Article 4: Accounting basics and definitions

Published 2:43 pm Monday, June 21, 2010

As the nonprofit Leadership column continues the series on Management and Fiscal Accountability for Nonprofits, this article will focus on accounting basics and definitions.

The nonprofit financial system is divided into two categories: activities & polices and people and institutions.&bsp; Activities and policies within nonprofits include the following terms; internal controls, external controls, insurance, contracts, grants, fundraising, personnel policies, risk management, reporting, and compliance.&bsp; People and institutions within nonprofits include the following terms; board of directors, treasurer, finance committee, director of finance, executive director, bookkeeper, program directors, auditor, IRS, attorney general, donors and funders.

Common terms and definitions for nonprofit accounting include the following;

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GAAP Generally Accepted Accounting Principles.&bsp; This is the most common set of accounting principles, standards and procedures that companies use to compile their financial statements.&bsp; GAAP is a combination of authoritative standards (set by policy boards) and simply the commonly accepted way of recording and reporting accounting information.

SFAS 117 Statement of Financial Accounting Standards. This is a piece of GAAP, among other things it requires nonprofits to report expenses by functional classification cost centered accounting.

Assets and Liabilities.&bsp; Assets are the things the nonprofit owns (i.e. cash, furniture, vehicles, etc.).&bsp; Liabilities are the bills the nonprofit owes or needs to pay (i.e. credit card charges, leases, lines of credit, anything outstanding).

Revenue and Expenses.&bsp; Revenue or Income is what the nonprofit earns (i.e. grants, contracts, donations, sales or rental income).&bsp; Expenses are the costs that the nonprofit incurs in the course of doing their work (i.e. payroll, rent, office expenses, etc.).

Net Assets. This is simply what is left after you take away what you owe (liabilities) form what you have (assets).

Direct cost.&bsp; Direct cost is a cost within a nonprofit that is connected to a specific activity, program or event.

Indirect cost. These are costs with in a nonprofit that are not related to a specific program, activity or event.&bsp; These often include general, administrative costs, and record keeping.

Directly allocable costs. These are costs within a nonprofit that are shared between several activities, programs or events. Otherwise known as joint or shared costs.&bsp; These include such things as rent, insurance, utilities and telephone.

Cost pool: This is a place set up to record allocable costs.

Generally with in a nonprofit you will see that expenses are divided into three basic categories; management and general/governance, fundraising and program.&bsp; Management expenses will include administration, board, legal, accounting, and D&O (Directors and Officers) insurance.&bsp; Fundraising will include all expenses incurred while trying to solicit funds.&bsp; Program expenses will include all expenses for the programs used to carry out the mission of the nonprofit. The next several articles will continue to focus on finances and accounting.