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Nonprofit

Nonprofit accounting is unique in its reporting requirements. Most nonprofits (also called not-for-profits) have the following financial statements:

  • Statement of Financial Position
  • Statement of Activities
  • Statement of Functional Expenses
  • Statement of Cash Flows

Nonprofits can have two net asset categories:

  • Net assets with donor restrictions
  • Net assets without donor restrictions

Nonprofits normally use the FASB standards to create their financial statements. This is a full accrual basis of accounting. So pledges receivable are accrued when received.

Revenues can be exchange transactions where the not-for-profit provides a service in return for income. But many of these organizations make most of their money from contributions. Generally accepted accounting principles require the accrual of contribution pledges as revenue when the pledge is made by a donor. Many times contributions are made for specific purposes, so these monies are recognized as revenue but they are categorized as “with donor” restrictions. Once the restriction is met, the money is moved from “with donor” to the “without donor” category and the related expense is recognized. Contributions can also have time restrictions.

Many people believe nonprofits never make a profit, but this is not true. Some nonprofits makes millions of dollars in profit each year. And some not-for-profits take in hundreds of millions of dollars annually.

Nonprofits exist for a myriad of reasons including entities to fight cancer, cystic fibrosis, homelessness, poverty, healthcare, and kids programs. Nonprofits are normally not taxable and they file an annual 990 tax return.

Most not-for-profit boards are volunteer but employees are often compensated.

Some state laws require audits of not-for-profits once their revenue exceeds a specified threshold. These entities, since they are usually small, often lack appropriate segregation of duties. Consequently, they may suffer thefts. An annual audit is advisable, especially when the number of employees is limited and segregation of duties is not possible. These organizations may also want to implement surprise checks of accounting activity to keep everyone honest.

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Charles Hall

Charles Hall

I am a practicing CPA. I have primarily audited governments, nonprofits, and small businesses for the last forty years.

My sweet spot is governmental and nonprofit fraud prevention. I am the author of (1) Journal Entries Made Easy,  (2) The Little Book of Local Government Fraud Prevention, (3) Preparation of Financial Statements & Compilation Engagements, (4) The Why and How of Auditing, and (5) Audit Risk Assessment Made Easy. I frequently speak at continuing education events.

I consult with CPA firms, assisting them with auditing and accounting issues. Contact Charles

More About Me
  • Books
  • Media
  • Topics
Book: Journal Entries Made Easy, an Introduction to Accounting
Book: The Little Book of Local Government Fraud Prevention
Book: Preparation of Financial Statements & Compilation Engagements
Book: Audit Risk Assessment Made Easy: Seeing What Others Miss
Book: The Why And How Of Auditing: Auditing Made Easy
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