Nonprofit Accounting Basics

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Accrual vs. Cash

Accrual accounting – and budgeting – matches revenue and related expenses in the same fiscal period, regardless of the timing of the receipt or disbursement of actual cash. Many small and midsize nonprofit organizations operate on a modified accrual basis – that is, mostly on a cash basis except for year-end adjustments for accrual. See the “Basic Accrual Concepts” page  in the Budgeting section of this website for a discussion of seven basic accrual concepts and how they affect budgeting for small and midsize organizations. 

Approved Budget vs. Year-end Forecast

A budget is a forecast or financial plan made with the best information available at a point in time. As an organization progresses further into the budget year, it only makes sense that better information will become available that would change the previously expected outcomes for various line items. However, unless there has been a truly major change in the organization's structure or programs, it is generally not a good practice to change the budget once it’s been approved by the board.

Associate Fixed Costs with Reliable Revenue

If reliable revenue is sufficient to cover fixed costs, an organization then knows it can adjust its variable costs to match its success in reaching its transient revenue goals.

Budgeting Terms & Concepts

The annual operating budget is associated with the Statement of Activities (SOA), previously called the Profit & Loss. It involves projecting revenue and expenses for a single fiscal year to accomplish an organization's immediate mission agenda. The annual budget can be projected over multiple years as part of a strategic plan to incorporate the budget impact of longer-term strategic initiatives. In building an effective operating budget it will be advantageous for everyone involved in the budgeting process to have some familiarity with relevant budgeting terms and concepts below.

Chart of Accounts-Expenses

An organization’s operating expenses comprise labor, services, or things you buy or spend resources on to accomplish mission activities and to manage the organization. For small and midsize nonprofits without overly complex systems, 4-digit account numbers are usually adequate. Longer numbers can certainly be used, but that requires more keystrokes and may be harder to remember.

Chart of Accounts-Revenue

Operating revenue may derive from two broad categories: 1) earned (or exchange transactions), usually from program activities or contracted services or from investments, and 2) contributions, usually in the form of gifts, grants, or in-kind goods or services from institutions, agencies, or individuals. Contributions may also come with donor restrictions that are either temporary (time or purpose) or permanent (endowment).

Chart of Accounts-Net Assets

Net assets accounts reflect what is left over from assets after you subtract liabilities. “Net assets” is the nonprofit term or equivalent to for-profit equity or retained earnings. For small and midsize nonprofits without overly complex systems, 4-digit account numbers are usually adequate. Longer numbers can certainly be used, but that requires more keystrokes and may be harder to remember. Net assets account numbering usually begins with 3.

Creating a Management Reports Inventory

There is a set of reports required by GAAP (generally accepted accounting principles) that are standard components of an audit. These are the Statement of Financial Position, the Statement of Activities, the Statement of Functional Expenses, and the Statement of Cash Flows. (See links below.) Between audits, an organization produces interim reports internally, which can be formatted a little differently while still tracking data that will comply with GAAP requirements. These reports serve various management purposes.

The Budgeting Process: Introduction

The budget process is the way an organization goes about building its budget. A good operating budgeting process:

Dashboards or Snapshots

According to much research, about 65% of the general population are visual learners, and providing visuals along with data improves both comprehension and retention. So, adding a dashboard or snapshot summary as the cover page for the more detailed financial report packet, featuring charts and graphs showing trends and comparatives, is likely to enhance understanding among your board members and other key stakeholders of your organization’s financial data.

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