Nonprofit revenue recognition: Tips and best practices

Generally speaking, there are two ways your organization can allocate expenses in its budget. The first method is based on the type of payment you’ll make to cover each intended cost, referred to as natural expense allocation. The second method, functional expense allocation, is based on how each expenditure impacts your mission. Whether you’re managing a nonprofit, launching a startup, or scaling a company, aligning your financials with GAAP gives you the confidence and credibility needed to grow. With Sage Intacct, we have improved productivity by 25% for our worldwide field operations and global finance teams and seen a revenue increase of 15%.

Multi-Year Grant Allocations and Spending Stipulations

Unlike for-profit entities, nonprofit organizations have unique accounting and reporting needs. Their financial health is judged not by profit margins but by transparency, accountability, and alignment with mission-driven goals. FASB standards ensure that nonprofits maintain consistent financial reporting practices that foster trust and demonstrate responsible stewardship of resources. The Georgia Secretary of State’s office, along with the Georgia Attorney General’s office, oversees charitable organizations, ensuring compliance with state laws. Georgia’s regulations include specific reporting requirements for fundraising activities, board governance, and financial transparency. Similar to Ohio, Georgia establishes its own thresholds for mandatory audits, which may differ from the federal “Single Audit” thresholds.

• No generic tips, no one-size-fits-all solutions—just real, practical guidance that no one else can offer, because your journey is uniquely yours.
• These references and tools will help organizations stay compliant with accounting standards and effectively manage their financial resources.
• Create month-end and year-end closing procedures that ensure all GAAP requirements are met consistently.
• To justify such increases, ensure these expenses align with your mission and demonstrate a measurable impact.
• Unconditional grants lack donor stipulations and should be recognized as revenue upon receipt or notice of intent to give.

Expense Reporting and Functional Classifications

Notably, Ohio sets its own thresholds for mandatory audits, which can differ from federal thresholds. This means a smaller organization, not subject to a federal “Single Audit,” might still be required to undergo a state-mandated audit. It’s essential for Ohio nonprofits to stay informed about these state-specific requirements, as failure to comply can lead to penalties and reputational damage. The Ohio Association of Nonprofit Organizations (OANO) is an invaluable resource for staying up-to-date on these state specific rules.

How to put your nonprofit’s existing cash to work, so it grows instead of shrinks

This involves distinguishing between reciprocal and non-reciprocal transactions, valuing non-monetary contributions, and accounting for the benefits afforded to donors. Donor-imposed restrictions, however, affect the purpose or timing of expenditure rather than determining if revenue should be recognized. These restrictions do not typically delay revenue recognition but must be reported to show how an organization can use the funds. An entity typically recognizes revenue over time if the donor receives benefits as the nonprofit fulfills the promise to give. This is in contrast to recognizing revenue at a point in time, which occurs when control of the promised funds transfers to the entity all at once. The beauty of technology is accounting and bookkeeping software can give your nonprofit tools to understand your financial information better.

While the SEC continues to oversee financial reporting for publicly traded companies, it defers Accounts Payable Management standard-setting to FASB. Meanwhile, AICPA continues to provide guidance and best practices, shaping financial reporting across industries, including nonprofits. This guide breaks down key nonprofit accounting principles in plain language, helping you navigate financial reporting requirements with confidence.

Statement of Financial Position

Specific Stipulations and Multi-Year GrantsWhen grants come with specific spending stipulations, it is imperative for the non-profit to monitor these restrictions closely. Multi-year grants require a systematic approach to recognize revenue in the correct accounting period, which may extend over several fiscal years. Discerning between contributions and exchange transactions can be more difficult than it appears. Not-for-profits recognize contributions upon receipt, and exchange transactions either at a point in time or over time based on facts and circumstances. Understanding how much of your funding is restricted helps in cash flow management and strategic planning.

Additionally, most lenders and donors require GAAP-compliant financial statements as a prerequisite for grants, loans, or investment opportunities. This legal and regulatory framework ensures that financial data retains its integrity and is presented uniformly, regardless of organizational size or sector. Furthermore, all U.S. nonprofits must adhere to Generally Accepted Accounting Principles (GAAP), which serve as the bedrock for financial reporting.

Financial Management for Non-Profits

• When donors receive benefits in return for their contributions, non-profits must be capable of valuing those benefits to distinguish between the donation and exchange components of a transaction.
• For nonprofits, GAAP ensures that financial statements accurately reflect the organization’s financial position, activities, and cash flows.
• Skipping or delaying audits can lead to compliance problems and damage the organization’s reputation.
• Kelly has expertise in audit, review, and compilation services across diverse industries, including nonprofit organizations, construction, manufacturing, and technology.
• PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network.
• This standard focuses on classifying net assets into those with and without donor restrictions, helping stakeholders assess financial health and resource allocation.

These statements organize and summarize data in consistent ways to provide different insights into your organization’s financial situation. While for-profit organizations orient their accounting practices around the goal of turning a profit, nonprofits’ main goal in accounting is financial transparency with donors, stakeholders, and the government. This allows these organizations to remain tax-exempt and use their revenue to effectively further their GAAP for Nonprofits missions. Partnering with a qualified Certified Public Accountant (CPA) firm like Brady Ware is an essential strategy for navigating the complex world of nonprofit audits.

In such cases, the non-profit should recognize revenue only to the extent of the fees or amounts it is entitled to retain. For gross vs net example, if a non-profit collects $10,000 for a specific program of another charity and charges a 5% administrative fee, it should only recognize $500 as revenue. These disclosures offer transparency concerning the financial health of the organization and demonstrate the organization’s commitment to donor-imposed conditions. Donor-imposed conditions specify a future and uncertain event that must occur before the nonprofit can gain entitlement to the funds.