Lesson 7 in the course Intro to Nonprofit Accounting
In this lesson, we will take a look at the standards that your nonprofit accounting system needs to adhere to. If you run a nonprofit and have gone through our previous lessons on how to build an accounting system, this is the lesson for you!
One rule to… rule them all?
Accounting really only has one rule and that is that everything must balance. Specifically, the debits and credits of your accounting system should always balance. If you need a refresher on debits and credits, check out Lesson 4 where we covered how these work as the nuts and bolts of your accounting system.
All of your accounts work together using debits and credits, and every transaction you enter needs to be in balance. This is why a double-entry accounting system is critical to your nonprofit’s financial success. If you record an expense of $50, but only record $45 being paid out of your asset account, that will cause problems with your reports. They won’t make sense. Every accounting software you find should be a double-entry system, so no need to worry. You’ll just need to make sure you find one that allows for true fund accounting in order to stay completely accurate.
Like any business or organization, there are always expectations created by governing authorities that dictate how your operations are run and what forms you need to file. Accounting decisions for nonprofits in the U.S. are made by the PCAOB, AICPA, IRS, GASB, and FASB. The main point of these organizations is to determine rules that accounting must follow. We call these GAAP (Generally Accepted Accounting Principles) standards. All entities in the U.S. must adhere to GAAP standards.
Public Company Accounting Oversight Board (PCAOB) – established by Congress to oversee the audits of public companies in order to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports.
American Institute of Certified Public Accountants (AICPA) – the national, professional organization of CPAs, which sets ethical standards for the profession and U.S. auditing standards for audits of private companies, nonprofit organizations, federal, state and local governments.
Internal Revenue Service (IRS) – the revenue service for the United States federal government, which is responsible for collecting taxes, and the interpretation and enforcement of the Internal Revenue Code.
Governmental Accounting Standards Board (GASB) – the source of generally accepted accounting principles (GAAP) used by state and local governments in the U.S.
Financial Accounting Standards Board (FASB) – a private organization whose primary purpose is to develop generally accepted accounting principles (GAAP) within the U.S.
Depending on your operations, you will need to research the individual requirements of your nonprofit, but generally it all boils down to your reports and tax returns.
Required Standards for Nonprofits
Reports, as mentioned in Lesson 5, are a collection of data from your accounting system that provide financial information about your nonprofit. As long as you have correctly set up your chart of accounts and entered accurate transactions within a double-entry, fund accounting system, you should be able to generate the reports required of your organization. Let’s recap what the three nonprofit financial reports are:
Statement of Financial Position – otherwise known as your balance sheet. This report illustrates the accounting equation and shows a snapshot of your organizations financial health.
Statement of Activities – otherwise known as your income statement. This report shows the money you’ve received, minus the money you’ve spent, which results in your net income or loss for a period of time.
Statement of Functional Expenses – this report shows not only how much money you’ve spent, but breaks each expense down by fund and category.
Once you have created these reports, you can present the information to your board or any interested party, and prepare your annual tax return. If you use software designed for business, you may have a difficult time creating reports that meet the requirements for nonprofits.
Yes, even though you are a nonprofit organization, the IRS still wants to know your financial information. Churches are exempt from this process, but nonprofits need to file a Form 990 return every year to the IRS.
The Form 990 return has three form options:
Form 990-n (e-Postcard) – required of any nonprofit organization with less than $50,000 in gross receipts (income) during the year.
Form 990EZ – required of any nonprofit organization with between $50,000 – $200,000 in gross receipts (income), and less than $500,000 in assets.
(Full) Form 990 – required of any nonprofit organization with over $200,000 in gross receipts (income) or $500,000 in assets.
Your tax return is due on the 15th day of the fifth month of your fiscal year. Meaning, if you have a fiscal year beginning on January 1, your return is due on May 15th. See here.
This lesson completes the course “Intro to Nonprofit Accounting.” If you have not read through the previous lessons in this course, we highly recommend it. Once you have completed each lesson, you will:
- Understand the basics of accounting
- Understand the basics of fund accounting
- Understand how to create a chart of accounts for your nonprofit
- Understand how to use these accounts when recording transactions
- Understand which reports are needed for your nonprofit, and how to create them
- Understand how to protect your accounting system with internal controls
- Understand what the standards and expectations are for your nonprofit
With this understanding, you are ready to move forward managing the accounting system of your nonprofit.