Things to consider in nonprofit accounting

I come from a corporate background where the primary financial goal is to make money. While many of my clients are for-profit businesses, I also have some nonprofit clients, and I have volunteered with various nonprofit organizations. And it’s a different world, bookkeeping and accounting-wise, with some specific things to consider.

In the nonprofit world, you’re not trying to make money-your goals are to keep the organization running, and providing its services. That means the goal is to basically break even. If there’s a little bit left over that can be put into a specific program or an additional effort, that’s great, but breaking even is the norm.

Here are two important things to keep in mind regarding nonprofit accounting.

Do nonprofits have equity?

A balance sheet tells you where the organization stands financially. It has assets at the top, and liabilities below them. In the corporate world, and at the bottom of the balance sheet, the difference between the two is called equity, generally meaning the owners’ residual claim on the business assets. But in the nonprofit world, there’s no owner, which renders the term equity meaningless.

Rather, in the nonprofit world, the difference between assets and liabilities is referred to as Net Assets. There may still be some nonprofits who use the term equity, perhaps as a way to help readers, usually board members, to understand financial statements. But in formal financial statements of a nonprofit, Net Assets is the norm.

How should you handle restricted funds?

Another accounting issue to the nonprofit world is that of restricted funds, specifically the classification and use of donated restricted funds. The tracking of restricted funds, both their receipt and expenditure, is of primary importance to a nonprofit.

As the name implies, donations of restricted funds must be set aside and used toward a specific purpose, either as specified by the donor, or by board directive. Let’s say a nonprofit that serves families wants to build a new playground, and it gets a large donation specifically for that purpose. That donation is set aside to be used only for a new playground. Even if the roof starts leaking, or the air conditioner goes out and needs to be replaced, that specified donation is off limits, and must be used for the playground. Repair expenses must come from other sources.

Where it matters in bookkeeping is how you set things up. You should keep the cash equivalent of the restricted funds amount somewhere hard to access. I’ve seen some nonprofits simply say “Oh, we won’t let our operating bank account go below X amount, because that’s what we have designed as restricted funds.” But that is a dangerous approach, because it’s easy to eye those funds when the roof or air conditioning needs urgent attention.

The cleaner way to approach it for bookkeeping purposes is to put restricted funds in a separate bank account. Then, if you need to pull funds out of that account for a different purpose, it requires board approval and there’s a clear record of when and why it was done.

Whether you’re working at a nonprofit or serving on the board of one, it’s a good idea to keep these two things in mind regarding nonprofit accounting.

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