Streetsmart Financial Basics for Nonprofit Managers

Chapter 8Nonprofit Accounting: Acknowledging the Strings Attached

If the measurement of profitability recedes as a driving force for nonprofit accounting, accountability comes to the foreground. Entities whose mission is to make a profit for their owners do not have to care very much about where their money comes from or how it is used, except for some fairly broad requirements imposed by lenders or the rules of securities exchange. By contrast, nonprofit corporations often need to be scrupulous about tracing both aspects of a transaction. Beginning in 1994, the way that organizations did that began to change significantly due to the adoption of the Statement of Financial Accounting Standards (SFAS) 117, a pronouncement governing nonprofits' financial statements.

Prior to 1994, a practice called fund accounting had evolved to fulfill the more stringent standards of nonprofit accountability. In financial terms, it was the single-greatest inherent difference between the two sectors in accounting and financial management. The term fund accounting refers to a loose collection of practices typically found in tax-exempt organizations years ago in which five separate groups within the tax-exempt field developed their own versions of fund accounting: (1) government, (2) hospitals, (3) colleges and universities, (4) health and human services agencies, and (5) a mix of miscellaneous tax-exempt entities.

There were also at least five types of funds and a potentially confusing presentation ...