Breaking Down Not-for-Profit Accounting: Chapter 14

What Makes a Not-for-Profit?

David Miller: Hey everyone, welcome back to Government & Non-Profit Accounting. I’m David Miller here with Maya Collins. Today, we’re breaking down not-for-profit accounting—what makes a not-for-profit organization tick, how they’re reported on, and some of the quirks in how they track contributions. Maya, you ready?

Maya Collins: Always! You know I love these episodes. So let’s jump in—first up, the basics. A not-for-profit is an organization that exists for purposes other than making a profit, right? Their goal isn’t shareholder dividends or anything like that. And, importantly, the money doesn’t get distributed to anyone—no owners, no directors, nada.

David Miller: Exactly. Instead, not-for-profits thrive on generosity and compassion—think about the volume of donations and time they receive. But, you know, with all that generosity comes risk too. There’s a lot of opportunity for, let’s call it, sneaky fundraising or even outright scams. That’s why accountability is king in this world. People want to know their donations are being used the way they intended. And frankly, the regulations reflect that.

Maya Collins: That lines up with pretty much every audit horror story out there, doesn’t it? But—okay, so here’s where we have to split hairs a little: not-for-profits can be either governmental or nongovernmental. So, universities, museums, social service agencies—some of these are run by governments, some are totally independent. But the standards they follow—FASB if they’re nongovernmental, GASB if they’re governmental—those depend on who’s controlling them, right?

David Miller: Yeah, and that split isn’t always obvious. FASB took over standard-setting duties for nongovernmental NFPs back in the late ‘70s. But if an organization checks off certain boxes, like if the majority of the board are government officials, or the government can dissolve them and seize the assets, or if they can actually levy taxes—then we’re in GASB territory. I remember this little shelter here in Illinois—provided services for domestic violence victims, got all its money from donations, board was county commissioners, but when they dissolved, funds had to go to United Way. The auditors spent way too much time figuring out, are you a governmental NFP or duh, a regular NFP? Turns out, that who-gets-the-leftover-assets question was the dealbreaker for them.

Maya Collins: That kind of technicality can totally trip people up. So, quick examples for listeners: let’s say a group teaching English as a second language, and it’s independent, funded by student fees. That’s nongovernmental. But a university—could swing either way depending on who’s at the wheel. If your nonprofit’s board is all local business folks, probably nongovernmental. But if it’s packed with city or county officials, then, well…that’s where the GASB might step in.

Required Financial Reporting and Net Assets

Maya Collins: Alright, since we’re talking about accountability, let’s move to the actual reporting. Not-for-profits have a set of financial statements they have to put together for the outside world—and there’s no wiggle room here, they all have to use accrual accounting for this, just like we’ve seen in the promote health world. I’m looking at you, tiny nonprofits running QuickBooks on a cash basis for day-to-day stuff—you gotta convert for the official reports.

David Miller: Yep. At minimum, you’ll see three statements: the statement of financial position—that’s the balance sheet—the statement of activities, and a statement of cash flows that breaks things down into operating, investing, and financing sections. We’ve got a real example right here from Promote Health Association. In their 2023 balance sheet, they had about $159,000 in assets—most of that contributions receivable—and net assets split up between ‘with donor restrictions’ and ‘without donor restrictions.’

Maya Collins: And the specifics on net assets are always a hot topic. You have your ‘without donor restrictions’—so that’s where board-designated stuff also lives, assuming it isn’t locked down by an actual donor. Then ‘with donor restrictions’—that’s everything where the donor said: “You can only use this money for X” or “don’t touch this money, but you can spend the earnings on your programs.” Like the INVOLVE example, where someone dropped three million bucks but said, you can only use the investment income. The whole $3 million goes into “with donor restrictions.” Then, when the org earns $150k on those investments, and the board designates that for general operations—suddenly you’re seeing transfers between the two buckets, but none of that $3 million gets spent directly.

David Miller: Oh man, this is where people start sweating during audits—especially with board-designated net assets. You see it on the Promote Health Association’s statement: only $7,387 without donor restrictions at year-end, and over $100,000 with restrictions. Maya, didn’t you get tangled in this the first time you looked at a not-for-profit's books?

Maya Collins: Oh, totally. My first job out of college, I had to review a community foundation’s financials. “Board-designated” versus “restricted by donor”—my head was spinning. I kept thinking, wait, if the board sets money aside for a rainy day, is it restricted? Nope, not in the official sense—it’s just a management decision, and they could change their minds next meeting. But if the donor says, “don’t touch it except for scholarships”—that’s when it moves into the “with donor restrictions” slot and it’s basically untouchable for anything else. I honestly wish someone had told me just to follow the labels: donor-imposed = restricted, board-imposed = not. Simple, but easy to mess up.

Revenue Recognition and Special Accounting Scenarios

David Miller: Now, let’s get into how NFPs actually recognize their revenue and handle some of those accounting curveballs. So, revenues—those come from more traditional sales and fees, like museum gift shops or program service charges. Support, though, that’s all the contributions and grants—the heart of most NFPs’ funding.

Maya Collins: Yup, and not all support is created equal. You’ve got pledges—sometimes conditional, sometimes not. Like, if a donor promises money but says you only get it if you expand your facility by 10 percent, that’s a conditional pledge, and you can’t recognize it until you meet the terms. But if someone just pledges “here’s $500,000, pay you in two years”—that gets recorded immediately, at present value, if it’s unconditional and collection’s likely. It’s so easy to mess up this distinction and recognize revenue too early.

David Miller: That’s right—and what about donated materials and services? A lot of people think, “oh, just record all volunteer hours given,” but nope. Only when services either create or enhance a nonfinancial asset, or when you’ve got specialized skills involved—like, say, a CPA comes in and drafts your financials for free, or a web designer builds your website pro bono. Those get reported as both revenue and expense, at fair value. But if it’s folks helping out at a food bank—important work, but unless their skills are required and you’d otherwise have to pay for it, there’s nothing to recognize beyond a thank-you card.

Maya Collins: Exactly, and that’s a weird gap between the reality of volunteer impact and what shows up on the statements. You know, I did a project for a local Boys and Girls Club, and the donated CPA hours were a line item in the books. But all the high school students volunteering over the summer? Nothing on the financials. It’s a rule that drives people a little nuts, but the standard’s there to keep things consistent.

David Miller: Now, special event accounting is another twist: let’s take the Maryville Cultural Center’s annual talent show. They raised $4,800 in revenue but had expenses—things like auditorium rental, advertising, trophies, and printing tickets. The reporting, by the rules, breaks down as $4,800 in special event revenue, $1,500 in special event expense for things like the trophies and stage, and $1,300 in fund-raising expense for, you know, advertising and tickets. FASB wants everything spelled out—expenses by both function and nature. That’s how you’ll see lines in the notes, or even as a separate schedule, breaking down salaries, depreciation, office costs, but also separating out program, management, and fundraising expenses.

Maya Collins: That dual breakdown helps people assess how efficiently funds are actually being used. Are most expenses going toward research or services, or is too much gobbled up by management and fundraising? That context matters, especially for donors who want to make sure their money’s doing the most good. So, whether you’re knee-deep in spreadsheets or just curious, remember—accounting rules here are really about transparency and trust, not just compliance.

David Miller: Couldn’t have said it better. And that’s a wrap for this episode. Next time, we’ll get into some of the crazier scenarios you’re likely to see in not-for-profit audits, maybe with a fraud twist or two?

Maya Collins: I’m in! Thanks, David—and thanks to everyone tuning in. We’ll catch you next time on Government & Non-Profit Accounting. See ya, David!

David Miller: Alright, see you Maya. And goodbye to all our listeners—until next time.