Accounting helps measure organizations’ financial strength. Since nonprofit organizations have different financial goals than for-profit companies, the accounting practices of both differ. Most significantly, the finances of nonprofit organizations are not beholden to investors and business owners seeking a return on investment. While nonprofits do generate revenue, the purpose is to pay for programs and cover operating costs. Also, while for-profit businesses produce revenue mainly through sales, nonprofits do so mostly through donations and grants. These distinctions between for-profit and nonprofit entities, create differences between nonprofit accounting practices and general business accounting methods.
What Is Nonprofit Accounting?
Nonprofit accounting is a specialized form of accounting, offering nonprofit organizations a unique approach to measuring their financial performance. The main differences between for-profit accounting and nonprofit accounting involve financial management and financial reporting processes, as well as the accounting terms used.
Financial Management in Nonprofit Accounting
A look into how nonprofits generate revenue reveals the unique aspects of nonprofit finance. In a for-profit business, accounting data informs business owners, investors, creditors, and others about sales revenue. On the other side, nonprofits raise funds mostly through grants and donations.
Nonprofit organizations receive grants come from government and nongovernmental organizations (NGOs) such as foundations. These funds are not loans, so recipients do not have to repay them. Grant money is often designated to pay for a specific program such as a homeless shelter or trade courses for disadvantaged youth. The grant money pays for the direct costs associated with the program. Indirect costs not tied to the program, such as those for utilities and insurance, are typically not paid with grant money unless specified.
As nonprofits do not have private owners and are not concerned with making a profit, accounting data focuses on informing donors, the board of directors, executive committee members, and other stakeholders of financial management outcomes. As a result, some of the terms found in nonprofit accounting reports differ from those found in general accounting reports.
Financial Reporting in Nonprofit Accounting
Nonprofit accounting reports provide decision-makers with key information to understand an organization’s financial state, assess funding streams, and develop strategies. Financial statements include information about balances, revenues, and expenses.
Nonprofit accounting tracks how money is spent in different funds. A nonprofit can have multiple funds—for example, a building fund, equipment fund, and general fund. Nonprofits use a type of nonprofit accounting system known as fund accounting to ensure accountability of the use of money. They must show that grant money fulfills its intended purpose as specified by the donor.
Nonprofits use different accounting terms than their for-profit counterparts. For example, in private industry, a balance sheet refers to the owners’ and shareholders’ net equity. As nonprofits do not have owners or shareholders, nonprofits use a statement of financial position to report assets and debts.
Similarly, business accounting reports include income statements, which show a company’s revenues, expenses, losses, and gains. For nonprofits, a statement of activities provides a detailed breakdown of the revenues and costs associated with each program.
Building a Strategic Nonprofit Accounting Plan
An effective long-term strategic accounting plan links a nonprofit’s mission with the past, present, and future. It should cover a minimum of three years: the current year (actuals), the planning year (budget), and future years (forecasting).
In building a strategic nonprofit accounting plan, it is essential to understand sources of revenue and potential vulnerabilities that may impact revenue sources in the future. An analysis of the performance and trends of the past can help determine the needs of the future. Trends happen over time, not in a single year, so it may be necessary to go back several years to determine the likelihood of continued trends.
Built upon a framework of past, present, and future components, a nonprofit financial plan can help ensure that an organization has the resources to succeed and the ability to adapt when necessary.
Generally Accepted Accounting Principles (GAAP)
Implementing financial management best practices, such as generally accepted accounting principles (GAAP), can help a nonprofit reach its strategic goals.
What is GAAP? The Financial Accounting Foundation (FAF) promotes accounting best practices through a collection of standards from various professional accounting organizations. These standards help nonprofits determine how to prepare and present financial statements. The goal of GAAP for nonprofits is to provide useful information to stakeholders who currently offer resources or may do so in the future. A GAAP report demonstrates adequate financial management, proper funds allocation, and economic viability. It includes information on assets and liabilities, as well as disclosure information, which helps explain financial statements.
Internal Policies and Controls
Implementation of documented internal controls can help prevent misuse and misappropriation of funds. These policies establish checks and balances for people inside and outside of the organization. They set forth procedures for staff, vendors, and, at times, board members, to ensure the proper use of funds.
One example of such an internal policy is requiring multiple signatures for check deposits to ensure that no single person has full authority over the organization’s finances. Other procedures may deal with theft. For example, an organization can implement an internal policy that requires staff to never leave laptops unattended, especially in public venues such as fundraising events.
Budgeting Best Practices
Budgets are essential for sound financial management and to ensure an organization’s economic sustainability. Staff members are usually charged with creating an initial annual budget and, then, the executive committee or board offers insights during a review and approval process. Once approved, the budget is reviewed periodically throughout the year to accommodate organizational changes. As part of these periodic reviews, a comparison with actual cash flow and expenses can help nonprofits determine whether their budget needs updating.
Budgeting best practices require setting realistic timelines for budgeting processes that include the time needed for thoughtful input, revisions, and multiple drafts prior to its approval. Allowing enough time for a detailed review and input from critical functions such as marketing, development, legal, information technology (IT), is crucial to a successful budget.
The budget presentation also matters. As a best practice, a summary of the most relevant accounting data on a single spreadsheet page helps donors more easily understand the most important points. This information includes revenues and expenses for the current fiscal year. A formula that automatically calculates the operating surplus can save board members from performing the calculations manually.
The Skills of Nonprofit Accounting
Nonprofit accountants must be self-motivated, with a passion for supporting worthy causes. They should have core business competencies such as well-developed analytical, problem-solving, and resourcefulness skills. While these accounting skills are relevant for accountants in for-profit organizations as well, they are even more critical for individuals working in nonprofit organizations. For example, nonprofits may require professionals with creative problem-solving skills and resourcefulness to make the most of limited resources.
Technological competencies are also essential for nonprofit accounting roles including knowledge of accounting and financial software. Unique skills include knowledge of fund accounting and the ability to use fund accounting software. Additionally, nonprofit accountants must understand the language of nonprofit accounting reporting.
Norwich University’s online Master of Accounting program and its General Accounting concentration include courses that prepare students to pursue a career in nonprofit accounting. For example, a course on Nonprofit and Government Accounting provides students with an understanding of GAAP principles for not-for-profit entities, concepts of fund accounting, and basic knowledge of state and local government financial reporting requirements.
Additional courses in the General Accounting concentration that provide a holistic overview of the accounting profession include Federal Income Tax for Corporations, International Accounting Standards, and Contemporary Topics in Accounting.
The General Accounting concentration features two tracks—the Advanced Track and the Full Track—based on educational experience. Individuals with an undergraduate degree in accounting or possessing professional accounting experience are eligible for the Advanced Standing Track, which offers an abbreviated timeline to move directly into upper-level coursework.
Students interested in the General Accounting concentration also have the option to enroll in the Full Track. This track is ideal for individuals who are undergoing a career change, new to accounting, or earned a nonbusiness bachelor’s degree.
Begin Your Nonprofit Accounting Career Journey
Students interested in earning an advanced accounting degree and working for nonprofits should consider the benefits of Norwich University’s online Master of Accounting program and its General Accounting concentration. Graduates will gain experience producing financial statements, understanding GAAP principles, and demonstrating knowledge of ethical accounting practices adopted by professional accounting organizations such as the American Institute of Certified Public Accountants (AICPA) and the Institute of Management Accountants (IMA).
Learn more about how Norwich University’s online Master of Accounting program and its General Accounting concentration can help you embark on a new phase of your career today.
A Nonprofit’s Guide to Accounting, Business.com
Non-Profit Accounting Definitions, Houston Chronicle
What Is Fund-Based Accounting? Houston Chronicle
About GAAP, Financial Accounting Foundation
Internal Controls for Nonprofits, National Council of Nonprofits
Budgeting for Nonprofits, National Council of Nonprofits
What’s the Plan? Best Practices in Not-for-Profit Budgeting and Financial Planning, American Institute of Certified Public Accountants
Top Skills and Characteristics of Nonprofit Accountants, Capital Business Solutions