Accounting for Nonprofit Entity

From churches to youth organizations to the local chambers of commerce, nonprofit organizations
make our communities more livable places. Unlike for-profit businesses that exist to generate profits
for their owners, nonprofit organizations exist to pursue missions that address the needs of society.
Nonprofit organizations serve in a variety of sectors, such as religious, education, health, social
services, commerce, amateur sports clubs, and the arts.

Nonprofits do not have commercial owners and must rely on funds from contributions, membership
dues, program revenues, fundraising events, public and private grants, and investment income.

Our intent is to merely introduce some of the basic concepts that are unique to nonprofit accounting
and reporting that are required by the Financial Accounting Standards Board (FASB).

We will not discuss the accounting which is similar to that used by for-profit businesses. If you are
not familiar with accounting for businesses or you need a refresher, you will find explanations,
practice quizzes, quick tests, and more at our

Unlike for-profit companies, which depend on profitability, nonprofits focus on providing services for
the community and other nonprofits. Accounting for nonprofits requires professionals to exhibit a
certain level of financial accountability to prove how an organization is spending its funds and
furthering its cause. While IRS 501(c)(3) status allows nonprofits to be tax-exempt, they are
permitted by law to make a profit.

“Leaders of charitable nonprofits know that financial transparency will help preserve the very
important trust each donor places in a nonprofit with each contribution,” the National Council of
Nonprofits said. “Additionally, and no less importantly, conduct that is accountable and transparent
earns employees’ trust and creates a positive workplace culture. Earning trust through financial
transparency and accountability goes beyond what the law requires, but let’s start there: Nonprofits
are required to disclose certain financial information to the public upon request; board members
have access to financial information in order to fulfill their fiduciary duty to the nonprofit.”

Professionals who pursue a career in accounting for nonprofit organizations should have a solid
foundational knowledge of the state and federal regulatory laws encompassing the financial
accountability of a nonprofit organization. Moreover, these accountants need to uphold the ethical
values and code of conduct outlined by the American Institute of Certified Public Accountants
(AICPA).

As the National Council of Nonprofits clearly suggests, accounting for nonprofit organizations
remains held at the highest ethical standards. Donors want to feel secure knowing their chosen
nonprofits are doling out their financial contributions equitably. Accounting for nonprofits requires
professionals who value not only integrity, but also full financial transparency.

The Financial statement in the nonprofit Entity

 Statement of Financial Position

 Statement of activities
 Statement of functional expenses (by function and nature)
 Statement of Cash flows
 Notes to financial statement
Statement of Financial Position

The statement of financial position of a not-for-profit business is prepared to provide information

about assets, liabilities, and net assets, as well as information about the relationship between these
elements at a particular point in time.

The information in this report is used together with disclosures and other information in financial
statement analysis to assist donors, organizational members, creditors, and other parties to assess
the organization’s ability to provide services.

With the statement of financial position, you can also provide relevant information regarding
liquidity, financial flexibility, ability to meet its obligations, and external funding needs.

Activity Report

Activity reports are prepared to provide information about the effects of transactions and other
events that change the amount and nature of net assets, the relationship between transactions and
other events, and how resources are used in the performance of various programs or services.

The information in the activity reports is used in conjunction with the disclosure of information in
the financial statements by:

 Donor
 Organization member
 Creditor
 Other party

They will use it to:

Evaluating performance over a period

Assess the organization’s efforts, capabilities, and sustainability in providing services

Assess the performance of managers’ responsibilities and performance

Cash flow statement

The cash flow statement serves as a provider of information about cash receipts and disbursements
in a period. The non-profit business cash flow statement is presented in accordance with PSAK 2
with the following additions:

1. Funding Activities

Cash receipts from donors whose use is restricted for the long term, cash receipts and investment
income whose use is restricted to acquiring, building and maintaining fixed assets, or increasing
endowments, as well as interest and dividends which are restricted for long term use.
2. Disclosure of Information

With a cash flow statement, you can provide information about investing and non-cash financing
activities such as donations in the form of buildings or investment assets.

ISAK 35

On April 11, 2019 the Financial Accounting Standards Board of the Indonesian Accounting
Association has ratified ISAK 35 (Interpretation of Financial Accounting Standards) which regulates
the presentation of non-profit-oriented entity financial statements that are effective for the financial
year period starting on January 1, 2020.

The financial statements of non-profit-oriented entities have been presented as follows: 1. PSAK 1
Presentation of Financial Statements paragraph 05 states that “This Statement uses terminology
suitable for profit-oriented entities, including public sector business entities. If entities with non-
profit activities in the private sector or If the public sector applies this Standard, the entity may need
to adjust the description used for some of the items contained within itself.” Thus, the scope of PSAK
1 has substantially covered the scope of presentation of financial statements of entities with non-
profit activities

2. PSAK 1: Presentation The Financial Statements do not provide guidance on how entities with non-
profit activities present their financial statements. Entities with non-profit activities in this
Interpretation hereinafter refer to non-profit oriented entities.

3. Characteristics of non-profit-oriented entities are different from profit-oriented business entities.

The main difference between a non – profit – oriented entity and a profit – oriented business entity
lies in the way in which a non – profit – oriented entity obtains resources to carry out its various
operating activities . A non – profit – oriented entity obtains resources from which it does not
expect repayment or economic benefits commensurate with the amount of resources provided .

4. Users of financial statements of non-profit oriented entities generally have an interest in

assessing: (a) the way management carries out its responsibilities for the use of resources entrusted
to them; and (b) information about the financial position, financial performance and cash flows of
the entity that is useful in making economic decisions. The ability of non – profit – oriented entities
to use these resources is communicated through the financial statements .

General Ledger Accounts and Chart of Accounts

A nonprofit’s transactions are recorded in accounts in the general ledger. A listing of the titles of the
general ledger accounts is known as the chart of accounts.

The accounts in the general ledger and in the chart of accounts are organized as follows:

 Statement of financial position accounts

1. Asset accounts
2. Liability accounts
3. Net asset accounts
 Statement of activities accounts
1. Revenues and gains
 2. Expenses and losses

The number of accounts in a nonprofit’s general ledger could range from 30 to 1,000 or more. The
number of accounts depends on the number of programs that the nonprofit has, the types of
revenues it earns, and the level of detail required for planning and control of the organization.

For example, a nonprofit is likely to have a separate general ledger account for each of its bank
accounts. It may also have 50 general ledger accounts for each of its major programs, plus many
accounts under its fundraising and management and general expense categories.

The detail in the general ledger accounts will always be available for management’s use. However,
the account balances will be combined into a few amounts that are presented in the financial
statements and IRS Form 990.

Nonprofit recordkeeping can get a bit challenging, so it is worth noting that accounting software
exists to help nonprofits record transactions efficiently. The accounting software will also allow for
reports of revenues and expenses by function (programs, fundraising, management and general), by
the nature or type of expense (salaries, electricity, rent, depreciation, etc.), and/or by grant.

Source:

Averkamp Herold, Nonprofit accounting (explanation

Diviana Sukma , dkk, Jurnal Akuntansi dan management vol.25, 2020,