What is nonprofit accounting?

Nonprofit accounting is a system of financial management, recordkeeping and reporting that is uniquely used by not-for-profit groups. Nonprofits are organizations that have no owners or ownership interests, Receive contributions or donations from third parties that don't expect a return.

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What is the difference between nonprofit and for-profit accounting?

  • Balance sheet vs. statement of financial position: A for-profit company produces a balance sheet that details its net equity for owners and shareholders. However, a nonprofit does not have shareholders or owners. Instead, it produces a statement of financial position that outlines its assets and debts.
  • Net assets vs. equity: In for-profit accounting, the stockholders' equity is equal to a company's assets minus liabilities, sometimes called net assets. A nonprofit does not have equity, so this line item is always referred to as net assets. Net assets are labeled as restricted or unrestricted.
  • Income statement vs. statement of activities: Because a company is trying to generate a profit, it produces an income statement showing its revenues, expenses, losses and gains. A nonprofit doesn't have a bottom line, since it is driven by a mission rather than the need to make a profit. Instead of an income statement, it produces a statement of activities that outlines the revenues and expenses associated with each program.
  • Statement of cash flow: Both nonprofits and for-profits must track and report their cash flow.

Like any organization that handles cash flow and pays taxes, nonprofits should invest in professional accounting. Many nonprofit organizations don't allocate resources for a professional accountant to manage their finances. Instead, they assign the task to an untrained staff member or volunteer. Tiffany Couch, CEO of forensic accounting firm Acuity Forensics, says this is one of the biggest mistakes not-for-profit organizations make. Nonprofits run the risk of fraudulent activity if the bookkeeping and accounting is not carefully managed. This is often unintentional, through a lack of oversight or experience. Volunteers, who often make up a large part of a nonprofit's staff, may leave an organization with short notice, which can cause gaps in recordkeeping. Hiring a professional ensures that someone with training and experience is always paying attention to the accounts and may notice something that an untrained employee would miss. For example, many organizations meet the requirements that release temporarily restricted funds but don't realize it because no one is keeping track.