Understanding the Importance of Accounting in the Nonprofit Sector

April 23, 2024   |   Blog

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Nonprofits consist of people who are passionate about making their communities and the world better. They provide a place where people can work together toward common goals to achieve positive change. Proper financial management ensures these organizations can focus on furthering their goals. It also offers support to safeguard financial integrity, maintain transparency and propel organizations to achieve their mission. Explore the importance of nonprofit accounting and the unique requirements it brings below. 

Accounting’s Importance for Nonprofits

Accounting is part of the essential business behind a nonprofit’s operations. Beyond supporting a nonprofit’s mission, accounting allows nonprofits to meet their industry’s unique rules and regulations. Nonprofits differ from for-profit organizations in their lack of legal ownership. Funding comes from supporters who don’t expect a return.

The structure of nonprofits calls for a type of accounting called “fund accounting.” Money goes to particular funds based on purpose. Also, instead of measuring equity, nonprofits measure net assets. 

Nonprofit Accounting Requirements

The unique nature of nonprofit accounting means you’ll need particular documents to demonstrate the financial position of your organization:

  • Nonprofit budget: This planning document tracks your expenses and revenue and determines where and when you plan to use particular funds. You will likely have an annual budget and short-term event and campaign budgets. 
  • Statement of functional expenses: This table-style report breaks down expenses into categories based on the money’s purpose. The categories depend on the organization.
  • Statement of activities: This document details revenue and expenses during a reporting period. It provides an overview of the changes to your assets during that time. 
  • Statement of financial position: This statement works like a for-profit organization’s balance sheet, but instead of showing equity, it shows assets available to reinvest in the nonprofit. It compares assets to liabilities to get net assets.
  • Statement of cash flow: This document tracks the inflow and outflow of cash to demonstrate your organization’s financial health. These reports allow nonprofits to determine trends that impact revenue and expenses.
  • Form 990: The IRS Form 990 maintains your tax-exempt status. You must file it annually to report on your financial position and spending allocation. This form is necessary for compliance with regulations and stakeholder transparency.

Best Practices for Nonprofit Accounting

Given the vital role accounting plays in furthering your mission, following financial best practices will ensure a better outcome. Here are a few practices to implement in your organization:

  • Use nonprofit software and expertise: Given the unique nature of nonprofit accounting, you should choose nonprofit-specialized accounting software and consider working with expert consultants that can ensure your financial activity is compliant.
  • Pay attention to your budget: With funding changing frequently, you want to watch your budget and revisit it frequently to determine whether you are meeting financial goals or need to make adjustments.
  • Plan for overhead expenses: While you may want to devote all funds to furthering your mission, you should also set aside some funds to fuel the growth and success of your organization. 

Choose an Expert Nonprofit Accounting Firm

At Marshall Jones, we provide accounting for nonprofits and faith-based organizations. Our extensive industry expertise allows you to meet specific nonprofit challenges, such ascompleting IRS Form 990. Explore our nonprofit services or contact us online to schedule a consultation.