Which Accounting Method Is Good for Your NGO?
As per the experts at Blackbaud, “Nonprofits are held to a high standard of accountability and transparency—and are required to comply with industry accounting and reporting standards to maintain nonprofit status.” Choosing which accounting method is right for your charity or nonprofit can be a bit confusing—especially you haven’t had much exposure to this subject before. In this article, we’ll go over some of the pros and cons of each approach so that you can decide which one is best suited for your organization. Choosing right type of accounting software is also an important factor and in this process SmallBusinessHQ list of small business accounting software can help you to select right software.
Cash Basis Accounting
Cash basis accounting is the simplest form of accounting, so it’s good for small businesses. If you don’t have a lot of transactions or assets to track, this is a great option for you. Cash basis accounting does not record income that has not been received and expenses that have not been paid. It also doesn’t account for purchases or sales of inventory or fixed assets until cash is received or paid out. This makes sense if you’re a small business owner who mostly sells goods—but what if your company sells services instead?
Cash basis can be useful for charities and nonprofits as well because these organizations often don’t receive income until after an event takes place (such as when tickets are sold). Cash basis helps keep things simple since there aren’t many invoices to keep track of—only those that represent money actually coming in the door!
Accrual Accounting
Accrual accounting is the most common method of accounting, and it’s a good choice for NGOs’ fund accounting needs as well. This method uses the accrual method of accounting: rather than recording income when it’s received (as you would do with cash basis or modified cash basis), you record income when it’s earned.
Accrual accounting can be used for both nonprofits and for-profits, but there are some differences in how each handles accruals: nonprofit organizations use accruals to report donations that have been promised but not yet received; for-profit organizations use accruals to report revenue from accounts receivable (e.g., unpaid invoices).
Hybrid Accounting
Hybrid accounting is a method of recording business transactions that combine cash and accrual methods. Like the cash method, revenues and expenses are recorded when they are actually incurred. The difference is that instead of only recording sales when cash is collected from customers, you also record sales when goods are delivered, or services are provided (or at some other point in time). This type of accounting can be used by both small businesses and nonprofits because it gives them an accurate picture of their financial position throughout the year, even if some income may not be collected until later in the year.
We hope that this article has helped you to understand the basics of accounting for NGOs and how it can be done. There is no one answer to the question of which accounting method is good for your NGO, but hopefully, we have given you some useful tips on what to look for when deciding which one is right for your organization.