Accounting for Nonprofit Organizations

Lesson Transcript
Instructor: Lee Davis

Lee has a BA in Political Science; and my MA is in Political Science with a concentration in International Relations.

This lesson discusses the basic financial aspects of a nonprofit organization. It focuses specifically on payment accounts, expenditure accounts, and the balance sheet of a nonprofit and how a nonprofit uses each of these tools in its daily operations.

Nonprofit Organizations

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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  • 0:04 Nonprofit Organizations
  • 1:20 Receipt & Payment Accounts
  • 1:52 Income & Expenditure
  • 2:21 Balance Sheet
  • 3:25 Lesson Summary
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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.

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