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Start Hiring For FreeNon-profit organizations likely agree that embracing sound accounting policies is critical, yet complex.
By exploring key accounting guidelines and procedures, non-profits can enhance financial transparency, stability, and decision-making.
This article will provide an in-depth look at critical accounting policies for non-profits, including financial statements, reporting, budgets, software, and more.
Non-profit organizations have unique accounting needs and face specific challenges when managing their finances. Adhering to accounting best practices and policies tailored for the non-profit sector is crucial for organizational success.
Nonprofit accounting differs from for-profit accounting in a few key ways:
Having a solid grasp of nonprofit accounting basics, including GAAP principles, is essential for managing finances properly.
Resources like accounting guides outline best practices for handling core nonprofit accounting tasks:
Leveraging such accounting resources helps nonprofits put in place accounting systems and procedures that meet industry standards.
Fund accounting classifies assets into unrestricted, temporarily restricted, and permanently restricted funds. Setting up proper fund accounting is vital for nonprofit planning, reporting, and decision making around designated organizational resources.
Fund accounting also supports grant compliance, allowing nonprofits to track restricted grants and demonstrate appropriate spending.
As nonprofits rely on external funding sources, strong budgeting practices are essential. Budgets allow organizations to allocate expenses across programs, plan fundraising goals, and set long-term strategic objectives.
Aligning program budgets with financial targets provides accountability to donors and grantors funding organizational activities.
Given their unique accounting needs, nonprofits greatly benefit from the expertise of accounting and finance personnel well-versed in the sector.
Experienced bookkeepers help nonprofits put in place internal control policies, manage restricted funds properly, and ensure all reporting follows industry-specific GAAP standards. This relieves other staff to focus on organizational goals.
Nonprofits follow the Financial Accounting Standards Board (FASB) Statement No. 117, also known as FASB 117. This establishes guidelines and requirements for nonprofit financial reporting, including:
Some key accounting rules from FASB 117 that nonprofits must follow include:
By following FASB 117, nonprofits present financial statements that accurately reflect their financial position, activities, cash flows, and functional expenses. This enhances financial accountability and transparency for donors, grantors, creditors, and other financial statement users.
The three major financial statements that are required for all non-profit entities are:
In addition to these three core statements, non-profits may choose to prepare a Statement of Functional Expenses. This breaks down expenses by program and supporting services to show how resources were allocated. However, this fourth statement is not universally required.
These financial statements help non-profits demonstrate transparency and accountability to donors, grantors, regulators, and other stakeholders. Properly prepared statements following GAAP standards are crucial for responsible financial management. They provide the information needed to evaluate financial performance, viability, and impact.
You can choose either a cash-basis or accrual accounting system for a nonprofit organization.
With cash-basis accounting, you record expenses and income when you actually pay or receive cash. For example, if your nonprofit charges membership dues, you would record the dues as income when members pay, not when membership starts.
Cash-basis accounting is simpler, but does not always accurately match revenue and expenses to the period in which they occurred.
With accrual accounting, you record revenue when earned and expenses when incurred. For example, membership dues would be recorded as revenue when the membership period begins, not when dues are paid.
Accrual accounting provides a more accurate picture of financial performance over time. It ensures revenue and expenses are matched to the correct period even if cash has not yet exchanged hands.
Most nonprofits use accrual accounting because it adheres to GAAP standards and provides better financial oversight for grants and donations. Accrual accounting is required if your nonprofit has over $250,000 in annual gross receipts.
In summary, small nonprofits can use cash-basis for simplicity, but accrual accounting is considered best practice for transparency and accuracy over time. Check specific grant, donation, or regulatory requirements as well when choosing an accounting system. Consistent financial oversight is key for responsible nonprofit management.
Most nonprofits use the accrual basis of accounting, which is recommended by Generally Accepted Accounting Principles (GAAP). Under accrual accounting, revenue and expenses are recorded when they are earned or incurred, regardless of when cash is exchanged. This gives nonprofits a more accurate picture of their financial position.
Some key reasons why accrual accounting is preferred for nonprofits:
The level of GAAP compliance needed does vary by state regulations, but most experts advise nonprofits to follow GAAP regardless. Accrual methods give the best financial transparency and accountability that donors, board members, and regulators expect from nonprofits. Software features like fund accounting specifically built for nonprofits can automate accrual-based financial reporting.
This section delves into the creation and implementation of financial policies that safeguard the organization's assets, ensure compliance, and support effective financial management.
Non-profit organizations should establish clear conflict of interest policies to prevent personal interests from influencing financial decisions. These policies typically require board members and employees to disclose any relationships, investments, or activities that could impact their objectivity. Procedures for recusing conflicted individuals from decisions and documenting the conflict should also be outlined. Regular reviews of the policy help ensure it remains relevant as the organization evolves.
Implementing strong whistleblower protections encourages accountability and deters financial mismanagement. Non-profits should have procedures allowing anonymous reporting of suspected fraud or misconduct without fear of retaliation. An independent party should investigate claims to avoid bias. Publicizing the policy to staff and volunteers demonstrates the commitment to transparency.
Standardizing financial policies and procedures through guidelines and templates improves consistency across departments. Core areas to address include procurement, reimbursements, credit card use, petty cash, and invoice approvals. Checklists and decision flowcharts further clarify complex processes. Centralizing resources on an intranet allows easy access organization-wide.
An annual process for evaluating executive compensation ensures alignment with budgets and financial targets. Compensation committees should benchmark pay against comparable non-profits and assess performance metrics. Any adjustments must balance fair pay, retention needs, public perception, and fiscal responsibility. Approval by the full board adds accountability and transparency.
Investment policies guide financial decisions to meet liquidity needs and growth targets. Non-profits should set asset allocation guidelines specifying allowable investments and risk tolerance. Policies typically distinguish short-term operating funds from long-term reserves, with different objectives. Regular performance reviews assess if policies should be adjusted to fulfill evolving financial priorities.
Non-profit organizations rely on accurate and transparent financial reporting to maintain public trust and ensure proper oversight. Proper accounting policies and procedures are essential to achieving this goal.
The non-profit income statement summarizes an organization's revenues and expenses over a period of time. Key line items include:
Understanding these components allows non-profits to track funding sources and spending.
The statement of cash flows shows the sources and uses of an organization's cash. It highlights:
Analyzing changes in cash flow over time helps assess financial health and liquidity.
External audits by an independent CPA verify the accuracy and reliability of financial statements. Audits help:
Regular audits are critical for transparency and accountability.
Properly allocating shared costs across programs and funding sources is key. Methods include:
Effective allocation ensures expenses tie directly to related programs and grants.
Internal controls like segregation of duties, system access controls, and regular reconciliations safeguard assets and ensure reliable reporting. They help:
Strong controls align with accounting best practices.
Non-profit organizations have specific accounting requirements that differ from traditional for-profit businesses. Investing in technology and training can help non-profits improve their accounting processes and overall financial management.
When selecting accounting software, non-profits should look for solutions that offer comprehensive core accounting features tailored to their needs, such as:
Key criteria to consider include ease of use, data security, customer support, and managing restricted funds capabilities. Evaluating options like QuickBooks and NetSuite can help non-profits find the best accounting software for their budget and requirements.
NetSuite offers robust features designed specifically for non-profit organizations' accounting and financial management needs, including:
By centralizing data and automating processes, NetSuite helps non-profits improve efficiency, transparency, and regulatory compliance.
Pursuing non-profit accounting training and certification helps staff master non-profit accounting basics and standards. Options like FASB online courses, QuickBooks training, and Association of Certified Nonprofit Accountants (ACNA) certification equip teams with specialized expertise.
Investing in professional development allows non-profits to handle core accounting functions in-house rather than rely on external auditors and accountants.
While hiring a certified public accountant (CPA) provides non-profits with advanced accounting expertise, high consultant fees can limit long-term viability.
Alternatively, non-profits can cultivate financial acumen internally through staff training programs. This allows them to manage everyday accounting, bookkeeping, reporting, and audits with existing personnel while leveraging a CPA primarily for tax filing and advisory purposes.
Building in-house capabilities proactively is key for non-profits aiming for sustainable growth.
Maintaining adequate operating reserves enables non-profits to smoothly continue operations during lean periods. Experts recommend reserving 3-6 months' worth of operating costs.
Non-profits should make operating reserves a priority in their long-range strategic plan and annual budgets. Assessing reserve levels regularly and establishing policies for reserve funding helps safeguard programs, payrolls, and the non-profit's overall financial health.
Non-profit organizations face evolving accounting standards and practices. By understanding key trends and overcoming common challenges, they can enhance financial management.
It is important for non-profits to stay up-to-date on accounting trends to leverage best practices. Some key trends include:
Organizations should proactively adapt by closely tracking updates from authoritative bodies like FASB, revising internal policies, investing in staff training, and upgrading financial systems.
Common accounting challenges faced by non-profits include:
Strategies to overcome these include:
With limited resources, sound budgeting is vital for non-profits. Best practices include:
Robust budgets align costs with strategic goals.
The AICPA Nonprofit Audit Guide standardizes protocols across the sector. It assists organizations in:
Familiarity with the Guide enables non-profits to better manage audits.
Helpful resources for improving financial practices include:
By leveraging such resources, organizations can optimize financial oversight.
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