Nonprofit Accounting Systems vs Commercial Accounting Systems

nonprofit accountingCommercial organizations have accounting systems that measure product, division and company performance by profit and loss. Accounting systems for nonprofit organizations and governmental agencies (collectively referred to as 'nonprofits') must also measure incoming and outgoing monies, but they must do more than just that. Nonprofits have social and legal responsibilities that extend far beyond spending their money wisely.

Fund accounting systems help them meet those responsibilities, in ways that commercial systems cannot, by:

  • Keeping a formal budget as part of the organization's books (it may also be a legal document)
  • Tracking and reporting accounting records separately for different funding sources, grants, departments, programs or functions (and being able to allocate expenses across these groupings)
  • Tracking and reporting across different time periods (frequently not an annual basis), which often span multiple fiscal years
  • Keeping funds separately, according to donor restrictions
  • Measuring the success of fund raising events, programs or departments
  • Tracking the ratio of overhead to program usage
  • Tracking encumbrances; and, Producing specialized reports, including SFAS 117, for different internal and external audiences

Not only do nonprofits have to comply with the stringent reporting standards of the Financial and Governmental Accounting Standards Boards (FASB & GASB), but they must also respond to requests from many private and public granting agencies that require detailed reports in their own unique format.
 
Once nonprofits reach a certain size and have multiple funding sources, most of them find that commercial accounting software will not meet these special tracking and reporting requirements.
 
Nonprofits also find that attempting to use commercial accounting systems to perform these unique nonprofit accounting functions is impractical and difficult, as well as expensive to maintain. They often use spreadsheets to try to compensate for the software's missing functionality; however, spreadsheets can be very time-consuming and can easily introduce reporting inaccuracies. The accounting system quickly becomes too complex for anyone to follow. Also, custom modifications or overlays to commercial software pose high up-front costs and are very expensive to maintain and support.

Nonprofits find that the only effective way to fulfill their unique accounting requirements is with a good Fund Accounting System, because it is developed specifically for their specialized tracking and reporting needs.

To match your nonprofit accounting needs to the features software vendors offer, try our free Accounting Software Selector Tool.