Having financial accountability of your nonprofit means having access to all of the fiscal information. Some financial reports have to be completed and others make good managerial sense. In the accounting world, some aspects of business are the same for nonprofit and for-profit organizations, and some are very different. Financial statements are a necessary tracking tool for any business, but components like the profit and loss statement differ between for-profits and nonprofits.

Nonprofit Defined

Charitable nonprofit businesses are mission-based organizations that are recognized under section 501(c)(3) by the Internal Revenue Service. According to these guidelines, all of the revenue must be used for the charitable mission of the organization. By definition, nonprofits do not make a profit because all of the surplus income is placed back into the business. The IRS is clear that a nonprofit cannot provide financial benefit to an individual or to a stockholder. By the nature of organization, a nonprofit cannot fill out a profit-and-loss statement because the business does not make a profit.

Statement Of Financial Activity

Having no profit does not mean that there is no income. Where a for-profit business would include a profit-and-loss document in its financial statements, a nonprofit will use a statement of financial activities. This statement categorizes all income and expense, showing net surplus or net deficit. The statement of financial activity serves much of the same role as a profit-and-loss statement. It gives the financial managers insight into the organization’s income and debt-coverage ability.

IRS Requirements

The Internal Revenue Service requires annual financial reporting on Form 990. The completed IRS document is available for public review and it includes the organizations financial information. Parts 8 through 11 are substantially the same as a statement of financial activity. Part 8 asks for revenue and part 9 asks for expenses. The next section asks you to put them together in a balance-sheet format. Part 11 breaks out the net assets for analysis. The other sections of Form 990 focus on managerial roles including any payments to members of the board and other executive staff.

Trust GAAP

When asking which reports are needed by your nonprofit, the Generally Accepted Accounting Principles are followed. The Federal Accounting Standard Advisory Board created GAAP standards, which are guidelines for accounting practices in the United States. There is no penalty for not following GAAP, but it is the single authority in the United States. Any company that is not following GAAP is essentially doing its accounting wrong. Proper GAAP financial statements would include a statement of financial activity.