What Does Accounting for Nonprofit Organizations Entail?

Individuals and for-profit corporations aren’t the only entities that require an accounting professional’s help to create accurate financial statements. Even nonprofit organizations present opportunities for accountants to work and earn a living. In fact, some accountants specialize in the nonprofit niche, while others take on these clients as well as individuals and for-profit companies. As an aspiring accountant, it’s important that you know what nonprofit accounting entails and how it keeps evolving.

Similar Goals and Requirements

The goal of nonprofit accounting is the same as the general goal of accounting: to create accurate financial statements for internal (within the organization) or external (for stakeholder information or to satisfy government regulations) use. As with accounting for individuals and for-profit organizations, nonprofit accounting includes creating statements that focus on information like assets, cash flow, and operating expenses.

What Sets Nonprofit Accounting Apart

Accounting professionals working with nonprofits may also need additional knowledge that doesn’t come into play when working only with individuals and businesses. For example, accountants must know what tax classification an organization falls into and what regulations it must comply with to operate legally. Some nonprofit organizations, like those with the 501(c)(3) designation, are tax-exempt, while others are not, and still others are only partially tax-exempt. Even tax-exempt charities must still produce accurate financial records in the form of Statements of Activities, Statements of Functional Expenses, Statements of Cash Flows and Statement of Financial Position.

Shifting Requirements for Nonprofit Accounting

The field of nonprofit accounting is constantly changing, and entities like the Financial Accounting Standards Board (FASB) play an important role in those changes. FASB drafts proposals for updating the accounting standards nonprofit organizations like charities are expected to meet with regards to their financial records. The FASB’s most recent proposal draft is titled Presentation of Financial Statements of Not-for-Profit Entities. This proposal includes suggested changes that would require nonprofit organizations to disclose more of their financial information, especially that which relates to liquid assets, operating expenses, endowment funds and cost allocation. One of the biggest proposed changes to nonprofit accounting is an emphasis on clearly differentiating between the money an organization is permitted to spend, and the money it can’t, according to The National Law Review.

Part of a nonprofit accountant’s job is to stay abreast of changing standards and requirements. For example, The National Law Review reports that pending updates to current standards mean that accountants may soon have to:

  • Distinguish between net assets that must comply with restrictions and those that don’t
  • Change their method of reporting cash flows from indirect to direct
  • Calculate additional subtotals of operating activities that better clarify how money is being spent

Accurate accounting practices are important for evaluating the financial health of any entity, including nonprofits. As regulations and accounting standards change for nonprofits in particular, it will be even more important for accounting professionals to have a solid understanding of those changes, nonprofit regulations and the financial records necessary to meet those requirements.