To most people, accounting is the same no matter what type of business you have. It consists of balance sheets, profit and loss statements, debits and credits. However, when it comes to nonprofit accounting, the rules are a little different.
For-profit businesses differ drastically from nonprofits when it comes to their accounting guidelines. For instance, not-for-profits must have management objectives, as well as create special reports for internal and external use. Nonprofits must also display accountability to their funding sources.
Nonprofits Have a Unique Accounting Concept
Many nonprofit organizations utilize fund accounting. Some organizations have one fund, some have many; it can be particularly confusing because most readers of commercial financial statements are not familiar with this type of accounting practice. The purpose of fund accounting is to allow a nonprofit to manage the diverse streams of revenues that it receives and to monitor the restrictions often attached to that revenue. It provides organizations with a method to measure how they are meeting their goals and identifies the sources of their revenue. Organizations are able to keep revenues in the proper categories and the accounting prevents those revenues from being spent on inappropriate expenses. Each fund has its own revenue and expense report, its own excess or deficiency calculation and its own balance sheet.
The following are categories of funds:
- Unrestricted fund- no restrictions are placed on this fund, and the organization can use the amounts as it chooses.
- Current restricted fund- these are resources that are given to the organization as part of its normal activities, but only for specific purposes.
- Restricted endowment fund- resources donated to the organization with the stipulation that only the income earned by these assets can be used, while the original gift is to be kept intact forever, or a stipulated period of time.
- Fixed asset fund- a separate fund for the cost of fixed assets, buildings, land, etc. The purpose of this fund is to separate these assets from the unrestricted fund.
QuickBooks May Not Be the Answer
Unless QuickBooks Premier is purchased, it is very difficult to manage the accounting needs of a nonprofit. Even then, it isn’t a perfect system. Intuit recommends using Classes in QuickBooks to generate a Balance Sheet by fund, and there are still kinks to work out with the software.
The following are potential problems for Nonprofit Accounting in QuickBooks:
- Net incomes differ between the Balance Sheet by Class and Profit & Loss by Class reports
- The Balance Sheet by Class report makes calculations to balance a transaction’s classes. In some cases, this causes the net income for a class on the Profit and Loss by Class report to differ from the net income for that same class on the Balance Sheet by Class report.
These are significant problems because they affect the primary financial statements in QuickBooks, the profit and loss statement and the balance sheet. As a result, nonprofits typically have to spend more money to have professionals create reports from their QuickBooks data. The QuickBooks Premier Nonprofit edition’s software wasn’t written to accommodate all the needs of nonprofit accounting either, so it is not a viable solution either.
Get the Right Software
To save yourself a headache and a significant amount of money, invest in accounting software that can handle nonprofit accounting. Since not-for-profit organizations have such different reporting requirements from commercial companies, it’s imperative that your software is compatible. A nonprofit accounting software such as FastFund Online is a great solution and reporting tasks are simplified and accomplished in a timelier manner. The right software can make all the difference in your accounting needs.