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Inferred more often than formally stated, non-profit accounting standards refer to typical expectations of non-profit organizations when reconciling their books. Direct regulations that apply to non-profits are often minimal to the internal financial process, though externally there are direct reporting requirements that result in a set of non-profit accounting standards or rules organizations will typically follow. External reporting requirements are central to non-profit accounting, including various government and non-governmental agencies in which standards business do not report. These include grant agencies as well as boards of directors at other firms who may have a stake in the non-profits mission. Following these implicit non-profit accounting rules assure uniformity and transparency in the final reports filed.
Accounting for multiple funding sources for the same projects is the primary reason for the evolution of non-profit accounting standards. Non-profits need to illustrate where all funding is coming from and accurately calculate how much funding has been accrued and where that funding is spent. Aside from filing these reports with government agencies, non-profits will also need to demonstrate this information to grant agencies that may require matching funds to disperse grants as well as to account for non-financial sources of funding, such as volunteer work or expertise rendered. As such, non-profit accounting standards usually revolve around the use of the accrual accounting method. Using this method, non-profits can align accrued expenses with funding sources in a timely manner, allowing for continued dispersal of grants and other contingent funding.
Fund accounting is also another method commonly deployed by non-profit organizations, central to non-profit accounting standards. Leveraging fund accounting allows non-profits to allocate expenses against multiple funding sources. Doing so involves a tedious process, however, also allowing the organization to accurately allocate expenses to multiple funding sources, while ensuring all expenditures are tied to a funding source. Therefore, the balance sheets of a non-profit will retain the same categories as a standard business, but will usually have multiple sub categories to show how revenue and expenses are attached to each funding source. This expectation is often uniform across all external organizations in which a non-profit will need to report.
While daily reporting relies on non-profit accounting standards to accurately reconcile its monthly and quarterly reports, non-profits also have additional periodic reports it must file. Various funding sources may all have different time periods in which they need to review updated financial statements related to dispersal and program evaluation. Thus, non-profit accounting standards usually specify what those reports are, with whom they need to be filed, and when. Additionally, an external audit is usually part of this process to ensure the standards are being met.
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