How to comply with nonprofit accounting standards

More than 2 million nonprofit organizations operate across the United States.

California leads the way with almost 200,000, followed by Texas and New York at just over 145,000 and 122,000, respectively.

Even the smallest state, Rhode Island, has more than 6,500 nonprofits.

With numbers steadily growing and with significant variation, nonprofits range from churches to museums, zoos, observatories, and research facilities.

The result is a range of revenue streams, expense types, and spending priorities, some simple and some complex.

To help streamline the reporting process, regulatory organizations have established nonprofit accounting standards that help ensure clarity, consistency, and transparency.

In this piece, we’ll break down the basics of nonprofit accounting standards, address the importance of standards compliance, offer steps to ensure compliance, and provide best practices to avoid regulatory headaches

Here’s what we’ll cover:

What are nonprofit accounting standards?

Nonprofit accounting standards are sets of rules and guidelines that specify what type of financial data your nonprofit must collect, and how this data must be reported.

The purpose of nonprofit standards

Nonprofit standards create both transparency and consistency for your organization.

Using a standardized reporting framework, nonprofits ensure that all relevant financial data—such as donations, grants, gifts, capital purchases, and expenses—is collected and verified.

Key standards to know

Your nonprofit should run on the Generally Accepted Accounting Principles (GAAP) which forms the basis of standards compliance.

GAAP rules were developed by the Financial Accounting Standards Board (FASB) and the American Institute of Certified Public Accountants (AICPA).

Under current standards, your nonprofit must typically provide:

A statement of financial position

Also called a balance sheet, this is a statement of your organization’s liabilities, assets, and net assets.

A statement of activities

This is a statement that reports how your organization’s net assets have changed over a period of time.

It should include revenues, gains, expenses, and losses.

A statement of cash flows

This statement tracks the flow of cash both into and out of your organization.

It further classifies these flows into costs of operation, financing actions, and investment practices.

The FASB also defines additional requirements for nonprofits, such as:

• Providing the composition of net assets with donor restrictions, and how these restrictions affect the use of resources.
• Detailing the amounts of expenses in both their natural classification and functional classification.
• Reporting qualitative information that communicates how your nonprofit uses its liquid resources to meet cash needs.

The importance of standards compliance

Standards compliance plays a critical role in continued nonprofit operations.

Key benefits of clear and consistent reporting include:

Transparency and accountability

As nonprofits evolve and grow, accounting teams may expand across multiple locations.

Team members may be promoted or leave for other organizations, and financial priorities may change in response to economic or social factors.

Compliant reporting ensures transparency across all financial statements, which allows teams to easily locate current data and make necessary changes.

Compliance also creates accountability.

When all processes are tracked, your nonprofit will know exactly how money is handled, where this money goes, and who makes these monetary decisions.

This is critical in the event of an external or internal audit.

Maintaining tax-exempt status

Nonprofits are typically tax-exempt.

This means they don’t pay federal income tax on earnings or donations.

Given that many nonprofits operate with limited resources and a small amount of staff, this status helps keep the organizations in operation.

If, however, your nonprofit fails to report its finances as required by GAAP and FASB, it could lose tax-exempt status.

Building trust with stakeholders

Your nonprofit depends on the generosity and commitment of stakeholders to fulfil its mission.

This might take the form of monetary donations from members or the general public, or it might be a donation of time and effort.

From industry experts willing to donate their time as members of the board, or individuals passionate about nonprofit priorities stepping up to help with donation drives or other initiatives, stakeholders are critical to your nonprofit’s success.

Transparent accounting builds trust

If your stakeholders are confident that money is well-spent and can trace revenue from source to spend, they’re more willing to invest time, effort, and money in your mission.

Steps to ensure compliance

It’s one thing to recognize the need for regulatory compliance—it’s another to put standards into practice. Here are four steps to get you started.

Step 1. Understanding the standards

The more you know about GAAP principles and FASB standards, the better.

Given the evolving nature of these regulations, however, it’s can be challenging to stay current, especially if you don’t have a financial expert on the payroll.

It’s worth exploring some of the educational resources offered by the FASB.

For example, a recent webinar explored the impact of recent FASB updates on private companies and nonprofits.

Step 2. Implementing strong financial policies

The stronger your policies, the better your reporting.

But what makes a strong financial policy?

First, it must be clear.

What data is required, how should it be formatted, and when should it be submitted to relevant compliance authorities?

Next, it must be secure.

This means protecting data in storage and use against tampering or theft.

Here, using cybersecurity hygiene practices such as encryption and multi-factor authentication can help.

Finally, a strong financial policy should be transparent.

Ideally, multiple staff should review any data before it is sent for review.

This both reduces the risk of mistakes and fosters both team accountability in your organization and community trust.

Step 3. Conducting internal audits

Even the best systems aren’t perfect.

To ensure financial practices meet GAAP and FASB requirements, your nonprofit should schedule regular audits of all finances and transactions.

While monthly or quarterly audits can often be handled internally, it’s worth working with a trusted third party to conduct a more in-depth audit at least once a year.

Step 4. Investing in training and education

The more your staff knows about accounting rules and regulations, the better.

Consider paying for in-person or online courses that include both the knowledge and skills required to track, analyze, and report financial data.

Best practices for nonprofit accounting

While every nonprofit has its own processes and policies to handle finances—for example, some organizations are primarily donation-driven, while others operate on government grants—try to use best practices.

Categorize funds and reporting expenses

Categorization of funds and expenses helps ensure accuracy and transparency.

This makes keeping tabs on the money trail easy and helps you use funds appropriately.

Funds typically fall into three categories:

1. Unrestricted funds

Unrestricted funds can be used for any organizational purpose.

2. Restricted funds

Restricted funds may have usage requirements based on time, purpose, or location.

For example, they may be earmarked for use in a specific outreach campaign.

3. Permanently restricted funds

Permanently restricted funds cannot be used directly by nonprofits.

One example is a scholarship fund.

While the money is given out by the organization to a recipient, it cannot be spent directly by the nonprofit on any expenses.

Your expenses, meanwhile, may include:

Operational costs

These costs include rent, leasing, utilities, and staff salaries.

Administrative costs

Administrative costs include accounting, legal, and other professional services.

Program expenses

These expenses may include outreach activities, events, tours, or digital initiatives.

Fundraising expenses

Fundraising expenses are any costs incurred when applying for grants or seeking donations from stakeholders.

Regularly review and update financial policies

As noted above FASB regulations and GAAP best practices change over time.

As a result, it’s worth regularly reviewing and updating financial policies to ensure they align with current expectations.

To reduce the risk of missing a key change, you could schedule reviews each quarter.

Leverage technology for compliance

The sheer amount of financial data now handled by nonprofits makes technology a key component of compliance.

From securely managing donors’ data to navigating expenses, investing, and outreach, it’s easy to get overwhelmed.

Solutions such as cloud-based nonprofit accounting software can help streamline financial reporting and improve regulatory compliance.

Even for small nonprofits, choosing the right technology can free up time to help your mission grow.

Benefits of cloud-based nonprofit accounting software

Cloud-based nonprofit accounting software uses offsite computing resources to simplify your nonprofit’s accounting process.

This can be accessed anywhere, meaning you become more agile and your data is available whenever you need it.

Streamlining compliance efforts

Cloud-based tools let you centralize fund, expense, and stakeholder data.

This provides easy access to relevant data sources, in turn reducing the amount of time required to collect and analyze key information.

In addition, some cloud-based accounting services offer advanced functionality.

Features such as automated accounts payable, spend management, and nonprofit revenue recognition are useful additional tools to add to your organization’s financial management toolkit.

Enhancing financial management

Using cloud-based solutions also enhances your nonprofit’s overall financial management.

For example, real-time reporting lets your teams quickly access role-based reports, in-depth dashboards, and data visualizations.

Real-time budgeting and forecasting, meanwhile, help keep finances on track.

Improving accuracy and efficiency

Finally, cloud solutions let you consolidate financial data across entities—both local and global—and access real-time metrics about these entities.

In addition, your nonprofit can easily track time and expenses for employees and volunteers, and ensure staff are paid on time with advanced payroll tools.

Worth noting?

The right provider makes all the difference in nonprofit cloud accounting software.

Look for solutions specifically designed for nonprofits by developers with industry experience.

With Sage Intacct, we have improved productivity by 25% for our worldwide field operations and global finance teams and seen a revenue increase of 15%.

This translates to added resources to reach an additional 100,000 children through our Literacy Program and 21,000 girls through our Girls’ Education Program.

Shari Freedman, CFO, Room to Read

Final thoughts

Nonprofits, like yours, face unique accounting challenges.

If not having the budget for dedicated accounts staff, but you’re faced with the task of collecting, analyzing, and reporting donations, grants, and other income from multiple sources sounds familiar, then a cloud-based solution specifically tailored to nonprofits could be what you need.

Compliance with nonprofit accounting standards is a critical but often complicated step to nonprofit financial management.

But with the right tools in place, your mission can continue to grow.

Considering a new approach to NPO accounting?

Download The Benefits of Cloud-Based Nonprofit Accounting Software ebook.