17
Oct 2019
A Guide to Nonprofit Accounting (for Non-Accountants)
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by Mohammed
Hassan on Pixabay
Here, we’ll go over the basics: how to set up a bookkeeping and accounting system for your nonprofit, how accounting for nonprofits is different from for-profit accounting, and what to look out for when doing your taxes. Nonprofit accounting: an overview Every organization is different. But at the very minimum, most nonprofits will need to do the following to get their accounting system up and running:
Notice how there are two types of net assets: unrestricted and restricted net assets. Unrestricted net assets are any funds your nonprofit has received from donors that have no rules or conditions attached to them, like a pure cash donation. Restricted net assets are donations that have certain terms and restrictions attached, have special accounting procedures, and must be kept separate from other net assets. Statement of activities The statement of activities (also sometimes called the operating statement) is like the nonprofit version of the income statement. Like the income statement, it tells you how “profitable” your NFP was over a given period by showing your revenue, minus your expenses and losses. One major difference between the statement of activities and the income statement is that instead of calculating net “profit,” the statement of activities calculates changes in net assets. Let’s look at a sample statement of activities for a nonprofit: World Impact Foundation Statement of Activities For the Year Ended December 31, 2018
See how instead of calculating “net income,” the statement of activities calculates changes in net assets? Notice also how the statement of activities is divided into two sections: restricted and unrestricted. Just like the statement of financial position, the statement of activities keeps net assets that have conditions and stipulations attached to them separate from unrestricted funds. Statement of cash flows The statement of cash flows helps you track all of your organization’s cash. It’s essentially a list of how much cash your organization generated from three main sources: operations, investing and financing. Let’s look at a sample statement of activities for a nonprofit: World Impact Foundation Statement of Cash Fellows For the Year Ended December 31, 2018
If you’ve dealt with for-profit cash flow statements before, this should look very familiar. Nonprofit cash flow statements will refer to “change in net assets” instead of “net income,” and will sometimes list cash flows that are restricted to certain uses. While for-profit cash flow statements will talk about sales, service fees and investment income, nonprofit cash flow statements will more often mention items like donor contributions, membership dues, program fees, and fundraising proceeds instead. For the most part, however, cash flow statements for now and for-profits are very similar. Taxes for nonprofits Once you’ve got your bookkeeping system set up and have started generating financial statements, the final piece of the nonprofit accounting puzzle is getting your tax obligations straight. Nonprofits are taxed differently than for-profit companies. For the most part, nonprofits can apply to the IRS to become exempt from federal taxes under Section 501. Section 501 This is the part of the tax code that concerns charities, nonprofits, and religious organizations that are exempt from paying federal taxes to the IRS. While tax-exempt status might be determined by the IRS and federal law, nonprofit status is determined by state law. Because of this, the IRS requires that you obtain nonprofit status from your state before applying for tax-exempt status. After you’ve registered as a nonprofit with your state, the next step is to apply for tax-exempt status under Section 501. The IRS has three applications for tax-exempt status:
– Nick Zarzycki
[clickfunnels_clickpop id=”371lu7f0zwj037te” subdomain=”hwaalliance”]Download here[/clickfunnels_clickpop]- Find a nonprofit-friendly bookkeeping solution
- Find an accounting solution that can do fund accounting
- Open a separate bank account and start performing bank reconciliations
- Learn how to record in-kind donations
- Start making budgets
- Learn how to create and analyze financial statements
- Accounting software, or some kind of journal system
- A dedicated bank account for the organization
- Some way of creating budgets
- Some way of producing accurate and reliable financial statements
- You can record them in a physical ledger.
- You could input them into nonprofit-friendly accounting software like Aplos or Nonprofit Treasurer.
- You could use an Excel spreadsheet, like the one we’ve prepared for you here.
- You can get a bookkeeping service like Bench to do all of the inputting and number-crunching for you.
Statement of Financial Position | |
ASSETS | |
Cash and cash equivalents | $2,050 |
Grants | $2,000 |
Pledges Receivable | $4,100 |
Equipment | $900 |
Total assets | $9,050 |
LIABILITIES | |
Accounts payable | $150 |
Long-term debt | $2,000 |
Total liabilities | $2,150 |
NET ASSETS | |
Unrestricted net assets | $5,000 |
Restricted net assets | $1,900 |
Total net assets | $6,900 |
Unrestricted | Restricted | Total | |
Revenues: | |||
Donations | $10,250 | $2,200 | |
Fees | $12,700 | – | |
Other | $550 | – | |
Total revenues | $23,500 | $2,200 | $25,700 |
Expenses: | |||
Events | $2,250 | – | |
Fundraising | $5,200 | – | |
Management | $4,900 | – | |
General | $5,700 | – | |
Total expenses | $18,050 | – | $18,050 |
Change in net assets | $5,450 | $2,200 | $7,650 |
Cash Flow from Operations | |
Increase in net assets | $2,100 |
Additions to Cash | $750 |
Depreciation | $350 |
Increase in Accounts Payable | $1,200 |
Subtractions from Cash | |
Increase in Accounts Receivable | ($1,700) |
Increase in inventory | ($2,000) |
Net Cash from Operations | $700 |
Cash Flow from Investing | |
Purchase of property and equipment | $1,200 |
Net Cash from Operations | $1,200 |
Cash Flow from Financing | |
Proceeds from restricted contributions | $2,700 |
Debt repayments | ($3,200) |
Net Cash from Operations | ($500) |
Total | |
Net cash flow for the month ending December 31, 2018: | $1,400 |
- Form 1023, for exemption under Section 501©(3)—this applies to “charitable, religious and educational organizations”
- Form 1024-A, for exemption under Section 501©(4)—this applies to “social welfare organizations”
- Form 1024, for exemption under Section 501(a)—this applies to “other nonprofit or tax-exempt organizations”
Nonprofits | For-profits | |
Primary financial statements | Statement of financial position | Balance sheet |
Statement of activities | Income statement | |
Statement of cash flows | Statement of cash flows | |
Assets, net of liabilities | Net assets | Equity |
Tax status | Tax-exempt, if approved by the IRS under Section 501 | Subject to income taxes |