While you might think that all accounting is the same – debits and credits – there are vast differences between Nonprofit Accounting and Commercial For-Profit Accounting.
Nonprofit Accounting Guidelines
Not-for-Profit Organizations must follow nonprofit accounting guidelines. Unlike for-profit businesses, it must have management objectives and generate unique reports both for internal and external use. Most importantly, it must demonstrate accountability to funding sources.
Trying to shoe-horn the functionality of an off-the-self commercial accounting package, such as QuickBooks or Peachtree, into the requirements for a nonprofit organization could be risky and jeopardize the fiscal well-being of your organization.
What is Fund Accounting?
Fund Accounting is unique to not-for-profit organizations. As a consequence, fund accounting more than any other single concept of not-for-profit accounting, is the reason why not-for-profit organizations need proper accounting software tools for proper accountability and stewardship of funds.
The separation of accounting records by departments, branches and product lines is sometimes done in for-profit business accounting, but this is not the same as the separation that nonprofits need for fund accounting. All software packages designed to be used in for-profit businesses do not have fund accounting capabilities.
In fund accounting, amounts are segregated into categories according to restrictions placed by funding sources and designations placed by the organization’s governing board on their use. All unrestricted revenue are in one fund, all temporarily restricted revenue in another, all permanently restricted in a third, and so forth. Typically in reporting, an organization using fund accounting will present separate financial statements for each fund.
Nonprofits Must Demonstrate Compliance
Fund accounting is widely used by not-for-profit organizations because it provides the ability in ensure compliance with legal restrictions and to report on the organization’s stewardship of amounts entrusted by funding sources. While this concept of separate funds in itself is not particularly difficult, it does create problems when trying to apply these principals with accounting software that is not designed to separate activity by funds.
The concept of fund accounting will continue to be appropriate for many organizations for keeping their books and for internal reporting to management, funding sources and the board. In addition the fund accounting financial records will be the basis for preparation of the financial statements used for reporting to the public.
This distinction between internal accounting and external financial reporting is important to understand. Accounting standards issued by the accounting profession deal only with external financial reporting, not how the internal books are kept. Organizations are free to use any method of record keeping they wish, as long as the final result – the financial statements seen by the public – are in the proper form.
Nonprofit Accounting in QuickBooks
Intuit recommends using Classes in QuickBooks to generate a Balance Sheet by fund, but there are inherent flaws in the design of QuickBooks that limit its capabilities in this area. However, the Balance Sheet by Class report is only available in QuickBooks Premier and Enterprise Solutions.
Here is information taken directly from the Intuit Support Site:
Potential Quickbooks Problems in Nonprofit Accounting
- Net incomes differ between the Balance Sheet by Class and Profit & Loss by Class reports.
- The Balance Sheet by Class report makes calculations to balance a transaction’s classes. In some cases, this causes the net income for a class on the Profit & Loss by Class report to differ from the net income for that same class on the Balance Sheet by Class report.
Why is this important?
- The two primary financial statements in QuickBooks are the balance sheet and the profit & loss statement.
- Net Income appears as a line item on both reports.
- It’s the bottom line on the Profit & Loss Standard report.
- It’s a component of Equity on the Standard Balance Sheet report.
Why is my balance sheet by class out of balance?
- The balance sheet uses the standard accounting equation: Assets = Liabilities + Equity.
- The balance sheet in total (across all classes) follows the equation and always balances. However, it’s possible that the balance sheet doesn’t balance for an individual class. When this happens, the report shows “Unbalanced Classes.”
The following is an excerpt from a book titled Running Quickbooks in Nonprofits by Kathy Ivens. This book provides information about using QuickBooks for Nonprofits to track financial data in nonprofit organizations.
As a result, most nonprofit organizations have to spend extra money to have accounting professionals create reports from their QuickBooks data. The goal of this book is to help you understand how to set up QuickBooks for nonprofit accounting, make it easier to create transactions properly, and reduce the amount of money to spend on accounting fees.
Even QuickBooks Premier Nonprofit edition isn’t a solution because the software wasn’t written to accommodate all the needs of nonprofit accounting.
I’ve worked with, or examined hundreds of QuickBooks nonprofit installations, and I’ve seen a wide variety of work arounds (including add-on software) aimed at making QuickBooks work properly. Most of them don’t work well, are too complex to be efficient (even for experienced QuickBooks users), and some don’t really work at all.
Using Classes in Quickbooks
Most consultants recommend using classes in Quickbooks to get the segregation of financial activity a nonprofit needs for funds, functional areas, programs, funding sources, etc. In QuickBooks, you get two data elements for coding and this severely limits reporting. You have Account and Class. Jobs is a third data element, but is not universally available in the QuickBooks report structure. If a nonprofit requires reporting on more than two dimensions, QuickBooks simply can t handle it and a majority of financial reporting must be done outside the system in spreadsheets, which can create internal control deficiencies.
Get the Right Tools for the Job
Since not-for-profit organizations have distinctly different reporting requirements from commercial companies, your accounting software must be able to handle those differences. With a true nonprofit accounting software solution like FastFund Online from Araize, reporting tasks are simplified and can be accomplished in a timelier manner. Fund accounting solutions that specialize in serving the not-for-profit sector will also have more robust integrated options for not-for-profit specific tasks, such as grant management, indirect cost allocations, and donor management.
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