The accounting responsibilities of a nonprofit organization are different from those of a commercial one. Nonprofit entities such as churches handle financial statements, tax payments, and record keeping differently from for-profit entities. A nonprofit organization can be anything aimed at fulfilling a religious, charitable, educational, and scientific purpose.
Though nonprofit organizations still need revenue to operate, their primary goal isn’t to earn profits. Charitable courses often receive tax-exempt status from the government and aren’t required to pay income tax. Here are unique tips to account for a nonprofit organization.
Understand Tax Responsibilities
A nonprofit organization doesn’t have to pay federal income tax after applying and qualifying for tax-exempt status. An organization with tax-exempt status may also be exempt from property and sales taxes. However, a nonprofit entity such as a church in Southlake, Texas can work with a church accounting firm for assistance in filing Form 1023, which determines their qualification for tax-exempt status. After that, the IRS will review its details to determine its eligibility.
However, being exempt from property and sales tax doesn’t mean that a charitable organization is exempt from filing its annual tax return. The IRS requires all organizations including nonprofit and for-profit ones to report their yearly expenses and revenue. Every enterprise has to report its finances and activities and keep accurate records for the year.
Choose an Accounting Method
As with for-profit entities, nonprofit organizations utilize various accounting methods to record their expenses and revenue. Whether it is a nonprofit or for-profit entity, every business needs a steady flow of income to run. Of course, every institution has to earn enough money to pay their utility bills, employee wages, rent, and unexpected expenses. A charitable organization may not have to sell services or products like a for-profit entity, but they have plenty of sources of income.
Appropriate Financial Statements
Non-profit accounting involves the creation of financial statements to report their economic progress. For-profit entities use three financial statements: cash flow statement, balance sheets, and income statements. Their financial statements are similar to those of nonprofit organizations but are organized and named differently.
Nonprofit organizations use the statement of financial position to assess the health of their operations over a given period. The report documents their net assets, liabilities, and expenses. Unlike for-profit entities, nonprofit organizations substitute their net assets for capital and equity. Their liabilities plus assets must equal all assets documented in their financial statements.
The ins and outs of bookkeeping and accounting can prove to be tricky for any enterprise including nonprofit organizations. Funding resources can be scarce, tax requirements are often stringent, and a nonprofit entity may not have a professional accountant. However, there are a few things that every nonprofit organization can do to streamline its bookkeeping and accounting.
Accounting and bookkeeping for a nonprofit entity involve accounting principles and tasks that all enterprises have to employ to track, record, and analyze their transactions. However, the differences between a for-profit and nonprofit organization affect some accounting and bookkeeping aspects. For example, the allegiance of a nonprofit organization is to its board members or mission while a for-profit entity reports to its shareholders.