Accounting Principles for Nonprofit Organizations

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 will go over the various accounting principles for nonprofit organizations, and how they differ from corporations. Nonprofits must keep a clear record of what money they take in and how the money goes out. Furthermore, nonprofits have a number of ways that they can generate revenue and keep it all tax exempt.

Introduction

Imagine that you want to start a nonprofit organization. How would you go about keeping track of the money coming in and out of the organization? How will you get money to support and pay for the programs that your organization wants to do?

A nonprofit organization is an organization whose purpose is not to make money, but to help further a particular social cause. They may also advocate for a particular view point as well. An example would be the Bill and Melinda Gates Foundation, which supports various causes across the world. It differs from a corporation in that it does not have shareholders that extra profit is given to, and there is no single owner of the organization. The extra profit is usually used to further its purpose or mission.

Accounting principles for nonprofit organizations

The accounting principles of a nonprofit are much different than that of a corporation. The primary mission for a nonprofit is that it provides services needed by a segment of society. A nonprofit secondary mission is to ensure that revenues are greater than their expenses, so that they can continue to maintain their current services and to expand. This is in contrast to a corporation's mission, which is to earn profits for stockholders and to provide services or sell goods.

The tax status of a nonprofit organization is also one of the most important aspects. A nonprofit will generally be exempt from income taxes provided that it is approved as such by the IRS. It is up to states and local governments as to whether or not to give them tax exempt status as well. Corporations on the other hand do not have this exemption and are subject to income tax.

There are also some main financial statements that are required as part of the generally accepted accounting principles. The main statement is the Statement of Financial Position. The Statement of Financial Position is essentially the Balance Sheet for the organization. It is a summary of the financial position the organization is in.

The Statement of Activities is compared to the income statement of a corporation. The Statement of Activities shows exactly what the nonprofit is spending money on and where they are getting their money from. This is helpful to ensure that all of the money is going to the right place and not being misused for anything else. How much should a nonprofit spend on administrative costs? There is no legal requirement ;however, there are plenty of groups that monitor this. The average is 26% being spend on administrative costs for nonprofits.

The Statement of Cash Flow is another important aspect of accounting principles for a nonprofit organization. This statement breaks down the Statement of Financial Position into a detailed report of the flow of cash in and out of the organization. Like the Statement of Activities, the Statement of Cash Flow is a good analysis of where the money is being spent on everyday things such as staff, utilities, and general supplies.

Nonprofit Revenue

Revenue for a nonprofit is much different than that of a corporation. While a corporation makes money from the sales of goods and services, a nonprofit cannot do that. A nonprofit gets its money through donor contributions and membership dues. Its membership is the greatest asset that a nonprofit has and its greatest means of revenue.

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