Not for Profit & Accounting

Not-for-profit organizations, also known as nonprofits, make up a growing business sector in the U.S. The National Center for Charitable Statistics states that between January and August 2010, more than 30,000 nonprofits registered with the IRS for their tax exemption. Like any business, not-for-profit organizations need to use accounting to capture revenues and expenses, process payroll and pay taxes, as required by Federal and State laws.

GAAP

The generally accepted accounting principles, also known as GAAP, guide nonprofits in their accounting and reporting requirements. An example of GAAP is the "Statement of Financial Accounting Standards No. 116 Accounting for Contributions Received and Contributions Made," which shows accountants how to record donations, in-kind contributions, services and other topics related to revenues. Another GAAP example is the "Statement of Financial Accounting Standards No. 117 Financial Statements of Not-for-Profit Organizations." This statement guides accountants in compiling financial statements for nonprofits, including how to report releases from restrictions, and other accounting transactions typical of the nonprofit world.

Net Assets

Net assets are used instead of owner's equity or retained earnings on a balance sheet. Net assets come in three types: unrestricted, temporarily restricted and permanently restricted. When a donation is received by a nonprofit, the accountant needs to identify which net asset the money belongs to. For example, suppose $50,000 was received to be used in the future -- the amount is booked as a revenue under the temporarily restricted net asset. If the donation was to be used at any time and for any purpose, it would be recognized in the unrestricted net asset.

Grants

Government and foundation grants provide funds for many organizations and accounting for them may be challenging. Grants may cover only certain expenses and not others. For example, some government grants may reimburse organizations for vacation benefits, while others may not -- the accounting for grants is very detailed with specific reporting requirements. Some nonprofits use a grant module to help them manage grant accounting needs. When using such a module, revenues and expenses are recognized on both the financial accounting system and the grant program, allowing for great flexibility of reporting.

Release from Restrictions

The temporarily restricted net assets hold funds for awhile -- until restrictions are met. The idea is that eventually the funds will become unrestricted and be used up by the organization. Once that time arrives, the revenue account is not used to reclassify the funds; instead, a debit is made to a net asset release-temporarily restricted account, and a credit is applied toward a net asset release-unrestricted account. The net asset release is presented in the statement of activities as a one-line item on the revenue section of the report.

References

• National Center for Charitable Statistics: Home
• Financial Accounting Standards Board: Statement of Financial Accounting Standards No. 116 Accounting for Contributions Received and Contributions Made; June 1993
• Financial Accounting Standards Board: Statement of Financial Accounting Standards No. 117 Financial Statements of Not-for-Profit Organizations; June 1993

Resources

• "Nonprofit Accounting Basics"; Statement of Activities; Elizabeth Hamilton Foley; 2008