From churches to youth organizations to the local chambers of commerce, nonprofit organizations make our communities more livable places. Unlike for-profit businesses that exist to generate profits for their owners, nonprofit organizations exist to pursue 5 Main Benefits of Accounting Services for Nonprofit Organizations missions that address the needs of society. Nonprofit organizations serve in a variety of sectors, such as religious, education, health, social services, commerce, amateur sports clubs, and the arts. Comparing your income and expenses between different time periods can be useful to track your organization’s growth. For example, if your organization hosts a large annual event in October, you might expect your expenses to increase around that time. You’ll want to ensure that you’re bringing in enough income to compensate for your anticipated expenses.

Notes to the Financial Statements

• But if you’re spending more than you bring in for several periods in a row, you’re headed for trouble.
• It’s the brainchild of the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB).
• As a nonprofit professional, it’s easy to get caught up in the nitty-gritty of developing programming, managing donor relationships, and mobilizing your volunteer base.
• Beyond helping your organization meet legal requirements, they also promote transparency and help you evaluate your performance.
• It is also important for nonprofit organizations to regularly review and update their accounting policies to adapt to changes in the regulatory environment and industry practices.
• Financial statements for nonprofits also provide transparency and accountability to donors, grantors, and other stakeholders, demonstrating that the organization is responsibly using its funds to achieve its mission.

An organized record-keeping system ensures your nonprofit can easily access key financial data when the time comes to compile your financial statements. Financial reporting provides transparency, helps fulfill legal obligations, builds donor trust, and evaluates financial health. Nonprofits in the United States are generally required to file an annual information return, known as Form 990, with the IRS. Form 990 provides a comprehensive overview of the organization’s financial activities and is essential for maintaining tax-exempt status.

Net Assets

These assets and liabilities are further broken down into current and noncurrent, depending on whether assets can easily be converted to cash to settle liabilities. A balance sheet line that includes cash, checking accounts, and certain marketable securities that are very close to their maturity dates. Budgeting for nonprofits can become complex when it involves several overlapping categories, such as grants, programs, function, and nature. The investing activities section of the SCF reports the amounts spent to purchase long-term assets such as equipment, vehicles and long-term investments. The investing section also reports the amount received from the sale of long-term assets. The operating activities section of the SCF reports the changes in cash other than those reported in the investing and financing sections.

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Financial statement notes play an essential role in enhancing transparency, as they give stakeholders a deeper understanding of the nonprofit’s financial situation beyond raw numbers. Categorizing expenses allows stakeholders to assess how effectively the nonprofit directs funds toward its mission. A high proportion of expenses dedicated to program services typically indicates that the organization is using its resources effectively for mission-related activities, with minimal overhead. The Statement of Functional Expenses breaks down expenses by both natural classification (e.g., salaries, rent) and functional classification (e.g., program services, management, fundraising). This statement is unique to nonprofits and is used to demonstrate financial efficiency and accountability.

Statement of financial position

• The nonprofit statement of financial position is also known as a balance sheet, which is what for-profit organizations usually call their equivalent statement.
• They serve as a valuable tool for stakeholders, such as donors, board members, and regulators, to assess the financial health and transparency of the nonprofit organization.
• Typically pulled on a monthly basis, this report provides insight into the specific activities that are bringing funds into the organization, and how those funds are being spent.
• Best practice, although not required, is to break-out the program service costs by the organization’s various programs and list the expense categories from highest to lowest.
• This section helps determine whether revenue sources are consistent with your exempt purpose and whether unrelated income may affect your tax-exempt status.
• Understanding these requirements is the first step to compliance and transparency.

Without a customized software solution, many nonprofits download their accounting data to Excel to compile the information in a usable format. However, this can be extremely https://greatercollinwood.org/main-benefits-of-accounting-services-for-nonprofit-organizations/ time-consuming for your nonprofit’s team and take energy away from focusing on your mission. The administrative cost ratio examines the proportion of total expenses used for administrative support, including salaries, office expenses, and general management. This metric helps determine whether the nonprofit is balancing mission-driven spending with necessary operational support.

• This section details cash transactions directly related to the nonprofit’s core mission.
• A statement of functional expenses breaks down its expenses by both nature and function.
• For example, funds designated for a specific program should not be used for general expenses or other purposes.
• It also provides transparency to donors and, in turn, opens up opportunities to solicit significant gifts.
• You’ll have to exclude unrealized gains or losses from investments, as well as the value of in-kind services and real estate donations.