There are over 1.5 million nonprofit organizations in the U.S. All of these organizations are bound bu the tax code and donors to show transparency.
Nonprofit accounting is much different than personal or business accounting. There are higher standards to meet to ensure their tax-exempt status is legitimate.
Keep reading to learn more about accounting for nonprofit organizations.
What Is Accounting for Nonprofits?
Nonprofit organizations are registered with the IRS as tax-exempt organizations. They use their profits to make a contribution to the community.
These organizations can be churches, community organizations, food banks, or any other type of organization that exists for a reason other than to make money.
In exchange for the community contribution, many of these organizations gain tax-exempt status, meaning they don’t have to pay federal taxes.
These organizations rely on donors or members for revenue, instead of selling a product or service to the public.
Accounting for nonprofits shows the income, expenses, and cash flow of the organization, similar to a business. There are some key differences in nonprofit accounting.
Business vs. Nonprofit Accounting
A key difference between business and nonprofit accounting is fund accounting. This is a principle that has a focus on transparency than profitability.
In business, there’s usually one general ledger for the entire business. That covers the income, operating expenses, assets, equity holdings, and liabilities of the business.
Nonprofit organizations have several general ledgers, which are called funds. Donors may have specific wishes for the money that they donate.
For example, they may want to see it used to buy a larger building or to improve the existing property. This is usually a capital fund.
Church fund accounting typically has funds for different ministries, operating expenses, and a building fund. That allows church members to see the income and expenses of each ministry.
With fund accounting, there’s much greater transparency for donors and tax authorities. Nonprofit organizations can account for all of the income and expenses. The board of directors can also make decisions with more detailed information.
Tracking In-Kind Donations
Nonprofit organizations depend on a community of volunteers to survive. They may have a marketing expert volunteer their services as a donation.
They may get physical goods to sell at the next fundraiser. It’s necessary to track and report these donations as fair market value. The IRS has rules to define the fair market value of goods and services.
Donors have an incentive to provide such goods and services to nonprofits because they may be able to deduct the donations from their taxes.
Nonprofit Accounting Basics
Nonprofit organizations have a lot of responsibility. They need to show donors, volunteers, and the people they serve that they use their funds wisely. Otherwise, people may not want to donate or be apart of the organization.
Nonprofit accounting has a focus on transparency and accountability. The use of fund accounting breaks up the income and expenses into different funds, which have a very specific purpose.
Visit the Marketing section of this site to learn how you can market your nonprofit organization.