Nonprofit accounting involves income from donations and expenses related to charitable programs. Nonprofits have asset restrictions and special terms for liabilities. Income sources include donations, grants, program fees, and loans, with restrictions on their use. Expenditures are limited by income source restrictions, including limits on program money allocated to administrative expenses.
The basic components of nonprofit accounting are income in the form of donations and expenses related to charitable programs and services. Unlike a regular corporation, a nonprofit does not manufacture or sell a product, carry inventory, or calculate the cost of goods sold. In contrast, the accounting system for a non-profit organization covers sources of income, restrictions placed on the use of funds, and categorical allocation of expenses between direct and indirect program costs.
A non-profit association is a non-profit business. Its operational purpose is to provide a public service. While a nonprofit is legally a corporation and operates in a financial landscape that features all of the same elements as a regular for-profit corporation, the accounting inputs are different. Instead of products, it has programs. Donations replace book sales in the income category. Assets and liabilities may look the same either way, but nonprofit organizations often have asset restrictions and special terms in place for liabilities that cause them to be treated or valued differently on their financial statements.
The basic distinction in accounting for nonprofits is in sources of income. An ordinary non-profit has income from individual donations, grants from foundations and corporations, and grants and contracts from government agencies. He can collect program fees and take out loans. The most important accounting concern is the restrictions placed on these sources of income which must be properly reported on the books.
Non-profit revenue is limited or unlimited. Restricted revenue means that it can only be used to cover specific expenses or for designated purposes. For example, a grant from a foundation usually comes with a contract that limits the use of funds to target expenses for an ongoing program in the current year. This means that the funds cannot be transferred to a different program, used to pay for overhead overhead, or applied to cover a previous year’s budget shortfall. Accounting for nonprofit organizations must take into account all these restrictions and correctly allocate income to expenses that it can legally cover.
Furthermore, non-profit expenditures are often limited by restrictions on sources of income. For example, a government grant for a program may state that no more than two percent of the total amount may be used for program-related travel expenses. Sometimes, government grants fail to cover certain types of expenses when the jurisdiction in question prohibits public money from being spent in certain ways, such as for particular types of medical care. The most problematic restriction on expenditures in nonprofit accounting relates to the amount of program money that can be allocated to administrative or indirect expenses. Many grants set a maximum percentage that can be directed towards this type of expense, which must be tracked as part of the accounting system.
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