9 Questions for a CPA on Nonprofit Accounting

I got to sit down with CPA Aaron Rios of Carr, Riggs & Ingram, LLC, CPA & Advisors to ask him a few questions on finance accounting for nonprofits.  Below is his response to the questions that were poised

1. What are the differences between For-Profit and Non-Profit financial statements?

For Profit

Balance Sheet

Statement of Income and Changes in Retained Earnings

Statement of Cash Flows


Statement of Financial Position

Statement of Activities

Statement of Cash Flows

Statement of Functional Expenses- Now required under ASU-2014-16


For profit financial statements focus on ownership.  Individuals and entities can own percentages of shares of a for profit company.  Those shareholders can receive distributions of earnings from the for-profit company- these are known as dividends.

A non-profit is not owned by anyone.  The nonprofit is run by its board of directors and focuses on achieving its particular charitable purpose.

Accounting Focus

Building on the ownership above, for-profit financial statements are focused on income and earnings.  Profitability.  Revenues are made up of sales of goods and services.

A non-profit generally receives contributions and grants.  Resources received can be restricted for various purposes.  Its focus is on resources that have donor restrictions and resources with no donor restrictions. 

2. What financial policies should a nonprofit have in place?

Financial Policies are extremely important for any entity.  A not-for-profit is no different.  I would recommend the following:

Policies on how cash donations are handled- who collects, who counts the money, who deposits, who reconciles the bank statement, etc.); especially want to consider if your not-for-profit has substantial fundraisers that collect cash and/or door to door campaigns.

Policies on in-kind donations

Cash disbursements

Gift acceptance policy

Reimbursement of Travel Expenses for Board Members

Review of the Executive Director’s Compensation

Policies on how excess funds are invested (cash management)

Endowment policies

Conflict of interest policy- because of the board’s fiduciary duty to ensure assets are used in accordance with the charitable purpose of the organization

Resource- Council of Nonprofits.org– has some self-assessment tools that can be used in order to see areas where non-profits can improve in terms of financial policies.

3. How should a nonprofit handle an in-kind donation

Normally, in-kind donations are something you would normally need to purchase, such as goods and services.  Volunteer services are not considered to be in-kind.  Professional services, advertising, supplies that would normally be purchased or examples of in-kind, donations of securities that can be converted to cash, discounted use of facilities.  These should be recorded at FMV in the financial statements.

If a donor makes an in-kind contribution.  The nonprofit provides a letter but does not assign a value.  That becomes the responsibility of the donor and their accountant.

4. When does a nonprofit have to file an annual audit?

State law in Texas does not require a mandatory independent audit of an NFP. 

A not for profit does not have to have an annual audit unless its board of directors would require one, the NFP has debt, which has special covenants, or the NFP receives federal monies in excess of $750,000, which would require an audit in accordance with the Uniform Guidance.  If a Uniform Guidance Audit- 9 months after year end or 30 days after issuance of the audit report, whichever is earlier. 

However, the Texas Business and Organization Code- 22.352 does state that a charitable organization with annual contributions over $10,000 must have current and accurate financial records in accordance with GAAP.  Based on these records, the board should prepare or approve a financial report that conforms to AICPA standards. 

5. When does a nonprofit have to file a 990 (different types)?

A form 990 is due on the 15th day of the fifth month after the end of your organization’s fiscal year end.  So as an easy example- December 31- would be due on May 15th.  An automatic 6 month extension can also be filed using form 8868.  August 31 would be January 15th.

6. Can a nonprofit have a net income? And if yes what can they do with it?

Although not called net income- Yes.  A not for profit can have a positive change in its net assets.  What this excess can be used for depends on whether such assets are restricted or unrestricted by donors.  So as an example, if a donor contributes $100,000 during a year and stipulates that he/she wants the money used exclusively for buying food for an after-school program, then that is what you can spend it on.  Now if the same donor simply contributes $100,000 with no stipulations, then the NFP can use that money as it sees fit in accordance with its charitable mission.  The board could designate these funds as an endowment; they could be used to create a new program of the NFP, accumulated in a rainy day fund; or used to supplement existing programs. They can also use it to create or grow an endowment.

7. What is the recommended amount for a cash reserve for an organization to be considered healthy?

Generally, 3-4 months operating expenses would be really good.

8. What are your top three nonprofit accounting best practices?

Top three-

  1.  Written internal policies and controls- fraud is always a concern and a well-run not for profit needs to have well defined policies and controls in place to prevent loss; this includes segregation of duties.
  2. Annual operating budget- get board approval
  3. Have a firm grasp of nonprofit tax and accounting regulations

9. What are the recommended percentages for expense allocations – program; fundraising; admin management?

BBB Wise Giving generally recommends-

Program- 65% or more

Management and General- No more than 35% (A portion of an executive can be used under program as long as you track the time.)

Fundraising- No more than 35%

I hope this helps. Your feedback is appreciated.  Sharing is caring. Leave any finance questions below and Aaron has agreed to answer them. 

If you are a CEO or ED of a nonprofit organization and want to learn from me and others join the Supporting World Hope Facebook Group.

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