Nonprofit Accounting vs. For-Profit Accounting: What You Need to Know

Responsible money management is at the heart of all bookkeeping and accounting. Where an organization’s financial goals drastically differ is whether it is a for-profit business or a nonprofit organization.

When the goal is stewardship and reinvestment of funds, you’re in the realm of nonprofit accounting. If you’re a nonprofit treasurer, president, board member, or executive director, you want to be sure that funds are being used responsibly and keep the books in shape in case of an audit. For nonprofit leaders or bookkeepers dipping their toes into nonprofit work, there are a few basics you’ll want to know before you jump in.

Hold Nonprofits Accountable with Financial Reporting

In routine accounting for businesses that make a profit, there are three key financial statements: a balance sheet, income statement, cash flow statement. The same types of documents are critical for nonprofits to keep abreast of their donations and spending.

There are four key financial statements for nonprofits are a statement of financial position, a statement of activities, a cash flow statement, and a statement of functional expenses. These are similar to a typical three-statement model but more closely align with the purpose of a nonprofit organization.

The statement of financial position is the equivalent of a for-profit business’s balance sheet. It lists the nonprofit’s liabilities, its assets, and — similar to equity on a balance sheet — its net assets. Nonprofits can’t have equity because they can’t have profits. The sections may be further categorized based on whether donors have earmarked the funds for specific use. With the statement of financial position, a nonprofit’s leaders, board of directors, and members can easily get a feel for the organization’s financial health.

The second financial document is a statement of activities, which replaces the standard income statement that businesses use. The revenue is again sorted into groups: with donor restrictions and without donor restrictions. The statement of activities also shows expenses for the reporting period. It shows the net assets for the nonprofit by subtracting expenses from revenue.

A cash flow statement for nonprofits works the same way as it does in for-profits business: It shows money in and money out over a period of time.

Finally, the net new financial report you’ll need to know for nonprofits is a statement of functional expenses. This document breaks down how the nonprofit’s money has been spent into transparent categories, such as staff salaries, marketing, and programs. It gives clarity into how the revenue is being spent. To make your life easier at tax time, take a look at page 10 of Form 990 and use similar functional expense categories.

Having bookkeeping software that can provide flexibility in the naming conventions can make accounting for nonprofits much smoother. For example, you might want to rename “invoices” to “pledges” or have the proper financial statement name atop the forms that the nonprofit’s leaders review. At Certum Solutions, our fan favorite software for nonprofits is QuickBooks Online; we’d be glad to walk you through it if you want to learn more.

Do Tax Time the Nonprofit Way

The IRS classifies nonprofits as exempt organizations, meaning that they’re exempt from the usual federal tax laws that govern revenue. (They do still pay federal taxes for employee salaries!) Nonprofits do have an Employer Identification Number, which is what they use to apply for their tax-exempt status and to file tax returns.

A pro tip for collecting revenue through sales or donations online is to create a “non-inventory part” in QuickBooks; those automatically do not have taxes applied, unlike products or services.

When April rolls around for annual tax filings, nonprofits can skip over the slate of tax forms meant for businesses and move straight to the 990 series. Form 990 and its derivatives are the required annual returns for income-tax exempt organizations, and they must be e-filed. Unlike businesses, which have quarterly returns to file, nonprofits generally need to file with the IRS only once a year.

When you file your Form 990, have your statement of functional expenses handy to fill out Part IX. If you’ve planned ahead, your report categories might already match the ones in the IRS form. Then be sure to include any schedules that are relevant to your nonprofit to include with the filing.

Another relevant IRS document that received an update just this month is Form 8940. It’s filed for miscellaneous requests, such as some types of advance approvals or an exemption from filing Form 990. The update expanded the types of miscellaneous requests that charities and nonprofits might make, and it mandated e-filing for all Form 8940 requests beginning in early July.

Level Up Your Nonprofit’s Operations

Keeping the books and financial records organized for nonprofits is different from doing them for any other kind of organization. Especially when there may not be a lot of “numbers people” on the leadership team or board of a nonprofit, it’s important to have clear, transparent, and straightforward financial reporting.

A solution like QuickBooks Online can make the job easier with features that are tailored to nonprofits. Its user permissions make it easy for a volunteer treasurer to keep an eye on the books for accountability without accidentally deleting or recategorizing records. And it automates monthly reporting and financial statement delivery so everyone is on the same page. If you’d like to explore the ways QuickBooks Online could assist you with financial accountability for nonprofits, book a call — we’ll volunteer our time to help!