How is Nonprofit Accounting Different?

Nonprofit leaders have a reputation of being strong in the areas of compassion, communication, and ambition, but being weaker in their financial acumen. And, you know, that isn’t a bad thing at all! No one can be the best at everything, which is why we have so many nonprofit clients that bring us in to supplement their team of passionate advocates and leaders with our financial skills and experience.
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We understand the intricacies of how nonprofit accounting differs from for-profit accounting and bring that expertise to every engagement. We do what we do best – cleaning up the books, ensuring grant accounting regulations are followed, improving financial reporting for stakeholders, maintaining cash flow to fund programming, and aiding in growth planning initiatives – so that nonprofit leaders can do what they do best – leading the kinds of organizations that can change the world!

But for leaders that want to better understand what’s most important in nonprofit accounting, we’re always willing to lend our expertise to help them grow professionally. So, today we’re providing a high-level overview of what makes nonprofit accounting unique to offer a sort of crash course in NFP accounting. 

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​Nonprofit Accounting Differences
The biggest accounting difference you need to be aware of is that nonprofit organizations use fund accounting, as opposed to accrual or cash accounting like for-profit entities.

What is fund accounting? Fund accounting allows for funds from various sources to be kept in separate buckets to ensure compliance with their associated restrictions. Why is this important? Using a fund accounting model allows restricted donations from donors to be kept separate from unrestricted donations to ensure organizations do not run afoul of compliance regulations.

For-profit entities do not need to worry about where their funds come from because they are all being used for the same purpose – to strengthen the overall financial performance of the company. However, nonprofits often have many different arms to fund (such as programming, community outreach, events, political advocacy, member services, and so on) that can have different compliance considerations. By keeping the funds for each of these arms of the organization separate, the organization can achieve compliance and increase its overall effectiveness.

But the differences do not end there!

Nonprofit revenue streams are also different. While some organizations may sell products, services, and/or memberships to generate revenue like their for-profit counterparts, nonprofits will also accept financial and in-kind donations as well as receive proceeds from fundraising events to fund their mission.
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Typically, nonprofit organizations are also expected to have a greater degree of financial transparency. This is due, in part, to their more varied revenue streams, but is also an implied social expectation because their goal is to serve their audience and support their community well, not help their leadership accumulate wealth. Obviously, money is required to fulfill their mission, but a nonprofit’s primary focus is not generating profits – it’s achieving their mission. As such, supporters will often demand greater insight into what their dollars are supporting than customers of a company will. Therefore, nonprofit accounting and finance teams should be prepared to provide timely and robust financial reporting that supports their activities and assures key stakeholders like donors, partners, volunteers, and boards that the organization is being a good steward of its finances.

Using Nonprofit Accounting Support to Improve Fundraising

Finally, there are unique regulatory differences that will apply to nonprofits depending on their location, size, scope, and organization-type. Nonprofits must navigate complex legal, financial, and operational requirements, especially across the areas of:

• Grant reporting
• Donor restricted funds
• In-kind donations
• Endowments
• Expense categorization
• Financial statements

This is one area where having an experienced nonprofit accountant can really help, because they have the kind of real-world experience needed to navigate these kinds of issues well.

Finding a Nonprofit Accountant
When you need an experienced nonprofit accountant, we can help! Our large team of US-based accountants is comprised of highly skilled professionals with a wide range of professional experience. We have consulting accountants that focus specifically on nonprofit accounting available to help your organization get its books under control and manage its finances better. Contact us to find out how we can help you achieve your mission to make a real difference in your community!