Understanding and Applying GAAP for Nonprofits: FAQ Guide

The Generally Accepted Accounting Principles—commonly known as GAAP—are a set of agreed-upon accounting standards that provide a framework for recording and reporting financial information. They ensure consistency and comparability in financial management among all organizations in the United States, both for-profit and nonprofit. While for-profit organizations orient their accounting practices around the goal of turning a profit, nonprofits’ main goal in accounting is financial transparency with donors, stakeholders, and the government. This allows these organizations to remain tax-exempt and use their revenue to effectively further their missions. Public viewpoints on overhead expenses hurt the nonprofit industry a great deal. Overhead includes those expenses that nonprofits use to cover administrative costs, market their mission for fundraising, and pay for other internal expenses that help the organization grow.

Capitalization

• Coding – The process of assigning numbers to data to organize transactions.
• A donor-designated fund is held by a community foundation, where the donor has specified that the fund’s income or assets be used for the benefit of one or more specific public charities.
• BylawsA document outlining the governance of and what activities a legal entity may or may not engage in.
• The Internal Revenue Service (IRS) is responsible for overseeing these organizations and ensuring they comply with applicable tax laws.
• The IRS, donors, and watchdogs use these forms to ensure organizations remain reliable and honest.
• A board uses investment income from the fund for operating costs or other purposes, while usually leaving the principal amount alone.
• The second method, functional expense allocation, is based on how each expenditure impacts your mission.

Bookkeepers don’t generally require specialized education for their positions, though it doesn’t hurt if a candidate has them. Lutz is a business solutions firm for people seeking a partner to help energize and heighten economic and organizational success. Take a deep dive into challenging business topics with these free educational resources. Working CapitalThe amount of liquidity (unencumbered cash and https://www.bookstime.com/articles/what-is-a-bookkeeper near cash) an organization has on hand or accessible (e.g., through a line of credit). SecurityReal estate or personal property used as collateral to back up a loan, which gives the lender tangible property that may be sold upon default to pay off the indebtedness. Ratio AnalysisConversion of financial numbers into ratios, often used as a tool to evaluate financial trends and health of an organization.

Allocate Expenses by Function

Your board is responsible for financial oversight, so naturally, they’ll play a role in your nonprofit accounting. Hiring members who can advance your mission and set a strong strategic direction for the organization is important. These documents should be your top priority to maintain a smooth accounting operation and get everyone on the same page. The first step to understanding nonprofit accounting is to know where you have options and where specific standards are already in place for all nonprofits. We’ll discuss the requirements later, but let’s discuss the flexibility to make the process your own. The Internal Revenue Service (IRS) regulates accounting with specific rules and practices for nonprofits as tax-exempt organizations.

Accounting for Nonprofits

Charitable organizations must record and report financials in a specific way to stay accountable and transparent with stakeholders and donors. Nonprofits are required to provide financial disclosures to help the public see a clear view of operations and growth. The fund accounting system considers that not all donations are straightforward. Many restricted funds come with terms set by the donor, usually indicating which project that donation can be used for. While basic accounting principles remain consistent, you can better understand nonprofit accounting by analyzing a few key differences from other businesses. Nonprofits have tax-exempt status with the IRS and operate in the best interest of their communities.

Equipping yourself with the best software and people can make a world of difference for your organization. When you set up your software to record and safeguard your financial information, be sure you choose a solution that has specific configurations for nonprofit accounting, such as Quickbooks. Providing detailed information on your statement of functional expenses also helps when it’s time to complete your annual Form 990 which requires expenses to be separated in a similar fashion. For example, if you have $50,000 of restricted assets set aside for your scholarship program, then decide to provide a $5,000 scholarship, you’re not losing those funds.

IRS Form 1099

People who strongly support a cause but might not be able to make a large donation all at once like recurring giving because it allows them to give more over time than they could otherwise. It also helps an organization budget more effectively since it can predict how much money will come in going forward. A philanthropic foundation is a corporation or trust that has been created through contributed funds, whether by an individual, family, corporation, or community.

• Borrowing BaseA mechanism for monitoring that funds advanced under a line of credit bear some proportionality to either the asset being financed or the source of repayment.
• And remember there’s nothing wrong with adjusting your plan when things go wrong, or even when they go right.
• This statement helps stakeholders understand how a nonprofit’s cash position has changed over time, and how the organization manages its cash resources.
• Chart of AccountsA list of all accounts used in accounting system, including assets, liabilities, income, and expenses.
• A corporate foundation is the philanthropic arm created by a corporation to deal with requests for contributions from various agencies, including local, region, or national.
• PledgeA formal commitment, generally in writing, to make a contribution of a specific amount.
• Donors who might not be able to give a large one-time gift are often willing to sign up for monthly giving, ultimately donating more over time than they would have otherwise.

Experienced Board Members Need Board Training Too

If you are not familiar with accounting for businesses or you need a refresher, you will find explanations, practice quizzes, quick tests, and more at our course outline. Unrestricted Net AssetsFunds that have no external restriction as to use or purpose. Permanently Restricted Net AssetsFunds with donor-imposed stipulations that the principal not be spent, e.g., traditional nonprofit accounting endowments; some or all of the earnings are available for specific or general operations. DepreciationThe recognition, by recording an expense, of the decrease in value of a fixed assetover its expected physical or economic life. Conditional Promise to GiveA commitment by a donor to make a contribution to the organization if a specific requirement is met.

• Generally, family members serve as officers or board members of the foundation and play an influential role in grantmaking decisions.
• It is essential to create an annual operating budget that aligns with the organization’s mission and strategic goals.
• It is defined as the philosophy and means by which an institution exercises ethical accountability in the use of contributed resources.
• Operating ActivitiesItems that relate to the organization’s main business or program activities.
• All public companies in the U.S. must follow GAAP and private companies generally do as well.

State reporting requirements

• In addition, they must implement strategic accounting practices and utilize proper accounting software to ensure financial health.
• You can use the statement to assess the usage of funds, track performance, and make decisions about future operations.
• Essentially, this statement will organize and categorize your expenses and revenue sources.
• However, these methods will make it difficult to find out how much money you’ve set aside at a given time, despite allowing you to track how much money you’ve received and spent in a class.
• An accounting method that records revenue and expenses when they are paid; does not matter when the work is performed.
• Treating the purchase of a long-lived piece of property or equipment (like a new computer or delivery van) as an asset, rather than an expense.