LUTZ BUSINESS INSIGHTS
Nonprofit Accounting Is Different: What You Should Know
LAUREN DUREN, SENIOR ACCOUNTANT
Your nonprofit organization exists for one purpose: to raise funds that will be distributed to individuals and entities that have a specific set of needs. Because of your tax-exempt status and your mission, you must follow a distinct set of accounting practices.
Like for-profit companies, you may have employees, acquire insurance, and build marketing campaigns. You send invoices and pay bills; perhaps manage inventory and payroll; and create reports. One of the biggest differences between the two types of entities lies in the latter activity. Both must provide financial statements. One of these is a Statement of Cash Flows, which both create.
Two other reports, though, have different purposes and audiences. Where for-profit businesses generate a Balance Sheet, which lists assets, liabilities, and equity, your nonprofit prepares a Statement of Financial Position, which, does not include the equity section. Instead, it has a net assets section.
Rather than an Income Statement (Profit/Loss), you as a nonprofit are charged with creating a Statement of Activities. Both show income and expenses, but your income, of course, comes from activities like donations and fund-raising events instead of sales of products and/or services. You probably have similar kinds of expenses, like rent and office supplies, but your nonprofit must also account for your use of funds related to your organization’s mission.
Beyond the need for creating the correct reports, there are other things to know about nonprofit accounting. For example:
- Though you don’t have to pay income taxes because of the tax-exempt status, you are still responsible for other kinds of taxes, like payroll, sales, and property.
- There are two types of functional expenses: support services and program services.
- You may have to declare unrelated business income if you receive funds not directly related to your charity’s cause.
Even though you’re referred to as a nonprofit, you are allowed to make a profit (have revenue exceed expenses).
Most accounting software is built for generic, for-profit businesses. They are not designed to handle the reports that nonprofits need, and are difficult to create on your own. For example, do you know the difference between unrestricted, temporarily restricted, and permanently restricted assets? This is one of the concepts you must understand to do the accounting for your nonprofit.
It’s critical to have proper reporting. If you don’t, you risk losing your tax-exempt status. Your donors wouldn’t be able to deduct their contributions on their income taxes, and you’d have to pay your own taxes.
ABOUT THE AUTHOR
LAUREN DUREN + SENIOR ACCOUNTANT
Lauren Duren is a Senior Accountant at Lutz with over three years of relevant experience. She provides outsourced accounting services to clients with a focus on tax, payroll compliance, and healthcare consulting.
AREAS OF FOCUS
- Outsourced Accounting
- Payroll Compliance
- Healthcare Accounting Consulting
- Nonprofit Industry
AFFILIATIONS AND CREDENTIALS
- American Institute of Certified Public Accountants, Member
- Nebraska Society of Certified Public Accountants, Member
- National Medical Group Management Association, Member
- Nebraska Medical Group Management Association, Member
- Certified Public Accountant
- MBA, University of Nebraska, Omaha, NE
- BSBA in Accounting, University of Nebraska, Omaha, NE
- Lutz Gives Back, Volunteer
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