Overview of NGO Accounting
NGO is an entity whose prime purpose is social and not profit-making. NGO Accounting is a system of recording and reporting all business transactions that are considered NGOs. It involves choosing the best accounting method, understanding compliances and tax responsibilities, and creating and reporting the figures in the appropriate financial statements. The main motive of an NGO is not to earn profit but to provide services for the welfare of society. It receives amounts out of contributions from different persons or entities but without any expectations to receive the return on such contributions. Thus, NGO Accounting is a unique system followed by the NGO for recording and reporting business transactions.
NGO Accounting is different from other organisations as NGOs are exempted from tax. Thus, NGOs only focus on keeping overhead low so that money can be used in programs or services that they provide for the welfare of society.
The NGO Accounting has three main reports in the financial statement that include a statement of financial position, a statement of activities and a statement of functional expenses.
NGO Accounting can be done by two methods, cash accounting method or accrual accounting method for recording expenses and income of the NGO. The cash accounting method records transaction amounts when the money trades hands. The accrual accounting method records amounts when a transaction occurs. The accrual accounting method is more accurate.
Components of NGO Accounting
There are certain areas where the accounting of NGOs differs from that of other organisations that aim at earning profit. The components that are different in the case of NGO accounting are as follows:
Basis of NGO Accounting
An important section of NGO account management is the basis of accounting. It defines the basis on which the accounting starts and methods applied for managing accounts with day-to-day transactions. Points to be considered for this process are as follows:
The account books are maintained in a set pattern, so all transactions are traced back and forth. The pattern is as follows:
- Cash memo
- Cash book
- Trail balance
- Income and expenditure statement, balance sheet
Fund accounting enables NGOs to allocate money in different groups or “funds” to keep them organised and spend as per need. The groups under which money is separated are:
- Restricted Funds:
The funds are for certain NGO projects and activities and are to be spent accordingly.
- Temporarily restricted funds:
The funds are spent on certain projects and activities at NGOs for a certain period of time. After that time period, the fund becomes unrestricted funds.
- Unrestricted funds:
This is also called the Annual Fund. These funds can be spent on anything that NGOs require.
Advantages of NGO Accounting
The advantages related to NGO Accounting are as follows:
Although NGO Accounting is beneficiary in the ways mentioned above, it also has disadvantages. The various disadvantages related to NGOs are as follows:
Books and Documents maintained for NGO Accounting
Following is the list of books and documents that NGOs maintain for proper and systematic account management:
NGO Accounting Statements and Reports
For NGO Accounting, one should adhere to specific guidelines while creating reports. The basic guideline one should know is GAAP (Generally Accepted Accounting Principles). These are general principles accepted by accountants. The Financial Accounting Standards Board (FASB).
NGO Budget is a document that is created by the finance team or leaders of the NGO using information from the development team and the historic spending habit of the NGO. It is a planning document used to predict expenses and allocate resources for the NGO. It deals with incurred costs as well as revenue that are expected to receive over a set period of time, usually a year.
Statement of Financial Position
A balance sheet of an NGO is known as a statement of financial position. It is a document that represents the financial health of an NGO. It has a list of assets and liabilities of the NGO.
Statement of Activities
The statement of activities is also known as an income statement. It shows revenue and expenses over time at NGOs. It categorises different revenue sources and expenses. It can also be used to review the change in net assets from the beginning of the year to the end of the year.
Statement of Functional Expenses
Statement of Functional Expenses breaks down NGO’s expenditures into various common categories and provides their function. This categorisation separates expenses into operational functions such as program expenses, administrative expenses or fundraising activity expenses.
Statement of Cash Flow
The statement of cash flow shows the funding and cash moved in and out of NGO. It allows the NGO to calculate how much is available to pay expenses at any given time. NGO breaks down the operating, financing and investing activities to show how the cash moves at NGO.
The filing of annual Form 990 is an important aspect of NGO Accounting. Form 990 is the annual tax form tax-exempted NGOs must file each year to remain compliant with mandatory regulations.
This document has a record of revenues and expenses from the year to demonstrate the utilisation of finances.
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