Explanation of the Topic...
Nonprofit (Not-for-Profit) Accounting
|Part 1||Introduction to Nonprofit Accounting, Differences between Nonprofits and For-Profits, Mission, Ownership, Tax-Exempt Status|
|Part 2||Financial Statements of Nonprofits, Statement of Financial Position, Statement of Activities, General Ledger Accounts and Chart of Accounts|
|Part 3||Illustration of the Statement of Financial Position and the Statement of Activities|
|Part 4||Statement of Functional Expenses, Statement of Cash Flows, Notes to the Financial Statements, Additional Reporting by Nonprofits, Budgeting for Nonprofits, Sources for More Information on Nonprofit Accounting|
From churches to youth organizations to the local chambers of commerce, nonprofit organizations make our communities more livable places. Unlike for-profit businesses that exist to generate profits for their owners, nonprofit organizations exist to pursue missions that address the needs of society. Nonprofit organizations serve in a variety of sectors, such as religious, education, health, social services, commerce, amateur sports clubs, and the arts.
Nonprofits do not have commercial owners and must rely on funds from contributions, membership dues, program revenues, fundraising events, public and private grants, and investment income.
Our intent is to present some of the basic concepts that are unique to nonprofit accounting and reporting, including the financial statements required by the Financial Accounting Standards Board (FASB).
We will not dwell on the accounting that is similar to that used by for-profit businesses. If you are not familiar with accounting for businesses or you wish to refresh your understanding, you will find free explanations, quizzes, Q&A, and more at Accounting Topics.
Accountants often refer to businesses as for-profit entities and to nonprofit organizations as not-for-profit entities. We will be using the more common term nonprofit instead of not-for-profit.
Again, this is not a comprehensive study of the field of nonprofit accounting. There are many different types of nonprofits, including governmental nonprofits, which we will not address.
The following table highlights some of the key differences between nonprofit organizations and for-profit corporations:
|Primary mission:||Provide services needed by society||Earn profits for stockholders|
|Secondary mission:||Ensure that revenues are greater than expenses so that the services provided can be maintained or expanded||Provide services or sell goods|
|U.S. tax status:||Exempt from income taxes if approved by IRS||Corporations (or their owners) are subject to income taxes|
|Main financial statements required by U.S. generally accepted accounting principles (US GAAP):||
Statement of Financial Position
Statement of Activities
Statement of Functional Expenses (for some nonprofits)
Statement of Cash Flows
Notes to Financial Statements
Income Statement or Statement of Operations
Statement of Cash Flows
Statement of Stockholders' Equity
Notes to Financial Statements
|Total assets minus total liabilities is reported as:
Subparts are reported as:
Unrestricted, temporarily restricted, and permanently restricted net assets (all based on the donors' stipulations)
Paid-in capital, retained earnings, minus treasury stock
|Examples of revenues:||Donor contributions, membership dues, program fees, fundraising events, grants, and investment income||Sales of merchandise, fees from services, investment income, gains on investments|
|Nonprofit expenses are reported by these functions:||Program, management and general, and fundraising|
|Sources of money other than revenues and the sale of assets:||Borrow from lenders||
Borrow from lenders
Issue shares of stock
|Additional annual reporting for some larger organizations:||Internal Revenue Service (IRS) Form 990 (churches are exempt)||Securities and Exchange Commission (SEC) Form 10-K|
Mission and Ownership
While businesses are organized to generate profits, nonprofits are organized to address needs in society. As a result, nonprofits will issue a statement of activities instead of the income statement issued by for-profit businesses.
Since nonprofits do not have owners, there is no owner's equity or stockholders' equity and there cannot be distributions to owners.
Some people mistakenly assume that if an organization is designated as a nonprofit, it cannot legally earn profits. In fact, earning profits (having revenues that exceed expenses) is almost a necessity for a nonprofit if it hopes to withstand such things as:
Nonprofit organizations may apply to the Internal Revenue Service in order to be exempt from federal income taxes.
A second issue is whether a donor's contribution to a nonprofit organization will qualify as a charitable deduction on the donor's income tax return. For example, churches, schools, and Red Cross chapters are some of the nonprofits that will qualify as tax-exempt and their donors' contributions will also qualify as charitable deductions on the donors' income tax returns.
However, there are nonprofits that qualify as tax-exempt but their donors' contributions do not qualify as charitable deductions (although they may qualify as business expenses). Examples of these nonprofits include social organizations, chambers of commerce, college fraternities and sororities, amateur sports clubs, employee organizations, and more.
You can learn more about the tax-exempt status for a nonprofit, the deductibility of contributions by donors, and the taxability of activities not directly related to a nonprofit's exempt purpose in the Internal Revenue Service Publication 557, Tax-Exempt Status for Your Organization, which is available at no cost on IRS.gov.
Even if a nonprofit is exempt from federal income taxes, it is likely that its employees will be subject to employment taxes. Nonprofits may or may not be exempt from sales taxes, real estate taxes, and other taxes depending on which state in the U.S. they are incorporated or operate.
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