Understanding Accounting for Not-for-Profit Entities

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Understanding Accounting for Not-for-Profit Entities

Accounting for not-for-profit organizations can be a complex process due to their unique financial reporting requirements and operational differences compared to for-profit businesses. In this blog post, we will outline some important considerations for not-for-profit entities when it comes to accounting.

First, it’s crucial to note that not-for-profit organizations are typically exempt from paying income taxes under the Internal Revenue Service (IRS) rules. This means they don’t have to pay taxes on the money they earn from activities related to their mission. However, this tax-exempt status is conditional and must be maintained.

A key aspect of accounting for not-for-profit organizations is accurate financial reporting. These organizations are required to report their financial information to the IRS and the public to maintain their tax-exempt status. The financial information must be presented clearly and transparently, accurately reflecting the organization’s financial position and activities.

Additionally, not-for-profit organizations must follow specific accounting principles. The commonly used principles are the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) 958 and the Governmental Accounting Standards Board’s (GASB) Statement No. 117. These principles outline the requirements for financial statement presentation, including recognizing transactions and valuing assets and liabilities appropriately.

A crucial consideration for not-for-profit organizations is the concept of net assets. Unlike for-profit businesses, which focus on profitability and shareholder equity, not-for-profit organizations track their net assets. Net assets represent the difference between total assets and total liabilities and can be classified as without donor restrictions and with donor restrictions based on the source, nature and purpose of the assets.

Not-for-profit organizations often receive donations and grants, which can significantly impact their financial statements. Properly accounting for these funds and ensuring compliance with any donor restrictions, if applicable, is essential.

Another benefit for non-profit organizations to maintain good accounting practices is that most are required to complete a Form 990 with the IRS. This form serves as a public disclosure document, providing detailed financial information about the organization’s operations, including its revenue, expenses, and net assets. The 990 also offers insights into the organization’s leadership, governance, and program services. Moreover, certain non-profit organizations might be subjected to additional state-level reporting requirements by the Illinois Attorney General’s Office, ensuring their operations align with state guidelines. This may include an annual review or audit requirement.  It’s essential for not-for-profits in Illinois to stay updated with both federal and state-level requirements to ensure compliance and uphold their tax-exempt status.

Accounting for not-for-profit organizations requires a thorough understanding of specific accounting principles and financial reporting requirements. Maintaining accurate financial records and adhering to proper accounting practices is crucial to preserve tax-exempt status and fulfill the organization’s mission. Seeking guidance from experienced accountants can help not-for-profit organizations navigate these complexities and ensure compliance with relevant regulations. If your non-profit organization needs accounting, audit or tax reporting support, contact the experts at MCK CPAs.