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Accounting Considerations for Non-Profits

All organizations have a capital structure, even non-profit organizations. This means that managing the finances of a non-profit organization requires an understanding of how its capital is structured, the way the entity is set up, and the plan of action in place to meet its long-term financial goals. When it comes to accounting considerations for non-profit organizations, it's important to know what separates the accounting practices from those of for-profit entities.

Budget

Accountants for non-profit organizations usually have to perform several steps when it comes to developing a workable budget. Since there are operating costs for every non-profit organization, there needs to be working capital — and that working capital needs to be distributed according to the budget.

Most organizations operate on an annual fiscal calendar. If the organization has been in operation for any length of time, the budget can be based on previous budgets, with adjustments made for inflation and other financial factors. For start-up non-profit organizations, budgets must be estimated to keep the organization up and running for the year.

De-Centralizing the Process

Rather than having one individual or team work on the budgeting process, many non-profit organizations assign a manager from each area to oversee their own budget, which can then be submitted to a central authority. This allows each manager to essentially “own” a portion of the budget unique to each area of the non-profit. When the mini-budgets are submitted, they can then be adjusted to fit within the construct of the larger macro budget.

Revenue

Revenue stream is an important and unique aspect of dealing with non-profit organizations. In a for-profit business, revenue is generated in the form of payment in exchange for goods or services. However, non-profit agencies generate revenue in the form of contributions as well. These contributions can be monetary contributions, (restricted or unrestricted funds), and donated goods. Accounting considerations for non-profit organizations include being able to determine the value of non-traditional revenue (such as donated goods or services).

Tax Exemption

A non-profit organization uses surplus income to reach certain organizational goals rather than using the monies as profit. If approved by the IRS, the organization can operate under Code Section 501(c), granting a tax-exempt status. The IRS requires the non-profit to be structured and operated solely for exempt purposes, including scientific, educational, charitable, literary, and religious functions, among others.

Accountants of non-profit organizations submit account information to the IRS and are assessed for taxes that are subordinate to the organization’s range, such as sales or real estate tax.

Because a sizable amount of non-profit funds come from private donation and membership dues or special events, the following accounting procedures have been implemented:

  • Pledges: Individuals often make promises to give funds to organizations. In 1993, the Financial Accounting Standards Board (FASB) created the Statement of Financial Accounting Standards No. 116.  These guidelines were set for pledge accounting and require that legally enforceable, unconditional pledges be recorded at the time the promise is made. Unconditional pledges are those that are not dependent on an ambiguous upcoming event, like an equivalent grant from another donor.
  • Special Event and Membership Dues:  Accountants of non-profit organizations must take into consideration funds paid by individuals to attend fundraisers or membership dues that enable individuals to use amenities or obtain services. The portion of an event charge that represents the fair market value of the benefits received is not tax deductible by the donor.

In addition, accountants involved in non-profit organizations have precise guidelines in terms of tracking contributions donated for a specific use, although these policies involved in tracking and reporting these funds depend on the nature of the restrictions.

Unrestricted and Restricted Contributions

Unrestricted contributions are funds that are given to a non-profit for general use. There are no conditions or stipulations put upon this form of revenue. Restricted contributions need to be accounted for on a non-profit’s 990 tax return, but the organization usually provides more detail about how restricted funds have been used. When donors contribute money, they sometimes want to make sure the money given is being used in accordance with their wishes. Accountants working for non-profit institutions need to carefully monitor which funds are unrestricted and which funds cannot be used except for the purposes under which they were donated.

The Need for Accounting Accuracy

Non-profit organizations need to ensure all their expenses are documented and fall within the constraints of the organization’s non-profit charter. For example, a New Orleans state legislative audit revealed that a non-profit program for underprivileged youth operated by a Jefferson Parish councilman had no formal accounting processes in place and was unable to provide documentation for hundreds of thousands of dollars in expenses, including more than $100,000 paid to a business owned by a fellow councilman. Because the audit encountered problems with documentation, the Department of Education recommended against hiring the foundation to operate the program in the future.

In a 2008 study by the Association of Certified Fraud Examiners, it was estimated that 14.3 percent of 959 cases studied involved not-for-profit organizations. The losses averaged about $109,000 per incident. With so many non-profit organizations operating on tight budgets, it’s vital to maintain accounting accuracy.

Accounting in a non-profit agency requires an eye for detail. Since some contributions have requirements attached to them focusing on how they are to be used, accountants in not-for-profit organizations need to be able to show interested parties where the funds have been spent. Failure to provide the necessary information can lead to violations of an organization’s charter.

Financial Incentives for Leadership

Something that must be considered when budgeting for a non-profit is finding ways to maintain strong leadership when profit motivation does not exist. Top level talent can be expensive and balancing a non-profit organization’s budget can be difficult when funding from one area might be reduced in order to keep individuals in key management positions in place. Accountants must maintain a careful balance when creating compensation budgets for non-profit organizations.

Grants

Since generating revenue can be challenging at times for non-profits, accountants may wish to consider looking into grants as another source of funding. Grants can come from a wide range of sources, including government agencies, corporations, and charitable foundations. Some grants require accounting departments to report on expenditures at the conclusion of the grant period.

Whether non-profits depend on grants to enhance their income stream or rely solely on contributions, nearly every non-profit organization needs accounting professionals that understand the intricacies of an organization’s capital structure and how it must achieve its long-term goals.

For accounting professionals that are up to the challenge and have the desire to give back to the community, working in the non-profit sector can be a rewarding career goal.