Accounting for a Nonprofit
Nonprofits raise money to provide services based on the mission of the organization. They serve people, animals and communities. Nonprofit organizations experience financial transactions and use accounting methods to measure each transaction and report the financial results of the organization. Nonprofits use the financial results to determine how well they use their assets to meet expenses and provide services.
Other People Are Reading
-
Expense Categories
-
Nonprofits incur expenses in two primary categories, namely programs and supporting services. Program expenses include the costs to run the main operation and serve clients. Supporting services expenses are the costs required to support the main operation. Supporting services include general expenses and fundraising costs. General expenses refer to the clerical staff and reporting activities of the nonprofit. Fundraising expenses refer to the cost of soliciting donations.
Revenue Sources
-
Revenues come from various sources, including donors, government grants and fundraising efforts. Donor contributions refer to cash payments or material donations received. Government grants refer to money received from the government to carry on the mission of the nonprofit. Fundraising includes admission charges for activities, or money raised through community events, such as spaghetti dinners or rummage sales.
-
Accounting Equation
-
The accounting equation for a nonprofit is assets equal liabilities plus net assets. Assets equal everything that the nonprofit owns, such as the building, supplies, computer system or furnishings. Liabilities refer to everything the nonprofit owes to another entity. These include employee wages or money borrowed to fund the nonprofit. Net assets are the value remaining when you subtract the liabilities from the assets. Net assets are in three categories. These are unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets. Unrestricted net assets are donations received with no donor restrictions on their use. Temporarily restricted net assets refer to donor contributions upon which donors pose restrictions. An example would be when the donor contributes money specifically for the purchase of updated computer equipment. Permanently restricted net assets are donor contributions the nonprofit cannot use directly. However, the organization can use money earned on the contribution, such as interest.
Financial Reporting
-
Nonprofits report their financial activities using four financial statements. These include the statement of financial position, the statement of activities, the statement of functional expenses and the statement of cash flows. The statement of financial position communicates the asset, liability and net asset balances. The statement of activities communicates the revenues and expenses for the period and the change in net assets. The statement of functional expenses communicates the type of expense associated with each activity offered through the nonprofit. These include program activities, general activities and fundraising. The statement of cash flows communicates the cash transactions for the period.
-
