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
Fund Accounting
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
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Books and Necessary Papers maintained for NGO Accounting
Following is the list of books and necessary papers 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).
Budget
NGO Budget is a necessary paper 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 necessary paper 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 necessary paper 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.
Form 990
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 necessary paper has a record of revenues and expenses from the year to demonstrate the utilisation of finances.
Corpbiz assistance in NGO Accounting
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Frequently Asked Questions
An NGO is an organisation that aims to fulfilling the needs of society.
The NGO Accounting is for measuring accountability instead of profitability, i.e., to show that the money is spent appropriately.
Income received by NGOs is not taxable; however, to get the exemption, the NGO has to register themselves with income tax authorities.
An NGO financial management policy is a manual that covers the accounting policies, systems and procedures of the NGO. It only governs the financial transactions of the NGO to set systematic procedure to be followed by members of the NGO and also fulfils local statutory requirements and demonstrate the management practices adopted by NGOs.
The Board of Directors or NGO Board Members appoints a finance committee to manage the finances of the NGO.
The accounting trial is important as it helps to check or counter-check expenditures incurred, or activities are done, thus helping maintain a transparent system.
Yes, if NGO requires to operate at multiple locations, then it can maintain its book of accounts location-wise.
NGO is required to submit its financial statement to IRS, and the IRS or NGO itself discloses the financial statements (reports) to anyone who asks for it. And so, it is public.
The Statement of Activities refers to Income Statement, and the Statement of Financial Position refers to the Balance sheet of NGOs.