Understanding and Applying GAAP for Nonprofits: FAQ Guide

While earlier stages of these transformation activities were complete in 2023 (Transformation 1.0), certain systems implementations and portfolio review activities (Transformation 2.0) are ongoing and expected to continue through 2025. We previously announced initiatives under Fit to Serve to right-size our business through a workforce reduction of approximately 12,000 positions throughout 2024 and create a more efficient operating model to enhance responsiveness to changing market dynamics. These initiatives are in addition to ordinary, ongoing efforts to enhance business performance. Our earnings release contains forward-looking free cash flow, gross margin, income tax rate and diluted earnings per share. We provide these non-GAAP measures to investors on a prospective basis for the same reasons (set forth above) that we provide them to investors on a historical basis. We do not believe this is a component of our ongoing operations and we do not expect this or similar payments to recur.

Statement of functional expenses

Review your annual tax returns for accuracy and to ensure that your organization is taking advantage of all available deductions and credits. Cash basis is the more convenient method when your organization is new and small, but you should consider fund accrual accounting for the long term. Our expert tax report highlights the important issues GAAP for Nonprofits that tax preparers and their clients need to address for the 2024 tax year. Stay informed and proactive with guidance on critical tax considerations before year-end. For example, the terminology of “exchange transaction” will be superseded by “contract with a customer,” but the concept will remain the same. As an example, Zygmunt cited a donor who said a not-for-profit would receive a specific amount in his will.

Tracking labor and services.

In accordance with these standards, there are several types of documentation that your organization should be aware of. We’ll walk through the various types of documents that your finance department will likely be working with most frequently. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network.

Generally Accepted Accounting Principles

• Generally Accepted Accounting Principles, or GAAP, are guidelines that make the financial reporting process transparent and are meant to standardize information.
• A public library had a grant from a large, private foundation on the condition that the funds would be spent on a specific technology improvement project.
• These associations can provide information on best practices, accounting standards, and regulatory compliance for nonprofits.
• Take our 2-minute survey to find out if outsourced accounting and bookkeeping is a good fit for your organization.
• If you’ve dealt with for-profit cash flow statements before, this should look very familiar.

The IRS receives more than 70,000 applications for tax-exempt status every year, so be patient when submitting your application. If you don’t hear back from the IRS within 90 days, call Customer Account Services to check on its status. For more information about https://www.bookstime.com/ how to create a budget, check out the National Council of Nonprofits guide to Budgeting for Nonprofits. You probably didn’t start a nonprofit organization to stare at spreadsheets and Google things like “how to record an in-kind donation.”

• Plus, these contributors have the right to sue your nonprofit for misuse of funds if you don’t respect their official wishes—another way GAAP and legal requirements for nonprofits align.
• Just because your nonprofit qualifies as tax-exempt under Section 501 doesn’t mean that all of your donors’ contributions qualify as charitable deductions.
• Whenever new tax laws pass, the rules outlining how nonprofits must handle and report income change.
• To act sincerely and in good faith, your organization needs to honor your commitments to use those funds as the donor or grantmaker intended.
• Return on invested capital (ROIC) is a non-GAAP financial measure that management believes provides useful supplemental information for management and the investor by measuring the effectiveness of our operations’ use of invested capital to generate profits.

For example, if you have $50,000 of restricted assets set aside for your scholarship program, then decide to provide a $5,000 scholarship, you’re not losing those funds. Nonprofits make money from various sources, such as individual donations, grants, investments, and corporate contributions. Each of income summary these types of revenue should be recorded separately in your accounting system to ensure consistency and materiality when it comes time to report your revenue. To begin implementing GAAP, sit down with the above financial professionals and anyone from your leadership and fundraising teams who can provide insight into your nonprofit’s everyday resource use so you can create a comprehensive financial action plan together. Once you’ve started following this plan, check in with your team regularly to identify what is going well and where there is room for improvement.

• The right nonprofit accounting experts ensure your knowledge of and compliance with nonprofit tax and accounting regulations is up to par, preventing costly mistakes from ever happening.
• Unless required in your organization’s bylaws, you may not be legally required to prepare financial statements that comply with GAAP.
• We believe free cash flow is an important indicator of how much cash is generated by our ongoing business operations and we use this as a measure of incremental cash available to invest in our business, meet our debt obligations and return cash to shareowners.
• This nonprofit accounting statement breaks down the operating, financing, and investing activities to show how cash moves at the organization.
• The statement of activities (also sometimes called the operating statement) is like the nonprofit version of the income statement.
• GAAP’s goal is to ensure companies’ financial statements are consistent across industries — allowing investors and the government to interpret them more easily.

Best Practices for Nonprofit Accounting

Another difference between nonprofits and for-profits are its financial statements. A for-profit puts together an income statement each quarter, which assesses a company’s financial performance. On the flip side, nonprofit organizations write up a statement of activities that includes revenues, expenses, and net assets, which it gives to its donors and board of directors. The other resource a nonprofit depends on is a quarterly balance sheet listing the owner’s equity.

Work with Compliance Experts

Avoiding new hires will cut down on administrative costs, reduce the budget dedicated to nonprofit accounting software and training, and save you money in various other places. Create a realistic operating budget at the start of each year, and if it needs corrections later on, don’t worry. Your organization’s budget is free to evolve further into the year you get, so don’t feel like you have to remain rigid with your initial plan. Also, make sure your budget is approved by your board of directors when it’s written up. It’s important for your board to be aware of upcoming plans and initiatives, and they may need to approve increases to the budget.