Nonprofit Accounting FAQ: Understanding the Essentials
The most common questions we're asked -- answered!
Welcome to our comprehensive non-profit CPA FAQ page, where we unravel the complexities of accounting in the nonprofit world. While there are similarities between nonprofit and for-profit accounting, it's crucial to recognize the distinct requirements and practices unique to nonprofit organizations. This page is designed to guide you through the various aspects of nonprofit accounting, ensuring your organization stays informed and compliant.
Key Questions Covered:
What kind of accounting do nonprofits use?
What is the best accounting method for nonprofit organizations?
Who handles the finances in a nonprofit?
Is GAAP required for nonprofits? Does FASB apply to nonprofits?
What does a bookkeeper do for a nonprofit?
Who does the CEO of a nonprofit report to?
Can I pay myself from my nonprofit
What edition of QuickBooks is most advantageous for a nonprofit organization
Our aim is to provide you with clear, concise answers to these critical questions, empowering your nonprofit organization to navigate the financial landscape with confidence and efficiency.
Feel free to dive into any section that addresses your immediate questions, or explore each topic for a thorough understanding of nonprofit accounting practices.
What kind of accounting do nonprofits use?
What is the difference between accounting for profit and nonprofit organizations?
Non-profit accounting isn’t too much different than for-profit accounting but there are some things you need to be aware of specifically related to non-profits.
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Financial reports have a different nomenclature that address some of these basic differences.
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The Profit and Loss (P&L) or Income Statement is called a Statement of Activity since a non-profit’s goal is not necessarily to make a profit.
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The bottom line, Net Income, is called Net Revenues, Expenses are called Expenditures, but the basic accounting rules are essentially the same.T
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The Balance Sheet is called the Statement of Financial Position, the Equity portion of the report is called the Statement of Net Assets. Since a non-profit organization is basically owned by the public, there is no single owner holding any equity in the business as there is in a for-profit business.
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Nature and function expense classification and allocation
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You are probably familiar with classifying expenses by their nature on a P&L like, rent, salaries, office supplies, etc. But non-profit organizations must also allocate expenses by function.
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The tax form 990 form requires that non-profits report expenditures as either Programmatic, Management & General, or Fundraising and Development
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Program-related expenditures tell regulators that you are spending the funds received on furthering the organization’s mission. This is important because the federal government has allowed for a tax exemption for the organization in order to accomplish its mission. Spending funds on non-program related expenditures could raise questions as to whether the organization should maintain its tax exempt status.
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What is the best accounting method for nonprofit organizations?
Depending on the size of the nonprofit organization, it is up to the finance team, possibly the Treasurer, to determine what makes the most sense based on the business’s operations.
Generally, if we are working with a non-profit client that has a high volume of restricted use, cost-reimbursement grants, we may suggest using accrual basis accounting. This is because with accrual basis of accounting we can match effort to output. We will report revenues as well as deferred revenues depending upon progress of the work performed and the pay schedule of the grant and account for the fact that these may not align seamlessly.
If the non-profit is earning revenues for services performed, it might make sense for the business to just report on a cash basis for the time being. Cash basis of reporting means that regardless of effort and output, financial figures are reported based on when cash is received and when cash is paid. This is usually simpler than accrual basis but often not as informative to a business and its overall operations when it comes to making important financial decisions.
Who handles the finances in a nonprofit?
Non-profits are required to have a Board of Directors that assist with overseeing the organization’s goals, operations, and finance functions. The IRS requires that a 501(c)(3) have at least 3 individuals that serve as on the Board of Directors. The Executive Director or President of the non-profit reports to the Board of Directors.
The Board of Directors usually includes a Treasurer. The Treasurer would oversee the finance operations. The finance and accounting functions of a non-profit can be in-house (accounting department), outsourced (accounting firm), or a combination of the two depending on the needs of the business.
For smaller organizations, an outsourced team is best. For large organizations, we find that a hybrid approach is best. It gives you on-site devoted staff, and the expertise of a firm and a CPA to provide ad hoc advisory and CFO-level services without the on-going salary and benefits burden of hiring full-time employees to fulfill these functions.
Is GAAP required for nonprofits? Does FASB apply to nonprofits?
A financial statement audit may require your organization to comply with United States General Accepted Accounting Principles (US GAAP). The FASB (Financial Accounting Standards Board) establishes accounting standards for those organizations that are required to follow GAAP. There are various reasons your non-profit may need to complete an annual financial statement audit and comply with GAAP as a result.
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Check with your non-profit’s state requirements. Often, certain levels of gross receipts require a time-sensitive audit report submission.
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Receipts or expending of Federal funds or grants over $750K annually may require an audit.
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A loan agreement may require an annual submission of a financial statement audit to your lender.
A financial statement audit must be completed by a qualified independent CPA. If you have ever been audited before, you know this is a heavy lift. The internal controls of your organization will also be evaluated at some level as part of the audit. Beyond just confirming that the financial reports are reasonable, the auditors want to ensure that the proper processes and controls are in place to support strong financial operations.
The required implementation of certain FASB accounting standards updates may be delayed for nonprofits. For example, publicly traded companies, and other for-profit entities must implement new accounting standards before nonprofits are required to comply.
If no audit is required, often we see smaller organizations reporting on another basis of accounting. This can be cash basis, modified-cash basis, accrual and even modified-accrual basis. Not sure what all of this means? Schedule a consultation with one of our experts to learn more.
What does a bookkeeper do for a nonprofit?
Hiring a qualified bookkeeper to handle the day-to-day accounting processes can benefit any organization. Beyond “keeping the books in order” an outsourced accountant or firm can assist you with processing accounts payable, accounts receivable, payroll, and other compliance related functions like filing your 1099-NECs and -MISCs. Bookkeepers do the same functions for a for-profit as they would for a non-profit. At LAFM, we believe the worry and burden that comes with finance and compliance should fall on our shoulders. This allows you to work with your team to grow a successful organization.
If you’d like more information about our Nonprofit CPA Services , get in touch today.
Who does the CEO of a nonprofit report to?
The CEO of a nonprofit, usually called the Executive Director, reports to their Board of Directors. The Board of Directors oversees a non-profit. A non-profit is set up to benefit the public. As a result, there is no “owner” in the traditional sense. The IRS requires a 501(c)(3) nonprofit to have at least 3 board members.
How to set up an accounting system for a nonprofit organization?
There are a number of data sets and end results you should consider when setting up an accounting system for a nonprofit. Utilizing QBO Plus or Advanced allows you to plan for the dimensions and data slices that you need based on the outputs (reports) that you need.
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990 Taxes – setting up a Class List by Function is your baseline.
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Programs – sub-programs
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Management & General
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Fundraising and Development
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Grants – Fund Accounting
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Check your grant contracts, what is required in terms of fiscal reporting?
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How many grants do you need to track?
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Your Programs class can have sub-classes assigned to it, these can be your major programs, and from there, you can create further grant sub-classes OR
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You can consider utilizing sub-customers for your restricted grants. A profit and loss by sub-customer and you have a running total of revenues and expenditures by sub-customer. A sub-customer can be assigned to any line item within QBO Plus or above.
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Finance Committee – Executive-level reporting
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Profit & Loss/Statement of Activity – at a minimum your Board will want to see an income statement for recent period of time.
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Setting up your Chart of Accounts that makes sense for your programs and operations is imperative to providing a valuable financial report to your constituents.
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Balance Sheet/Statement of Financial Position – telling your organization’s story via the balance sheet is an important part of understanding the full picture of your organization’s financial health.
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Setting up your Chart of Accounts for your balance sheet will help you see data points like how much cash do you have, other current assets like accounts receivable or prepaid expense, liabilities like credit card or other short- and long-term debts, and lastly net assets. Over time, how much has the organization retained in accumulated earnings or losses? Our net asset balances will tell us this. And beyond that, it will also tell us how much of these balances are donor-restricted or unrestricted.
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Can I pay myself from my nonprofit?
As an employee of a nonprofit, you can pay yourself from the nonprofit that you’ve created. Working for the nonprofit makes you an employee and you can run payroll for yourself.
You should properly set up payroll services with a reliable payroll service provider to provide yourself W-2 wages. Complete the onboarding docs as any employee would and begin running payroll for yourself. Onboarding documents may include the completion of the I-9 form for employment verification, the W4 form for proper tax withholdings, and setting up your pay for direct deposit to your personal bank account.
Make sure that the payroll company that you choose is a reputable and well-regarded payroll company. Need help choosing the right payroll provider? We can help!
What edition of QuickBooks is most advantageous for a nonprofit organization?
The minimum level subscription for QuickBooks Online for a nonprofit is QBO Plus. The Plus version of QuickBooks Online allows you to categorize and classify your expenditures by nature and function respectively. Functional reporting is a requirement unique to nonprofits and it required on the annual 990 tax return form. Functional classifications include Programs, Management & General, and Fundraising & Development.
Additionally, tracking restricted use grants can be made easier by using sub-classes under the main Programs class. You might also consider utilizing projects or sub-customers to track your grants if you will be using the Class functionality to track departments or various locations. Setting up QBO Plus account with your reporting requirements in mind will help simplify your grant required financial reporting when separate fund accounting is required. Year-end journal entries to properly categorize your donor-restricted and unrestricted fund balances will be made simpler with proper ongoing tracking using the various dimensions provided within the Plus and Advanced versions of QBO.
If you’ve already outgrown QBO Plus, QBO Advanced offers more flexibility and additional reporting capabilities that QBO Plus does not. Recently, Intuit (QBO’s parent company) implemented upgrades and new features to the QBO Advanced that makes it a viable solution for mid-sized organizations.
Why Choose LA Financial Management for Your Nonprofit Accounting?
You have plenty of options when it comes to finding the best CPA in the nonprofit industry.
We are also an option, but not like other CPA firms. Here’s what makes us your best choice;
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We have a passion for helping non-profits achieve their unique goals and missions.
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We take pride in our reliability and integrity with our clients.
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We offer specialized services to cater to your specific financial needs.
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Your financial health is our number one priority.
Let’s Discuss Your Nonprofit’s Financial Future—Contact Us Today
A dedicated CPA specializing in nonprofit organizations is the cornerstone of financial health and transparency. So whether you’re looking to strengthen your financial management practices, ensure compliance with regulatory standards, or simply need strategic financial guidance to propel your organization forward, we’re ready to help you. Contact us, and let's discuss your nonprofit’s financial future today!
Get in Touch
L.A. FInancial Management
303 N Glenoaks Blvd #200, Burbank, CA 91502