Accounting: The process of tracking, analyzing, and reporting an organization’s finances, which, for nonprofits, focuses primarily on accountability to governments and community members.
Accounts Payable (AP): Short-term debt that an organization owes to its vendors for products received before a payment is made.
Accounts Receivable (AR): The balance of money owed to an organization for goods or services delivered or used without being paid for by the customer, which is often divided into contributions receivable and grants receivable.
Accrual Basis Accounting: An accounting method where revenue and expenses are recorded when they’re pledged or incurred, rather than when a payment is received or made.
Amortization: Paying off a debt over time in equal installments. This term can refer to loan amortization or asset amortization, which are separate processes.
Assets: Anything an organization owns, such as cash, cash equivalents, AR, property, and equipment:
- When combined, these are also known as total assets or gross assets.
- Current assets are the items in this category that can be converted into cash within one year (if they aren’t already cash).
- Fixed assets are purchased for long-term use and are difficult to quickly convert into cash.
Bank Reconciliation: The process by which the account balance in an organization’s internal records is reconciled to the balance reported by a financial institution in the organization’s most recent bank statement (i.e., any differences between those numbers are examined and rectified as needed).
Bookkeeping: The process of keeping records of an organization’s finances, although many nonprofit bookkeepers also handle other day-to-day financial tasks like invoice management and payroll processing.
Budget: A financial planning document used to predict expenses and revenue for an organization, which can either cover all of a nonprofit’s activities for one fiscal year (i.e., its operating budget) or be specific to a campaign, program, or grant.
Cash Basis Accounting: An accounting method where revenue and expenses are recognized at the time cash is received or paid out.
Chart of Accounts (COA): A financial resource that serves as a directory of a nonprofit’s financial records by organizing all accounts under the categories of assets, liabilities, net assets, revenue, and expenses, making it the foundation for all other accounting procedures and documents.
Coding: The process of assigning numbers to data to organize transactions in a COA, which is unique to each organization’s needs.
Contribution Transaction: An instance in which a nonprofit receives revenue without the contributing individual or organization getting anything in return, meaning the nonprofit can recognize the transaction as soon as the revenue is pledged.
Controller: An experienced professional who manages key financial functions for a nonprofit, focusing on efficiency and compliance.
Deferred Revenue: A liability that represents a prepayment for goods or services that have yet to be delivered.
Depreciation: An accounting process used to allocate the cost of a tangible or physical asset over its useful life, which represents how much of an asset's value has been used.
Donor-Advised Fund (DAF): A giving account established at a public charity that allows donors to make a charitable contribution, receive an immediate tax deduction, and distribute grants from the fund over time.
Endowment Fund: A source of long-term nonprofit funding typically made up of one or several large contributions that are invested to generate interest that funds specific initiatives, rather than being spent directly.
Exchange Transaction: An instance in which a nonprofit receives revenue and the contributing individual or organization gets something in return (e.g., merchandise, mission-related services, or business publicity), meaning the nonprofit can only recognize the revenue after the contributor receives what they were promised.
Fiscal Policies: Internal guidelines or regulations that govern how a nonprofit team handles its organization’s funding day-to-day. Common examples include gift acceptance, conflict of interest, expense reimbursement, and employee compensation policies.
Financial Statements: A set of four reports that a nonprofit creates internally (typically on an annual or monthly basis) to summarize its financial data in actionable ways. They include the income statement, balance sheet, cash flow statement, and functional expense report.
Forecast: An estimate of future financial outcomes for an organization that informs major financial decisions, such as whether to fund a capital project, increase staffing, or diversify revenue.
Form 1099: A federal tax form used to prepare and file income information that’s separate from wages, salaries, or tips—i.e., payments to individual contractors who work with a nonprofit.
Form 990: The annual federal income tax return document for exempt organizations, which nonprofits have to file every year with the IRS and some state governments to maintain 501(c)(3) status. There are four versions of this form:
- Form 990-N (or e-postcard), for small nonprofits
- Form 990-EZ, for mid-sized nonprofits
- Form 990 full, for large nonprofits
- Form 990-PF, for private foundations of all sizes
Form W-2: A federal tax form used to prepare and file income information for individual nonprofit employees who are paid salaries or hourly wages.
Form W-9: A federal tax form used to request tax information from a contractor that the contracting organization needs for that individual’s 1099.
Fractional Chief Financial Officer (CFO): An outsourced financial professional who focuses on financial strategy and completes many of a full-time nonprofit CFO’s duties (e.g., budgeting and forecasting), but usually on a part-time basis for a lower cost.
Fund Accounting: An accounting method that tracks the amount of money allocated to various operations at a tax-exempt organization, paying special attention to restricted funds to ensure those commitments are honored.
Fundraising Efficiency Ratio: A calculation that shows the amount of money a fundraiser generates compared to the amount the nonprofit spent to raise those funds, providing insight into the campaign’s return on investment (ROI).
Generally Accepted Accounting Principles (GAAP): A set of agreed-upon accounting standards that provide a framework for recording and reporting financial information across nonprofit and for-profit sectors to ensure consistency and comparability for all organizations in the United States.
Grant: A financial contribution to a nonprofit from a foundation, corporation, or government agency, which is typically large, restricted, and competitive to secure.
Independent Financial Audit: The most common type of nonprofit audit, in which a third-party auditor examines your nonprofit’s financial statements, records, transactions, accounting practices, and internal controls to ensure compliance and recommend improvements.
In-Kind Donation: A non-monetary contribution (i.e., of goods, services, or immaterial assets) to a nonprofit from an individual or organization.
Internal Control: A procedure specifically designed to prevent financial risk, such as having two leaders sign off on purchases over a certain amount.
Journal Entry: A method of recording a transaction or adjusting balances in an accounting platform.
Liabilities: Anything an organization owes, such as debt, AP, or deferred revenue. Current liabilities are due to creditors within the next year.
Liquidity: The degree to which a security can be quickly purchased, sold, or turned into cash.
Management Letter: A form letter written by external auditors and signed by an organization’s senior management that attests to the accuracy of the financial statements that the organization has submitted to the auditors for analysis.
National Taxonomy of Exempt Entities (NTEE) Code: An alphanumeric identifier that the IRS assigns to a nonprofit to categorize it according to its primary mission, activities, and objectives.
Net Assets: The value of a nonprofit’s assets minus its liabilities, also known as the organization’s equity or net worth.
Overhead Expenses: Also known as indirect costs, and in contrast to program expenses, these are an organization’s administrative and fundraising expenses combined.
Permanently Restricted Funds: Nonprofit revenue that has been designated for a specific purpose in perpetuity, such as an endowment.
Pledge: A promise from a donor or funder to give a certain amount of money to a nonprofit over a set amount of time, which may be conditional or unconditional.
Prepaid Expenses: Future expenses that are paid in advance and considered assets until their benefits are realized.
Program Efficiency Ratio: A financial ratio that compares the percentages of a nonprofit’s funding spent on programming vs. overhead.
Program Expenses: Also known as direct costs, and in contrast to overhead expenses, these are any expenses that specifically further a nonprofit’s mission
Program Efficiency Ratio: A financial ratio that compares the percentages of a nonprofit’s funding spent on programming vs. overhead.
Program Expenses: Also known as direct costs, and in contrast to overhead expenses, these are any expenses that specifically further a nonprofit’s mission
Restricted Funds: Nonprofit revenue that has been designated for a specific purpose by the donor or funder.
Risk: The probability that something bad (damage, injury, liability, loss, etc.) might occur at a nonprofit due to internal or external circumstances, which can be prevented or mitigated through effective risk management.
Statement of Activities (or Income Statement): A nonprofit financial statement that categorizes an organization’s revenue, expenses, and net assets to assist with future planning.
Statement of Cashflows: A nonprofit financial statement that shows how cash moves in and out of an organization through operating, investing, and financing activities.
Statement of Financial Position (or Balance Sheet): A nonprofit financial statement that provides a snapshot of an organization’s financial health by outlining its assets, liabilities, and net assets.
Statement of Functional Expenses: A nonprofit financial statement that organizes expenses into the categories of program, administrative, and fundraising costs to show how each natural expense furthers an organization’s mission.
Temporarily Restricted Funds: Nonprofit revenue that has been designated for a specific project or initiative for an agreed-upon period of time, but once the time elapses or the project is completed, any remaining funding is either released from restriction or returned to the funder.
Treasurer: A financial expert who provides oversight for a nonprofit and is usually a member of its board of directors.
Unrealized Gain or Loss: An increase or decrease in the value of an asset while it’s in an organization’s possession (the gain or loss would be realized if and when the organization sold the asset).
Unrestricted Funds: Nonprofit revenue that the donor or funder didn’t designate for a specific purpose or that has been released from restriction, so the organization can spend it freely.
Working Capital Ratio: A calculation used to measure an organization’s short-term financial health by comparing its current assets and liabilities.