Intricacies of Accounting for Nonprofit Organizations
Some laws directly state how nonprofit organizations must manage their internal finances. However, there are also a lot of outside or external factors which have roundabout effects on how they present and administer the flow of their funds within the organization. Such factors include the IRS reporting requirements and accounting standards that should be adhered to by non-profit organizations; also included are the state reporting and requirements for grant recipients.
IRS reporting necessitates nonprofit organizations to submit the Form 990 and other attachments annually. The report incorporates the following details: 1) a revenue and income statement which specifies particular categories (postage, wages, etc.); 2) a balance sheet that details account receivables, account payables, cash, etc.; 3) an expense report that classifies individual program services; 4) a functional expense statement, where all expenses are categorized in fundraising programs, program services or operations; and 5) a schedule which indicates the organization’s supply of income with categories like membership fees, donations, etc.
Since the IRS specifically provides classes and categories for expense and revenue provision, a nonprofit organization that does not have an accounting system which conforms to such classes and categories would have a difficult time preparing the IRS annual report.
On the other hand, state reporting requires that all accounting for nonprofit organizations must have a uniform report on similar transactions that must likewise adhere to the industry audit guide of the AICPA that is supplemented by “Not-For-Profit Organizations”, and “Standards of Accounting and Financial Reporting for Voluntary Health and Welfare Organizations” of the National Health Council. The IRS annual reporting system conforms to the other reports and states generally accept a complete IRS report that represents the organization’s financial statement.
The last legal regulation for accounting nonprofit organizations is the requirements for grant records. The OMB or Office of Management and Budget have another set of financial accounting regulations set for organizations that get federal grants. Instructions are given in OMB circulars on how costs are categorized, what types of costs are funded and which are paid via other means.
Luckily, commercial accounting differs from accounting for nonprofit organizations in such a way that it does not face the additional requirement of classifying expenses into three categories: program services, operations and fundraising.
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