Good vs Bad Accounting

A nonprofit organization is only as strong as its accounting team. Though grant writers and administrators spend most of their time developing relationships with funders and preparing outreach documents like Letters of Intent (LOIs) and proposals, the funding they locate would not be sustainable without an accountant to ensure all financial details are being recorded and reported. However, it is not as simple as just applying the same accounting practices that one would use in a for-profit business. The purpose of a non-profit accountant is to manage revenue generated through donations, fundraising, grants, and other funding mechanisms with the purpose of providing support to the nonprofit’s mission. In contrast, a for-profit accountant serves the firm’s goal of making profit, sot their main purpose is to focus on the money the firm is bringing in. 

            Nonprofit accountants are concerned with maintaining consistent and sustainable financial support for mission-driven organizations. They track funding sources for each program or service the nonprofit provides so each can be accounted for separately. What businesses refer to as “equity,” nonprofits call “net assets,” reflecting the fact that a nonprofit accountant is focused on providing a picture of how much funding is available for programs, not the overall value of a company’s assets minus their liabilities. At no point is a nonprofit accountant concerned with how much the nonprofit would be worth to a potential buyer, which is a key distinction setting them apart from for-profit firms.

            The most important best practices for nonprofit accounting are focused on transparency. It is always in the best interest of a nonprofit to be open about how funds are being acquired and distributed, so all stakeholders can see the effect of their contribution. For any fundraising activities, nonprofit accountants should provide receipts to donors and provide total transparency about how funds are being used. For grants, nonprofit accountants often hold the essential responsibility of making sure all funds from a grant are disbursed to the correct program with a thorough paper trail. This is not only a critical part of nonprofit ethics, but an important measure to ensure the nonprofit’s annual tax obligations are fulfilled in compliance with state and federal laws. Inaccurate reporting of these details can lead to steep IRS penalties that will prevent your nonprofit from supporting its mission, so it is crucial to ensure nonprofit funds are managed by experienced accountants.