As a nonprofit organization, it is important to be up-to-date on the most recent changes to revenue recognition. The new standards outlined in recent years are now creating an impact that has significantly changed how revenue should be recognized. This guide will explain the most important aspects of the new revenue recognition standards and how they apply to different types of nonprofit organizations.
What Is Revenue Recognition?
Revenue recognition is an accounting term that means recognizing revenue as a)how it’s identified and b) when it is earned. For nonprofit organizations, this generally means recording donations and other forms of income when they are received. However, the new standards require nonprofit organizations to recognize revenue as specified by law, when it is received, and when it is recorded for accounting purposes.
What Are the New Standards for Revenue Recognition?
The new standards state that revenue must now be recognized at the time that it is earned, rather than when it is received. This is a major change for nonprofit organizations, as you often receive donations after the services have been provided. In order to comply with the new standards, your nonprofit organization must have a good understanding of your contracts and donor agreements. You must also put systems in place to track when revenue is earned.
In the past, nonprofit organizations were able to use the “cash basis” of accounting, which meant that they only recognized revenue when it was received. However, the new standards require nonprofit organizations to use the “accrual basis” of accounting, which means recognizing revenue when it is earned. This change will have a major impact on the way your nonprofit organization keeps your books and reports your income.
How Does this Affect Nonprofit Organizations?
The new standards will have a significant impact on your nonprofit organization, however you can learn and apply the new standards by simply studying them and changing procedures as soon as possible. First, you will need to have a good understanding of your contracts and donor agreements. Second, you will need to put systems in place to track when revenue is earned. Finally, you will need to use the accrual basis of accounting, which means recognizing revenue when it is earned.
The most important thing for you to remember is that these changes are designed to improve financial reporting. By understanding the new standards and putting systems in place to comply with them, your nonprofit organization can ensure that your financial statements accurately reflect your income and expenses.