS requires nonprofits to report their expenses by nature and function. Charitable organizations can do so on the face of their Statement of Activities, as a schedule in the notes attached to their full set of financial statements, or in a separate financial statement called the Statement of Functional Expenses.

If you have a business background, it can be helpful to remind yourself of these differences so you can use the correct nonprofit terminology. Remember to focus on accountability and stakeholder transparency rather than generating a profit.

What’s the difference between nonprofit accounting and bookkeeping?

You may hear people use the terms “accounting” and “bookkeeping” interchangeably. While these concepts are interrelated, they encompass different roles and responsibilities. Let’s explore the tasks that fall under each aspect of financial management:

• Accounting: reconciling accounts, compiling financial statements, preparing for audits, budgeting, managing grants, and maintaining compliance with Generally Accepted Accounting Principles (GAAP)
• Bookkeeping: entering transaction data, maintaining organized financial records, managing accounts payable and receivable, allocating resources, and processing payroll

While nonprofit accounting focuses on recording, tracking, summarizing, and reporting financial transactions, nonprofit bookkeeping refers to the less complex day-to-day financial activities that keep your organization running smoothly.

Which financial statements do nonprofits need to compile?

There are several nonprofit financial statements charitable organizations must compile to comply with GAAP and remain transparent with stakeholders. These documents include:

• Statement of Financial Position. This statement helps you assess your nonprofit’s financial health through its liquidity and financial flexibility. Its categories include assets, liabilities, and net assets.
• Statement of Activities. This statement focuses on your revenues and expenses for a certain time period and allows stakeholders to understand how you manage your resources. This statement includes categories such as revenues and support, expenses, and change in net assets.
• Statement of Cash Flows. This statement shows how cash flows in and out of your organization for a designated time period. The categories of this statement include cash flows from operating activities, cash flows from investing activities, cash flows from financing activities, and changes in cash, cash equivalents, and restricted cash.
• Statement of Functional Expenses. While not technically required, many nonprofits compile this statement to report on the nature and function of their expenses. The categories of this statement include program expenses and supporting activities, the latter of which is further broken down into management and general expenses, fundraising expenses, and membership development expenses.

Together, these documents allow you to make data-driven decisions, set realistic financial goals, better manage risks, and increase transparency and accountability with stakeholders.

How can nonprofits best manage their finances?

While your organization must compile financial statements, there are other optional tips and tricks your nonprofit can implement to better manage your finances. For instance, it’s recommended that nonprofit organizations:

• Leverage multiple revenue sources. Maximizing the revenue streams you use allows your finances to remain flexible even if you see fluctuations in certain sources. Common revenue sources include monetary donations, in-kind donations, grants, corporate philanthropy, membership dues, investment returns, program fees, consulting fees, and rental income.
• Communicate about their finances with stakeholders. Keep your stakeholders informed about your finances so they feel comfortable contributing to your organization. You may share your annual report, include financial updates in your newsletter, and leverage data visualizations to portray complex financial data.
• Plan ahead for potential challenges or uncertainties. Ensure your organization stays stable in times of financial distress by creating a backup plan for different scenarios, regularly analyzing financial metrics to assess your current position, and strategically planning to hit your long-term financial goals.

If your organization has trouble managing its finances or needs extra guidance, consider partnering with a nonprofit accounting firm that can take these tasks off your plate and offer expertise.

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With a better understanding of nonprofit accounting, you can effectively assist accounting staff members, help your organization make stronger financial decisions, and explore your role through the lens of financial management. If you have any additional questions, don’t hesitate to ask your accounting team or reach out to a firm that can help.