The number of accounts depends on the number of programs that the nonprofit has, the types of revenues it earns, and the level of detail required for planning and control of the organization. Under the accrual method of accounting, expenses are to be reported in the accounting period in which they best match the related revenues. If that is not clear, then the expenses should be reported in the period trial balance in which they are used up. If there is uncertainty as to when an expense is matched or is used up, the amount spent should be reported as an expense in the current period.
Because the money that comes from nonprofit businesses is the result of grants, fundraisers, donations, and campaigns, not-for-profit organizations must report their expenses differently than a for-profit business would. With this categorization, stakeholders, including donors, board members, and even the general public, gain a clearer picture of the organization’s financial operations. They can discern how their funds or contributions influence and drive the different facets of the nonprofit. A more extensive estimation process is required for expenses that cannot be tied back to a specific program or support service (e.g., payroll costs, depreciation, occupancy, and repairs and maintenance). The most common benchmarks to allocate these expenses are time and effort for payroll costs and square footage for occupancy costs.
Since the Form 990 filed by the nonprofit becomes public information, you can learn much about a nonprofit by reading the information on Form 990. The website guidestar.org is a resource one can use to obtain financial (and other) information reported on nonprofits’ Form 990. There are many different types of nonprofits, including governmental nonprofits, which we will not address. Nonprofits do not have commercial owners and must rely on funds from contributions, membership dues, program revenues, fundraising events, public and private grants, and investment income.
For example, a management employee might be spending 30% of her time in fundraising activities but her entire salary has been recorded as management and general expenses. If the nonprofit’s board of directors designates some of the nonprofit’s unrestricted assets for a specific purpose, those assets must continue to be reported as net assets without donor restrictions. The following table compares the main financial statements of a nonprofit organization with those of a for-profit corporation. While businesses are organized to generate profits, nonprofits are organized to address needs in society. As a result, nonprofits will issue a statement of activities instead of the income statement issued by for-profit businesses. Accountants often refer to businesses as for-profit entities and to nonprofit organizations as not-for-profit entities, or NFPs.
Second, functional categories promote transparency by showing how much of your funding is spent on mission-related activities and how much is used to run the organization. Program services describe the Bookstime activities that an organization engages in to further its mission. Nonprofits generally strive to have most expenses fall into the category of program services because it is appealing to donors and grant agencies. Expenses related to fundraising are not program services even though they often exist to fund the mission, however lobbying expenses can be included here if they are directly related to the nonprofit’s tax-exempt status.
The statement of functional expenses gives you insight into how well your nonprofit used the money it received from donors or grants. You can improve decision-making by reviewing the data in your non-profit accounting software and comparing it to previous years when creating your annual operating budget. Functional expenses are reported by their functional classification and recorded in a Statement of Functional Expenses. This method of expense reporting is most commonly used by nonprofit organizations. An accountant has the expertise to compile your statement of functional expenses, analyze the data it contains, and determine next steps that will allow your organization to manage its finances more effectively. Your organization can save time, energy, and money by outsourcing these tasks to an accounting firm that specializes in working with nonprofits, like Jitasa.
Following the Financial Accounting Standards Board requirements, all non-profit organizations in the US now have to declare their expenditures according to their practical classification and their natural classification. The systematic allocation of the cost of an asset from the balance sheet to Depreciation Expense on the income statement over the useful life of the asset. (The depreciation journal entry includes a debit to Depreciation Expense and a credit to Accumulated Depreciation, a contra asset account). The purpose is to allocate the cost to expense in order to comply with the matching principle. In other words, the amount allocated to expense is not indicative of the economic value being consumed. Similarly, the amount not yet allocated is not an indication of its current market value.
Management and general expenses include expenses that aren’t directly related to any program of the nonprofit. Fundraising expenses are incurred statement of functional expenses through the solicitation of contributions, gifts, and grants. These expenses include the efforts to collect both cash and non-cash contributions. Common expenses that appear as a fundraising expense include the postage for appeals and letters, acknowledgment letter creation, and the wages paid to the development director.
