We love our little non-profits here at Dynamic Bookkeeping! It was during my tenure as a treasurer of a local non-profit that I discovered my passion for accounting and realized how vastly different accounting for a not-for-profit is from for-profit. Many non-profit organizations incorrectly assume that the bookkeeping will be very easy to do and forego consulting with a professional to ensure proper set up and record keeping. I’m here to STRONGLY recommend that you reconsider this mentality and at least meet with an accountant who specializes in non-profit accounting. Why? Keep reading.
Break It Down – Elements of a Non-profit Chart of Accounts.
As we’ve discussed in previous articles about for-profit companies, your chart of accounts is the best way to provide your board with meaningful reporting. A non-profit organization takes the typical for-profit model and expands the chart based on three main income categories and three main expense categories:
- Program Income
- Fundraising Income
- Other Income
- Program Expense
- Fundraising Expense
- Management & General Expense
Further, non-profits are tasked with keeping track of all contributions and donations to ensure that the money received is used as the donor wishes. If the donor does not make a specification, then those funds go under unrestricted net assets. Donations to be used for a specific purpose or within a certain time frame are classified as temporarily restricted net assets. Finally, any donation that is restricted into perpetuity is placed in a permanently restricted net assets fund. These three fund accounts are found under the heading of Equity. If your board decides to designate any of the unrestricted funds for special purposes (like scholarships), now you have a sub-account of Unrestricted Net Assets called Board Restricted Net Assets. That’s a lot to keep track of!
To add more insult to injury, the most common terms and reports found in for-profits are also found in non-profits but are called something completely different:
Profit & Loss Statement Statement of Activities
Balance Sheet Statement of Financial Position
Net Income Net Assets
Most accountants believe the word “income” to be a dirty word when working with non-profits. It’s true, the point of a non-profit is to provide a needed service to the community, so matching revenues to expenses is very important. However, if you hope to expand and grow your program, you’ll have to create more revenue than there are expenses. Rather than call this difference net income, non-profits call this net assets and use these funds to reinvest in their program or take on unexpected/emergency expenses.
What is the mission of your organization? This is one of the most important aspects to spend time on, develop and understand. Why does mission matter to your bookkeeping? Mission matters because those activities that you do to accomplish your mission are considered your Program Revenue/Expense. Two organizations that perform the same exact service could potentially have different program revenues and expenses and this would be precisely because of the wording of the mission statement.
Food for Families’ mission statement is “Providing food for families in our community.”
Family Food Pantry’s mission statement is “Empowering families with food and services.”
Both organizations focus on feeding families. Let’s say, however, that both organizations are having a pancake feed and decide to hire a financial planner as a speaker to talk about easy ways to save money.
Under Food for Families, the cost of the food for the meal would be considered a program expense. The fee for the speaker would be considered a management & general expense.
Family Food Pantry, on the other hand, can make a strong argument that both costs are considered program expenses since their mission statement includes ‘services’ as part of their mission.
Can you see now how important your mission statement is? Not only is it the measuring stick for everything your organization chooses to accomplish, it’s also the measuring stick for how revenues and expenses are booked in your general ledger!
Tax-Exempt Does Not Equal Tax Free.
You’ve got your tax exempt status, so you don’t have to pay taxes or file returns, right? WRONG. You may not have to pay any federal taxes on your revenue, but you’re still required to file a Form 990 at the end of your fiscal year (some tax-exempt organizations can file a 990 EZ and some do not have to file at all, make sure you know if you fall under one of these rare categories). Do you have employees? Their wages are also still subject to federal and state payroll taxes – but not all of them. Make sure you get with a CPA versed in non-profits to help you navigate these waters.
As you can see, there is much more than meets the eye when it comes to proper record keeping in your organization. Knowing the rules (or contracting with someone who does!) will keep you compliant and focussed on your main goal: providing much needed services or shedding a bright light on an important cause in your community.