Nonprofits need to understand local accounting regulations and build an accounting system that meets them. Tax exemption can increase funds, but requirements vary by region. Good record keeping and knowledge of tax requirements are important. Nonprofit accounting software differs from for-profit software.
Running a successful nonprofit requires a solid understanding of your organization’s specific location and accounting regulations. Building a nonprofit accounting system that meets local requirements is one way to join. Accurate and ethical keeping of financial assets also increases the accuracy and legality of nonprofit accounting.
Non-profit organizations don’t have to apply for tax exemption, but doing so can increase the funds available for organizational goals. Waiver requirements are region-specific and should be consulted for more information. Receiving nonprofit status does not imply federal tax exemption in the United States, for example.
Nonprofit accounting departments should be aware that accounting procedures vary by geographic location. Many US companies use Generally Accepted Accounting Principles, while many international companies use International Financial Reporting Standards. Tax requirements also vary by region.
Keeping someone with an accounting background on staff can be beneficial when setting up an accounting system or filing taxes, but organizations without this luxury may consider completing self-tutorials or hiring outside help. For those wishing to complete the required forms themselves, local tax authorities often offer form and process tutorials. Certified public accountants can also provide a lot of information about policies and procedures.
Good record keeping is required for proper accounting. Having accessible statutes, organizational policies, and tax requirements for the financial manager can be helpful. Some accounting software programs will alert users when information is missing, but for those operating without software, a requirements checklist can keep employees aware of procedural requirements.
Knowing specific tax requirements also helps organizations create supporting accounting systems. For example, non-profit businesses in the United States must file an appropriate Form 990 report each tax year. The required report contains a statement of financial position, similar to a balance sheet, a statement of assets, similar to an income statement, and a cash flow statement. 990 requests information about programs, non-cash contributions, tax-exempt bonds, and executive salaries. A nonprofit accounting system in the United States, therefore, could be modeled on the information required in these specific tax documents to facilitate filing procedures.
A major difference in accounting practices between profit and nonprofit corporations involves the categorization of expenses and revenues. Tax-exempt income is often categorized by type of support, as nonprofit funding can come from a variety of sources. Non-profit expenses in some locations must also be labeled, to ensure that organizational expenses use the collected revenue appropriately.
Financial management software can assist non-profit accounting departments as well. Software packages appropriate for nonprofit accounting will differ slightly from the software used in for-profit companies. For example, nonprofit accounting software includes the ability to categorize expenses with multiple labels and the ability to separate revenues and their needs.
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