What is Nonprofit Accounting?
Nonprofit accounting refers to the unique system of recordation and reporting that is applied to the business transactions engaged in by a nonprofit organization. A nonprofit entity is one that has no ownership interests, has an operating purpose other than to earn a profit, and receives significant contributions from third parties that do not expect to receive a return. Nonprofit accounting employs the following concepts that differ from the accounting by a for-profit entity.
While for-profits primarily focus on earning a profit, nonprofits focus more on the accountability aspect of accounting. They follow a specific set of rules and procedures that help them stay accountable to their donors and contributors.
Nonprofit Accounting Statements and Reports
Nonprofit accounting isn’t a free-for-all. Nonprofit accounting professionals must adhere to specific guidelines when they create reports. The primary guidelines your organization should know about are the GAAP standards. GAAP stands for Generally Accepted Accounting Principles. These are (as the name states) general principles accepted by accountants in all sectors. These guidelines are set by an organization called the Financial Accounting Standards Board (FASB).
The nonprofit’s budget is the document that individuals at the organization are more likely to be familiar with. This document is created by the leadership or finance team using information from the development team and historic spending habits from the organization. The nonprofit budget is the planning document used to predict expenses and allocate resources for the organization. It details both the costs that the organization will incur as well as the revenue expected to receive over a set period, usually a year.
A budget is not necessarily used in a for-profit business but is considered an essential component of the accounting for a nonprofit business. This is because a nonprofit typically has quite limited revenue sources, and so must always maintain tight control over its expenditures. Consequently, its budget must be rigorously developed based on reasonable revenue expectations, with all cost variances being promptly investigated.
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The writer of this blog is Jory Mirtil. He works at Thaddeus as an Accounting Intern. He chose Thaddeus because of the work environment and the mission it stands for. He is someone who aspires to be an Accountant one day. His career path journey will involve a ton of work experience and education in accounting in order to reach his dream to become a CPA.