Nonprofit Accounting Basics Every Board Member Should Know

The core financial statements

Nonprofits report on a few key statements:

• Statement of financial position — what you own and owe (the nonprofit balance sheet)
• Statement of activities — revenue and expenses for the period (the nonprofit income statement)
• Statement of functional expenses — costs split by program, management and fundraising
• Statement of cash flows — where cash came from and went

Two classes of net assets

Instead of owner's equity, nonprofits report net assets — split between those with donor restrictions and those without. A large total can hide a cash crunch if most of it is restricted, so always look at the unrestricted figure.

Program, management and fundraising

Your Form 990 and functional expense statement show how much goes to programs versus overhead. Donors and rating sites look at these ratios, but a healthy organization still needs adequate administrative investment.

Internal controls a board should expect

• No one person both approves and records payments
• Monthly bank reconciliations reviewed by someone other than the preparer
• Two signatures or approvals above a set dollar amount
• A written conflict-of-interest policy signed annually
• Regular financial reports to the board or finance committee

When to bring in a CPA

Growth past roughly $200,000 in revenue, a first federal grant, a funder requiring reviewed or audited statements, or a board that can't get clear reports are all good reasons to talk to a nonprofit CPA.