Accounting software for nonprofit organizations is designed to capture accounting transactions. Nonprofit financial statements are constructed from these transactions and depict the economic activity and financial position of the organization. Knowing how to read financial statements can help you determine the health of a nonprofit organization and plan for the future. Is your organization well-funded? Is your organization properly managed? How is the organization spending its resources? How have your assets or liabilities changed over time? Several key financial statements can provide clues to these answers.
In a for-profit organization, net income can be a measure of success. Nonprofit organizations, on the other hand, use any surplus revenue to achieve its goals rather than distribute the surplus as profit. Changes in net assets are referred to as surplus or deficit and are carried forward. Thus FASB (that’s the Financial Accounting Standards Board) requires a different set of statements for nonprofit organizations.
In order to adhere to FASB’s regulations, nonprofits must know what is expected of them. Let’s take a look at some of the most important nonprofit statements:
FASB Statement 117 requires nonprofit organizations to have a complete set of financial statements, including:
- A Statement of Financial Position (which we will discuss in more detail later this month)
- A Statement of Activities
- A Statement of Functional Expenses for Voluntary and Welfare Organizations (also encouraged for other nonprofit organizations)
- A Statement of Cash Flows
- Financial Statement Disclosures
A Statement of Financial Position is similar to a balance sheet in that it shows the ending balance of the assets, liabilities and net assets (also called net equity) at a specific point in time. Further, net assets must be classified based on the donor-imposed restrictions of permanently restricted, temporarily restricted, or unrestricted. Learn more about the importance of the Statement of Financial Position on our blog later this month.
A Statement of Activities is similar to an Income Statement, also known as a Statement of Revenue and Expenses, in that it reports the changes in net assets over a certain period of time. The change in net assets is also reported based on the restriction categories of permanently, temporarily, or unrestricted.
A Statement of Functional Expenses is the Statement of Activities with expenses reported by functional classification such as programs and services, management and general expenses rather than the natural classification of salaries, office and supplies expenses, and maintenance, to mention a few examples.
A Statement of Cash Flows summaries the inflow and outflow of cash by an organization over a specified period of time. Because many nonprofit organizations use accrual accounting, the recognition of revenue and expenses is often different from the actual timing of cash receipts and disbursements. The cash flow statement is intended to address the actual flow of cash and validate the ending cash account balance reported.
And finally, A Statement of Financial Disclosure simply stated is a list of explanations and comments that explain certain aspects of a nonprofit organization’s procedures. FASB Statement 116, as well as FASB Statement 117, require specific disclosures for nonprofit organizations.
Now that we’ve defined the basic statements your organization should be producing on a regular basis, it’s time to talk about how to produce these statements. Accounting software for nonprofit organizations should provide these statements both “out of the box” and with customizable features. If your organization does not have a good nonprofit accounting software solution, now would be the time to make the investment. Accounting software for nonprofit organizations will not only help your organization produce the financial reports you need, but it will also help you simplify the accounting process. If your organization is wasting time in accounting tasks, accounting software for nonprofit organizations, such as Abila Fund Accounting 100 (formerly Sage MIP Fund Accounting) or AccuFund Software, can help. These accounting solutions provide standard statements that can be run without any changes as well as the ability to customize each report for the needs of your organization.
Contact RBP Methods today if you are interested in learning more about your accounting software options. Stay tuned to our blog as we discuss more important nonprofit financial requirements.