Non-profit accounting differs a bit from for-profit businesses since their focus isn't on maximizing profit. Here's a breakdown of the key aspects:
1. Fund Accounting:
- A core principle in non-profit accounting. It tracks money designated for specific purposes (restricted funds) and unrestricted funds that can be used for various activities.
- This ensures funds are used as intended by donors and funders.
2. Choosing an Accounting Method:
- Non-profits can choose cash accounting (recording transactions when cash is exchanged) or accrual accounting (recording transactions when they occur).
- Accrual is more common as it provides a more accurate picture of the organization's financial health.
3. Financial Statements:
- Non-profits typically prepare three main statements:
- Statement of Activities (similar to an income statement): Shows revenue, expenses, and net surplus/deficit.
- Statement of Net Position (similar to a balance sheet): Shows assets, liabilities, and net assets.
- Statement of Cash Flows: Shows cash inflows and outflows from operating, investing, and financing activities.
4. Form 990 Filing:
- Most tax-exempt non-profits must file an annual Form 990 with the IRS. This reports their financial activities and ensures compliance with tax regulations.
Best Practices for Non-Profit Accounting:
- Maintain strong internal controls to safeguard assets and ensure accurate record-keeping.
- Regularly reconcile accounts to identify and fix discrepancies.
- Use accounting software specifically designed for non-profits.
- Seek professional guidance from a qualified accountant familiar with non-profit accounting.
By following these principles, non-profits can maintain transparent and accountable financial practices, building trust with donors, funders, and the public they serve.
