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Not only are nonprofits obligated to follow the Federal Accounting Standards Bureau’s (FASB) guidelines but they must use the Generally Accepted Accounting Principles (GAAP) to do so. GAAP functions like the ground rules for accounting. it creates a consistent way to record and analyze financial statements in the accounting world.
All GAAP financial statements are formulated using the accrual basis of accounting. With this system, all transactions are recorded when they occur, regardless if cash is transmitted or not. There are a variety of GAAP princples nonprofits must follow.
Nonprofit GAAP Principles
- Cost Principle: Assets are to be recorded at their cost. Do not take into account appreciation or depreciation of the asset.
- Business Entity Concern: The Separate Legal Entity Concept outlines incorporation for a nonprofit as a separate legal entity from the owner. The advantage of incorporation is that the board and staff are not held legally responsible for lawsuits etc. It separates people from the entity and won’t hold them personally responsible for the organization’s debts or charges of misconduct.
- Objective Principle: All donated items go on the financial statements as assets. They must be given an objective value. It is recommended to seek a third party opinion to determine an object’s worth. Use sticker prices, sales invoices, property deeds, transfers of titles, Kelly Blue Book values, or a banker or creditor to establish the objective value.
- Matching Principle: Donations and revenues received as well as expenses incurred must be recorded in the same period as they’re received or incurred.
- Revenue-Recognition Principle: Recognize donations as revenue when they become unconditional.
- Expense-Recognition Principle: Expenses are reported as decreases to unrestricted net assets on the statement of financial activities.
- Full-Disclosure Principle: Any changes made to accounting methods, inventory valuation and pending lawsuits must be revealed in the notes of the financial statements.
- Consistency Principle: Keep accounting methods consistent for recording transactions throughout.