Overview of NGO Accounting

An NGO is an entity primarily focused on social welfare, rather than profit-making. NGO Accounting refers to the system of recording and reporting all financial transactions within an NGO. It involves selecting the appropriate accounting methods, understanding compliance and tax responsibilities, and generating financial statements accordingly. The primary goal of an NGO is not to generate profit but to provide services for societal welfare. It receives contributions from individuals and entities without the expectation of returns. Therefore, NGO Accounting is a distinct system tailored to record and report financial activities.

Unlike for-profit organizations, NGOs are typically exempt from taxes. As a result, the focus is on keeping overhead costs low to ensure that funds are used effectively in programs or services benefiting society.

NGO Accounting relies on three key reports in the financial statements: a Statement of Financial Position, a Statement of Activities, and a Statement of Functional Expenses.

NGOs can choose between two accounting methods: cash accounting and accrual accounting. Cash accounting records transactions when money changes hands, while accrual accounting records transactions when they occur. Accrual accounting is considered more accurate.

Components of NGO Accounting

Several aspects of NGO accounting differ from those of profit-driven organizations. These differences include:

1. Donations: NGOs receive both general and specific donations. General donations can be used for any purpose, while specific donations must be used for the purpose designated by the donor.
2. Programs: NGOs often run specific programs for societal welfare. Accounting for these programs is done separately to track surplus or deficit.
3. Equity: Unlike for-profit companies, NGOs do not have equity or shareholders. Instead, net assets are used in place of equity in the financial position statement.
4. Statement of Activities: This replaces the profit and loss statement of profit-driven organizations, calculating surplus or deficit rather than profit or loss.
5. Statement of Functional Expenses: This report details the allocation of expenses across different funds and categories.

Basis of NGO Accounting

Key aspects of NGO accounting include:

1. Historical Basis: Accounts are prepared on a historical cost basis, though assets are re-valued to reflect current values.
2. Accrual Accounting: Revenues, grants, and donations are recorded when received, and expenses are recognized when incurred.
3. Grant and Donation Recording: Donations are recorded separately from operating revenues and are classified as contributed capital or donated equity.
4. In-kind Contributions: Contributions made in-kind are recognized through journal entries, supported by appropriate documentation.

Fund Accounting

Fund accounting helps NGOs allocate funds to various projects, ensuring resources are used efficiently. Funds are categorized into:

• Restricted Funds: Allocated for specific projects or activities.
• Temporarily Restricted Funds: Funds allocated for a specific time period, after which they become unrestricted.
• Unrestricted Funds: Also known as the Annual Fund, these funds can be spent on any need within the NGO.

Advantages of NGO Accounting

1. The Statement of Functional Expenses enables detailed tracking of funds.
2. Program-specific accounting helps monitor the effectiveness of each initiative.
3. NGO accounting provides transparency and clarity in financial management.

Disadvantages of NGO Accounting

1. NGO Accounting may be more susceptible to fraud than other accounting systems.
2. Improper accounting may result in funds being mismanaged or not properly accounted for.

Books and Documents Maintained for NGO Accounting

Key documents include:

• Vouchers for cash and bank payments/receipts.
• Daily petty cash summary.
• Journal vouchers and ledger.
• Fixed assets register.
• Attendance register, grant budgets, and utilization certificates.
• Copies of contracts, agreements, and purchase quotations.
• Donation receipt registers.

NGO Accounting Statements and Reports

NGOs must adhere to the Generally Accepted Accounting Principles (GAAP). Key reports include:

• Budget: A planning document used to predict expenses and allocate resources for the NGO.
• Statement of Financial Position: A balance sheet showing the assets and liabilities of the NGO.
• Statement of Activities: Shows revenue and expenses over a given period.
• Statement of Functional Expenses: Categorizes expenses into program, administrative, and fundraising costs.
• Statement of Cash Flow: Tracks cash inflows and outflows to determine the NGO's ability to cover expenses.
• Form 990: An annual tax form NGOs must file to demonstrate compliance with tax-exempt regulations.

Fastzeal Support in NGO Accounting

At Fastzeal, we specialize in providing comprehensive NGO Accounting support. Our expert team will guide you through every step to ensure your financial operations are transparent, efficient, and compliant with regulations. Follow these steps to get started:

1. Purchase a Plan for Expert Assistance
2. Submit Queries Related to NGO Accounting
3. Complete Eligibility Criteria for Preliminary Screening
4. Complete Procedural Actions
5. Get Your Work Done Efficiently