Why Nonprofit Accounting Is Different

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Many of the accounting principles and procedures that apply to for-profit businesses also apply to nonprofit organizations. However, nonprofits share several accounting and financial considerations since these organizations do not generate revenue for the benefit of shareholders. Discover several important distinctions that can make nonprofit organizations interesting careers for accounting professionals.

Nonprofit Organizations Maintain a Different Set of Tax Records

Signing papers.

Image via Flickr by slightly everything

Since nonprofit organizations receive many benefits as tax-exempt organizations, they must keep detailed records about contributions, assets, and expenses. The National Council of Nonprofits recommends creating a document retention policy. This policy outlines the organization’s guidelines and rules for retaining and destroying documents.

The IRS requires tax-exempt organizations to document credits, expenses, and other information, even if those organizations don’t intend to file Form 990-N. If the IRS decides to audit an organization, and the nonprofit doesn’t have the required documentation, the organization could incur steep penalties.

Financial Statements Differ Between Nonprofit and For-Profit Businesses

Tax records aren’t the only paperwork differences between nonprofits and corporate businesses. Human resources agency Paychex identifies several differences between the two types of organizational financial statements as well. For example, while a for-profit business maintains a balance sheet, a nonprofit records its statement of financial position. The latter addresses specific items, such as restricted and unrestricted donations.

According to the Nonprofits Assistance Fund, contributions fall into one of three categories: “unrestricted, temporarily restricted, or permanently restricted.” Restrictions apply when a donor specifies how the money or in-kind donation must be used. For example, a donor might give a charitable gift, but that donor may require the organization to direct the contribution toward a particular fund or initiative.

Nonprofits Feature More Complex Income Sources

Aside from documentation, nonprofits must also properly classify income from different sources. The Center for Nonprofit Management’s Nonprofit Answer Guide uses the example of volunteers. A nonprofit organization must know how to value volunteers’ donated time and service.

Specifically, according to the Center for Nonprofit Management, if volunteers’ skills or abilities would normally cost the organization money, the rules for recording and reporting that contribution change. Graduates of master’s degree-level accounting programs who work for nonprofit organizations must understand these variables and apply them to reporting correctly.

Nonprofit Organizations Handle Overhead Differently

While income is an important difference between for-profit businesses and nonprofits, overhead might prove even more critical to a nonprofit organization’s accounting procedures. Blue Avocado (a magazine covering American nonprofits) writers Jan Masaoka and Steve Zimmerman,,  state that board members and staff accountants must analyze each expense and categorize expenses correctly.

Masaoka and Zimmerman explain that a nonprofit can classify its monthly rent differently depending on the circumstances. Nonprofits depend on accounting advisors to help them properly categorize their expenses and to control overhead. Ideally, overhead should make up 30 percent or less of a nonprofit’s total revenue, according to Masaoka and Zimmerman. These numbers can impact an organization’s charity ratings and its public perception.

While nonprofit organizations have many of the same accounting obligations that for-profit businesses face, these organizations need accountants who have knowledge and experience with nonprofit organizational structures in particular. When paired with educated financial advisors, nonprofits can keep proper records, correctly follow federal and state laws, and serve needs and people in their communities.