Lee has a BA in Political Science; and my MA is in Political Science with a concentration in International Relations.
Imagine that you have just started your own nonprofit organization to help homeless youth. Your nonprofit is getting a lot of money and support from volunteers. But, how are you keeping track of the money coming in and money going out? Do you know if you qualify for tax exempt status?
A nonprofit organization is an organization that is dedicated to advancing a particular social cause or point of view. A nonprofit is different from a corporation in that it uses its surplus money to advance its views or causes, whereas a corporation takes surplus money and distributes it to the shareholders. While a nonprofit can make money through the sale of goods, the biggest difference between a nonprofit and corporation is that a nonprofit usually is exempt from paying income tax, whereas a corporation must pay.
As stated before, nonprofits are permitted to have surplus revenue and generate their own money through sales. However, they must keep the money within the organization for expansion, programs, and day-to-day operations. Like a corporation, a nonprofit organization has a board of directors who oversee the overall direction and philosophy of the organization. Some nonprofits may have a paid staff or management team, others may just have volunteers.
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Receipt & Payment Accounts
At the end of the year, all nonprofits prepare what is called the receipt and payment account. The receipt and payment account shows how much money the nonprofit has on hand, what they spent money on in the past year, and how much money they took in. Usually it is a detailed look at all the donations that they took in for the year. It is very important that nonprofits keep a record of the donations that they take in and from whom. In most cases, the money that is taken in by a nonprofit was donated to them in order for that person to get a tax deduction.
Income & Expenditure
The income and expenditure account shows whether or not a nonprofit is running a surplus or a deficit. This account shows money coming in and money going out. The money coming in would be from donations, sales, and grants. The expenditure side would be how much money was spent on the nonprofit's causes and programs, payments to staff, and operating costs. From a corporate point of view, the income and expenditure account is essentially the profit and loss statement of the organization.
A balance sheet is universal amongst all organizations. A balance sheet shows an organization's assets, liabilities, and net assets. The basic formula for a balance sheet is:
Assets = Liabilities + Net Assets
Liabilities include things such as accounts payable, expenses and payroll, lines of credit, and loans or rent. Assets include things such as cash or cash equivalents, inventories, prepaid expenses, equipment, property, and deposits. Net assets include unrestricted or restricted monies. Unrestricted monies would be cash donations that are given with the express intent of using the money for anything the organization sees fit for.
Restricted money would be monies given to the nonprofit for a specific project or aspect of their cause. In our example nonprofit that deals with homeless youth, the organization may get money for specific education programs or assistance for homeless youth. This money will usually come from a government entity or another nonprofit organization.
While a nonprofit may be similar to a corporation in the sense of keeping track and recording their money, they are very different in how they are run and what they do with their money. The biggest difference is that nonprofits may be exempt from paying income tax. We learned that all nonprofits prepare what is called the receipt and payment account. This shows what cash they take in and where they spend their money as well. This is an important aspect of nonprofits, because they must keep careful track of their money to retain their tax exemption.
We also learned that the income and expenditure account shows whether or not a nonprofit is running a surplus or a deficit. This account shows money coming in and money going out. This also shows the overall spending of the nonprofit. Lastly, the balance sheet shows an organization's assets, liabilities, and net assets.
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Accounting for Nonprofit Organizations
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