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How is Nonprofit Accounting Different?

You may wonder if it's okay to apply general business advice you find online while searching for help with nonprofit bookkeeping and accounting. While a lot of the information may be helpful and interchangeable, you should be aware of some of the specific nuances of nonprofit accounting. 

This knowledge will help you understand which pieces of general bookkeeping articles you can apply to your nonprofits. For example, with nonprofit bookkeeping, there are a few unique considerations for categorizing revenue and expenditures. There are also features of your accounting software that you should take advantage of to maintain your financial records properly. 

hand with a pen pointing on accounting report

Differences in Terminologies

One surface level difference worth setting straight is the difference in terminology you will find when reading about nonprofit accounting instead of accounting in the for-profit world. This short cheat sheet will demystify the language you'll encounter.

Nonprofit Terminology

Business Terminology
Statement of Financial Position          Balance Sheet
Statement of ActivitiesIncome Statement / Profit and Loss Statement / P&L   
Revenue Income
ExpendituresExpenses
Net AssetsRetained Earnings
Change in Net Assets

Net Income (Loss) 

Revenue Recognition 

magnifying glass on a revenue report

Nonprofits bring in money in various ways. Individual donations might first come to mind as the primary revenue source. Still, for many nonprofits, while vital, these contributions are a small percentage of total revenue. Other nonprofits bring in money through fee-based services, such as mission-centric training, but this is often a low-dollar revenue bucket as well.

Grants are often one of a nonprofit's largest revenue sources. Grants can be issued by government entities, foundations, corporations, and other nonprofits. Grants come in all shapes and sizes and can be for operating costs or restricted for specific programs or use at a particular time. 

With donations and fee-for-service income, revenue recognition is more straightforward. You usually don't know you're getting the payment until you receive it, and it is at that point that you recognize it. 

However, grant revenue raises a new concept that may be unfamiliar to some. Grant awards are often for large sums of money and often span more than one fiscal year. Awards are also usually announced in advance of receiving the funds through a grant letter. This letter states that money has been awarded, for what purpose, and when it can be expected to arrive. 

Reporting Grant Revenue

A nonprofit should recognize the grant revenue in its financial reports when the grant letter is received. You do not want to wait until the cash has been deposited to make the first entry in your accounting software. 

Using QuickBooks accounting software, you would book an invoice using the date on the grant letter. This action records a receivable on your books, indicating the grant money is coming. When the funds are received, you will receive payment on the invoice. 

For proper tracking, when creating the invoice, you will also likely want to create a new class for the grant to track its uses. Using classes will make keeping track of net assets with restrictions, releasing said restrictions, and grant reporting much more manageable. 

Functional Expenses expenses and receipts text on sticky notes with number magnets

Nonprofits typically need to take one extra step when recording expenses. It isn't enough to categorize expenditures by category (e.g., office supplies). Instead, nonprofits should also categorize expenses by function or purpose. At a minimum, nonprofits should use three functions to allocate further their costs: Program Services, General and Administrative, and Fundraising Expenses. 

The nonprofit bookkeeper can utilize the Class feature of QuickBooks to meet this reporting requirement. For a nonprofit with multiple significant programs, these should be identified as sub-classes of the Program Services Class. 

Keeping records in this manner on a day-to-day basis will make completing Form 990 at year-end much easier. It will also provide good information year-round to the nonprofit program managers. 

Accounting for Non-Profit by Your Local CPA

Ben Szweda is your Cleveland certified bookkeeper at Szweda Consulting, LLC can provide complete accountancy and bookkeeping services nationwide that are flexible and customized to your nonprofit's needs. We can ensure that our services are national level that includes bookkeeping to tax preparation services.

Cleveland-based accounting firm with a national reach and a focus on saving you time and helping you run your business.
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