Key Differences in Nonprofit Organization Accounting

The distinction between a for-profit organization, like a company, and a nonprofit organization, like an advocacy group, is a tax status distinction. Nonprofit organizations are often exempt from paying taxes on their income, and people or groups who give money to nonprofit organizations are often entitled to tax deductions for their contributions. Because the differences between nonprofit organizations and for-profit organizations concern tax practices, there are differences between accounting for nonprofit and for-profit organizations as well. Below you will find explanations on some of the different ways that for-profits and nonprofits account.General_ledger

Contributions VS. Sales                                        

When a business receives money from a customer, it’s usually in exchange for selling a product or service. When a nonprofit receives money from a citizen, it’s usually in the form of a contribution intended to support the nonprofit’s efforts. In 1993 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards 116, and since that statement nonprofit organizations have been required to detail the type and quantity of contributions they receive, and are required to structure these contributions into the following categories:

  • In Kind Contributions such as donated materials or volunteered time
  • Special Event and Membership Fees
    • The individual must calculate the fair-market benefit they receive from attending a nonprofit special event such as a fundraiser (benefits could include something like hearing a speech from a compensated speaker), or from being a member of a nonprofit organization. The value of this benefit is not tax deductible, but smaller benefits within a special event or membership expense may be. If you are unsure contact a qualified certified public accountant with experience helping nonprofits.
  • Unconditional pledges
    • Pledges donated without stipulation about future events, such as a matching grant from another organization or donor

Basis of Accounting

Some nonprofits use cash-basis accounting instead of accrual-basis bookkeeping to record and report expenses and revenues. Cash and modified cash-basis accounting means that nonprofits report expenses as they pay them and income, in the form of contributions, collected fees, and pledges, as they receive them. Conversely, most businesses use the accrual method of accounting, which records expenses and income as they are scheduled over the course of months and years so that a business has an expanded perspective of their financial position.

Functional Expense Allocation

The IRS requires that nonprofits report how they spend money by categorizing their expenses based on where the effects of their payments will be experienced. The two most frequently used classifications are

  • Program services
  • Supporting activities

Program services expenses are payments directly involved in providing the services that fulfill the purpose of the nonprofit. Supporting activities include management, general expenses, fundraising, membership development, and other practices that support and sustain the nonprofit organization. Many nonprofits categorize their expenses uniquely. Do you know how your nonprofit organization categorizes their expenses? If you are unsure of whether your nonprofit is accounting in accordance with FASB practices, contact an experienced nonprofit accountant in Fairfax, VA or wherever you live in order to ensure that your nonprofit is accounting properly.