Accounting for non-profits (also known as “fund accounting”) can require a greater level of detail than a for-profit company. Most accounting concepts that apply to for-profit also apply to non-profits. GAAP (Generally Accepted Accounting Principles) is followed and is the same concept, but with a twist. There are differences in reporting and an extra step in booking both revenues and expenses.

Cash or Accrual: Per GAAP, the accrual method should be used for non-profits. However, the reality is that many small organizations use cash basis or modified cash, and at year-end, the books are adjusted for accruals. Cash basis accounting is conservative in recognizing revenues. If large pledges may not be collectible, cash basis may provide a more realistic view of the financial situation of the organization.

Cash basis accounting has inherent weaknesses, such as not recognizing future revenues or expenses. This makes planning difficult. For instance, if the organization is supposed to pay $100,000 within the next few months, it is better to show this liability now and not be surprised later on. Maybe this expense is in the budget or maybe not. If this were an unexpected liability, it may not have been budgeted for at all.

Sometimes, especially if there are no receivables, differences between the cash and accrual basis are not material. Organizations may be in cash basis and then adjustments can be done for reporting purposes with no major consequences.

Cash basis wouldn’t be appropriate if a non-profit is trying to calculate the cost of a program now and bills are received and paid in the future. Expenses may be “forgotten,” especially if they show up months later.

There are many good reasons for a non-profit to report on accrual basis rather than on cash basis. Not only is accrual accepted by GAAP, but also by IFRS– International Financial Reporting Standards (IFRS) standards and interpretations adopted by the International Accounting Standards Board (IASB). The IFRS may not have much effect now on non-profits but it is just a matter of time before it will start trickling down to the non-profit sector.

Fund: A “fund” is also known as a “net asset” in the non-profit sector. “Fund” may have a different connotation than “net asset” but for the purposes of this discussion, they essentially mean the same thing. Fund/Net asset is a basic entity for a non-profit organization. In the for-profit world, we have Retained Earnings. In the non-profit world, we have funds or net assets.

All business transactions of a non-profit must be booked in a fund. A fund is like a project. Each revenue and expense must be booked in a specific fund, not just in an account. It must be an account within a fund. For instance, if a non-profit has $100 in postage expense, the question is not just about which account this expense should be booked but also which fund it should be booked.

If there are departments, then the expense needs to be booked in the right account, department, and fund. As noted earlier, normally non-profit organizations’ accounts have many digits to identify regular accounts, departments, grants, and funds.

Accounting for non-profit systems must accommodate the fund concept within its chart of accounts. Sometimes, another module such as “grants” or “projects” are used in conjunction with the accounting system to identify funds, funding sources, etc. Some non-profits keep separate checking accounts for each fund and reconcile the balance on each fund with the books at least once a year. The point is not to forget about funds and to avoid spending inappropriately.