Nonprofit Accounting Terminology

Posted on Wednesday, November 04, 2015

Nonprofit accounting is a specialized industry and as such uses specific terms that those outside of the nonprofit world may not be familiar with.  The following is a list of common nonprofit accounting terminology.

 Mission – The purpose or reason an organization exists.

Tax exempt – A status granted by the Internal Revenue Service (IRS), granting a nonprofit organization exemption from federal income taxes.  The organization must meet certain requirements to receive and maintain this status.

501(c)(3) – Many nonprofit organizations meet the requirement to be exempt under the Internal Revenue Code Section 501(c)(3).  Organizations described in Section 501(c)(3) are referred to as charitable organizations and must have charitable, religious, educational or scientific purposes.

Form 1023 – IRS Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, is the required form for a nonprofit to file with the IRS to receive its tax-exempt status under 501(c)(3) of the Internal Revenue Code. 

Determination letter – The letter received from the IRS by a nonprofit organization stating that the organization is tax-exempt from federal income taxes.  It also indicates which section of the Internal Revenue Code the organization qualifies as exempt under.

Public charity – A nonprofit organization that generally receives its funding from the general public (individuals, businesses, government, and private foundations).

Private foundation – A nonprofit organization that generally receives its funding from a single major source.

Generally Accepted Accounting Principles (GAAP) – The standard framework of guidelines for financial accounting established by the Financial Accounting Standards Board (FASB) to help ensure accuracy and consistency in financial statements.

Pledge receivable – A promise from a donor to give an organization a specific amount of money at a future time.

Conditional promise to give – A promise from a donor to give an organization a specific amount of money if certain criteria is met.  For example, a donor may promise to give an organization $50,000 if the organization first raises $25,000 of other funds.

Contribution – A voluntary donation of funds, services or assets to an organization in which the donor expects to receive nothing in return.

In-kind contribution – A contribution of goods or services rather than cash.

Net assets – The difference between an organization’s total assets and total liabilities.  Similar to a for profit entity’s equity, net assets represent an organization’s net financial worth.

Unrestricted contributions – Contributions to an organization that have no limitations or restrictions as to their use.

Temporarily restricted contributions – Contributions received by an organization that have been restricted by the donor to be used for a specific purpose or for a period of time.

Permanently restricted contributions – Contributions received by an organization that cannot be spent by the organization and must be maintained in perpetuity. The most common permanently restricted funds are endowments that are invested with any earnings available to be spent by the organization.

Board designated – Unrestricted money received by an organization that has been set aside for a specific purpose by the board of directors.

Program service revenue – Fees and revenue received by an organization for services rendered.

Functional expenses allocation -  A method of dividing expenses between program services, management and general, and fund raising categories using a reasonable and consistent basis.  This allocation is required by Generally Accepted Accounting Principles and the IRS. 

Program expenses – Expenses necessary in carrying out the organization’s mission or purpose.  These expenses “touch” the programs, for example, food served at a daycare, space used for an afterschool program or the salaries of a counselor working with clients.

Management and general expenses – Expenses associated with the overall administration of the organization.  These expenses are necessary to keep the organization and its programs running but are not directly connected to a particular program or with fund raising.

Fund raising expenses – Expenses associated with getting donors to contribute to the organization.

Statement of financial position – A required statement in a nonprofit organization’s financial statements under GAAP.  The statement of financial position reports an organization’s assets, liabilities and net assets.  Net assets are reported by class (unrestricted, temporarily restricted and permanently restricted) and total.  Similar to a for profit entity’s balance sheet.

Statement of activities – A required statement in a nonprofit organization’s financial statements under GAAP.  The statement of activities reports an organization’s revenues and expenses and the changes in the amounts of each net asset class (unrestricted, temporarily restricted and permanently restricted).  Similar to a for profit entity’s income statement.

Form 990 – IRS Form 990, Return of Organization Exempt from Income Tax, must be filed annually by tax-exempt organizations to report information on organization’s programs and activities.   An alternate form, Form 990-EZ or 990-N, may be filed if the organization meets specific requirements.

Unrelated business income - Income resulting from an activity that (1) is a trade or business, (2) is regularly carried on, and (3) is not substantially related to furthering the exempt purpose of the organization.  Nonprofits must pay tax on any unrelated business income.

Posted by: Carrie Minnich, CPA

Posted in Mission Minded Nonprofits

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.

"Carrie does an excellent job every year presenting the audit to the Board of Directors.  She clearly communicates relevant information and action items we can take as a Board.  Through her…"

Heather Schoegler, Board Member of Ronald McDonald House