Nonprofit accounting has distinct features compared to for-profit accounting due to the nature and goals of nonprofit organizations. Nonprofits focus more on the accountability aspect of accounting. There is a specific set of rules and procedures regulated by Generally Accepted Accounting Principles (GAAP) set by the Financial Accounting Standard Board (FASB) that help them stay accountable to their donors and contributors.
Nonprofit Budget – Creating and managing a budget is crucial for any nonprofit organization. It helps ensure that resources are allocated effectively, financial goals are met, and the organization’s mission is supported.
Components of a Nonprofit Budget
- Revenue sources including grants, donations, fundraising events, program fees, membership dues, and investment income.
- Expenses including salaries of program staff, materials, direct services, salaries for administrative staff, office supplies, utilities, occupancy costs, depreciation, miscellaneous expenses, event costs, marketing, and donor outreach.
- Cash Flow Projection allows for the estimates of cash inflows and outflows to ensure the organization has enough liquidity to meet its obligations.
- Variance Analysis allows for comparison of actual financial performance against the budgeted amounts to identify discrepancies and make adjustments as needed.
Statement of Financial Position – The Statement of Financial Position, also known as the Balance Sheet in for-profit organizations, is a critical financial statement for nonprofits. It provides a snapshot of the organization’s financial health at a specific time. This statement details the organization’s assets, liabilities, and net assets (equity) and helps viewers understand its financial stability and liquidity.
Components of the Statement of Financial Position
Assets:
- Current Assets are assets that are expected to be converted into cash or used up within one year, including cash and cash equivalents, accounts receivable, prepaid expenses, and inventory.
- Non-Current Assets: Assets that are not expected to be converted into cash or used up within one year, including plant, property, equipment, long-term investments, and intangible assets
Liabilities:
- Current Liabilities are obligations expected to be settled within one year. Examples include:
- Accounts Payable: Amounts the organization owes to suppliers or vendors.
- Accrued Liabilities: Expenses that have been incurred but not yet paid
- Deferred Revenue: Funds received in advance for services or programs to be provided in the future.
- Non-Current Liabilities: Obligations that are due beyond one year. Examples include loans or bonds that are due after one year and any other long-term obligations not classified elsewhere, such as pension liabilities.
Net Assets:
- Unrestricted Net Assets are funds available for any purpose not restricted by donors. They include the net assets that can be used at the organization’s discretion.
- Temporarily Restricted Net Assets are funds donated with restrictions on their use that will expire over time or through the accomplishment of specific activities.
- Permanently Restricted Net Assets are endowment funds where the where the principal amount is to be maintained permanently, with only the income available for use.
The statement of financial position for a nonprofit follows the equation: Assets – Liabilities = Net Assets
This equation ensures that the nonprofit’s total assets are always balanced against its obligations and net assets, providing a clear view of its financial standing at a specific point in time.
Statement of Activities – The Statement of Activities, also known as the Income Statement or Statement of Revenues and Expenses in for-profit organizations, is a critical financial report for nonprofits. It provides a detailed account of the organization’s financial performance over a specific period, showing how revenues are transformed into net assets through various activities and expenses.
Components of the Statement of Activities
Revenues:
- Unrestricted Revenues: Funds received without restrictions on their use, including:
- Donations and Contributions: Gifts from individuals, businesses, and other entities.
- Grants: Financial support from foundations or government agencies that are not restricted.
- Program Fees: Income earned from providing services or goods.
Investment Income: Earnings from investments, such as interest, dividends, or gains from investments. - Restricted Revenues: Funds that come with specific restrictions on their use, including:
- Temporarily Restricted Contributions: Donations earmarked for specific purposes or time periods.
- Permanently Restricted Contributions: Donations that must be maintained in perpetuity, with only the income available for use (e.g., endowments).
Functional Expenses:
- Program Expenses are expenses directly related to the nonprofit’s mission and specific programs or services. Program expenses can include compensation for staff working directly on program activities; materials and resources used to deliver services or conduct activities; expenses directly tied to the implementation of program activities, such as outreach costs or service delivery expenses; fees paid to consultants or service providers who contribute directly to program goals.
- Program Expenses are expenses directly related to the nonprofit’s mission and specific programs or services. Program expenses can include compensation for staff working directly on program activities; materials and resources used to deliver services or conduct activities; expenses directly tied to the implementation of program activities, such as outreach costs or service delivery expenses; fees paid to consultants or service providers who contribute directly to program goals.
- Management and General Expenses are costs associated with the general operation and management of the organization, which support its overall functioning but are not directly tied to specific programs.
- Management and general expenses can include compensation for administrative staff, including executive leadership and finance personnel; costs related to leasing or owning an office space; expenses for electricity, water, and other essential services; and costs for items such as computers, software, and general office materials.
- Fundraising Expenses are costs incurred in the process of raising funds to support the organization’s mission, including expenses related to organizing fundraising events, including venue rental, catering, and event promotion; costs for promoting fundraising campaigns or donor appeals; expenses related to communication with potential and current donors, including mailings and telephone solicitations; and compensation for employees involved in fundraising activities.
The budget, Statement of Financial Position, and Statement of Activities provide a detailed view of the organization’s revenues and expenses, highlighting how effectively it uses its resources to achieve its mission. This format helps donors and funders understand how funds are used, ensuring the organization is accountable for its financial activities. It assists management and the board in assessing financial performance, making informed decisions about future activities, and planning for sustainability. It also allows for comparison of financial performance over different periods and with similar organizations, helping identify trends and areas for improvement.
Sciarabba Walker & Co., LLP has a dedicated nonprofit team that can assist with various challenges and with preparation and analysis. If you have any questions, please email info@swcllp.com.
By Svetlana Svetlichnaya, CPA