When it comes to accounting, there are a few key principles that guide how nonprofit organizations handle finances, including the setup of a chart of accounts for your nonprofit organization. In this article, we’ll take a look at what those standards are, and explore how they differ from those of for-profit businesses. We’ll also discuss the reasons why these standards exist in the first place, and what you need to do to ensure that your organization is compliant.
Key Accounting Standards for Nonprofits
Nonprofits have many standards to uphold when it comes to accounting. This is to ensure the organization is benefitting the public as it promised and is properly making use of its tax-exempt status. Let’s explore the key accounting standards for nonprofits.
Keep Track of All Sources of Revenue
All money coming into the organization must be properly tracked and reported. This includes donations, grants, investment income, membership dues, and any other form of income. All money should be deposited into the organization’s bank account(s), and a record should be kept of every transaction.
This is important for two reasons: first, it ensures that all money is being used appropriately; and second, it prevents the organization from over-reporting its income (which could lead to problems with the IRS).
All Income Should Go Back to The Organization
Perhaps the most important key is that all of the organization’s income must go back into furthering its cause. This means that any surplus income, outside of overhead expenses, must be reinvested, rather than distributed among shareholders or used to pay executive salaries.
This is important because it ensures that the organization is using its resources in the most efficient way possible and that all money is going toward furthering its cause.
It also allows donors to see where their money is going, and how it is being used to further the organizational goals. By definition, the organization cannot make a profit or benefit any shareholders. All income must benefit the organization as a whole.
Keep Track of Your Disbursements
All of the nonprofit organization’s expenses must be tracked and reported. This includes expenses like office rent, salaries, travel expenses, and any other costs associated with running the organization.
Again, this is important for two reasons: first, it ensures that all money is being used appropriately; and second, it prevents the organization from over-reporting its expenses (which could lead to problems with the IRS).
Create Essential Financial Statements
All nonprofits must create three essential nonprofit financial statements:
-Balance sheet, which lists all of the organization’s assets and liabilities;
-Income statement, which reports the organization’s revenue and expenses; and
-Cash flow statement, which tracks the organization’s incoming and outgoing cash.
These financial statements are important because they provide a snapshot of the organization’s financial health. They can also be used to track trends over time and to make projections for the future.
Ensure GAAP Standards Are Met
All nonprofits must ensure that their accounting practices meet GAAP (generally accepted accounting principles) standards. This includes things like maintaining accurate records, using proper accounting methods, and ensuring that financial statements are prepared in accordance with GAAP guidelines.
GAAP compliance is important because it ensures that the organization’s financial statements are accurate and reliable. It also makes it easier for donors and other stakeholders to understand the organization’s finances.
File IRS Form 990 Each Year
All nonprofits must file IRS Form 990 each year, regardless of their size or income. Form 990 is a federal tax return that provides information about the organization’s finances, activities, and governance.
It is important to file Form 990 because it allows the IRS to monitor the organization’s compliance with its tax-exempt status. It also provides transparency for donors and other stakeholders.
Be Transparent with the Public
All nonprofits must be transparent with the public about their finances. This means providing accurate and up-to-date information about their income, expenses, assets, liabilities, and governance.
It is important to be transparent because it allows donors and other stakeholders to see how the organization is using its resources. It also helps to build trust between the nonprofit and the public. If the IRS or the public does not trust the organization, it may not get the money it needs to fund its programs.
How Do Accounting Standards Differ Between Nonprofits And For-Profit Organizations?
Now that we’ve looked at the key accounting standards for nonprofits, let’s compare them to those of for-profit businesses.
Distribution of Income
As we mentioned earlier, nonprofits are not allowed to make a profit. This means that they cannot reinvest income back into the organization. All of the money received must be spent on furthering their mission.
For-profit businesses, on the other hand, can reinvest their earnings back into the business. This allows them to grow and expand their operations. It also allows them to pay shareholder dividends on a regular basis.
How Financial Activities Are Reported
Nonprofits must report their financial activities on IRS Form 990. This form provides information about the organization’s income, expenses, assets, liabilities, and governance.
For-profit corporations must report their financial activities on IRS Form 1120, while sole proprietors use Schedule SE on personal tax forms. Form 1120 provides information about the company’s income, expenses, assets, liabilities, and shareholders.
Nonprofits are exempt from paying federal income taxes if the corporation is registered and holds 501(c)3 status. However, they may still be required to pay state, local and property taxes.
For-profit businesses must pay federal and state income taxes. They may also be required to pay property taxes and other local taxes.
As you can see, nonprofits have some strict yearly accounting standards that must be followed. However, these standards are in place to ensure that the organization is using its resources in a responsible and transparent way. By following these accounting standards, nonprofits can maintain their tax-exempt status and continue to serve their mission.