Outsourced Nonprofit Accounting: Why It’s Special and Essential

Nonprofit organizations are distinctive because their missions address various needs. From religion to education, health to social services, commerce to amateur sports clubs, and of course, the arts, each caters to a wide variety of sectors. But one thing they all have in common is accounting — more specifically, nonprofit accounting. It is special and essential to the survival of the organization, not to mention the success of its mission. Here are a few reasons why it’s different:

Fund accounting

The main difference between for-profit and nonprofit financials is fund accounting. It favors accountability more than profitability. Typical profit-based businesses usually have a general ledger, which is one, big, self-balancing account. However, nonprofits typically have several funds. It’s similar to having a bunch of general ledgers. The organization must closely track each one separately, as they usually have different rules as to how the money should be utilized or spent.

Expenses

Speaking of spending, expense allocation (a.k.a. cost allocation) is a detailed account of how a nonprofit’s funds are spent. Expense allocation must be updated and maintained because it’s required on the IRS Tax Form 990 (a.k.a. the statement of functional expenses). Both donors and grantors like to see a nonprofit’s expense allocation too, as it ensures their money is utilized correctly. Without it, your organization could miss out on critical donations or federal and state grants. Lastly, the expense allocation helps nonprofits comply and maintain their 501c3 tax-exempt status — a crucial factor for financial success.

Tax exemption

Unlike their for-profit counterparts, most nonprofits qualify for income tax exemption. After successful registration through the state, the organization can then apply for federal tax-exempt status under Section 501. Note that tax exemption does not mean a nonprofit can avoid reporting its financials. Each must file a Form 990 (or, if qualified, a Form 990EZ) annually. It shows that the organization is appropriately conducting business through disclosure of its revenues, expenses, and changes to net assets, among other critical financials. What’s more, a well-thought-out and polished Form 990 makes for an excellent marketing and storytelling tool.

Financial Statements

To ensure that a nonprofit’s Form 990 is accurate, it must use three financial statements — the statement of activities, the statement of financial position, and the statement of cash flows. The statement of activities is similar to a for-profit income statement. It shows the organization’s “profit” by subtracting expenses from revenue. The statement of financial position is like a balance sheet. It shows the organization’s assets and debts, with the difference between the two portraying its “value.” The statement of cash flows tracks the amount of money generated from operations, financing, and investing.

There’s more to a nonprofit’s financial story, but as you can tell, each one must account and track every penny received and spent. Without detailed accounting (not to mention a reasonable budget and great software,) the process can quickly become cumbersome, complicated, and confusing. If you’re struggling with any of it, give us a call. Nonprofit accounting is our specialty — and your success is our success. Let’s get started today.

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