Size matters when choosing cash basis vs accrual basis accounting for nonprofits. Simple cash-based accounting works best for small organizations. Larger organizations with multi-funded companies benefit from accrual accounting.
Cash vs Accrual Accounting Definitions
If a nonprofit organization uses the cash method of accounting and preparation of its financial statements, it recognizes income and expenses when they occur. In other words, the nonprofit would record income when it receives the cash and not when it is actually earned. It would also record expenses at the time it pays their bills rather than when it incurred the expense.
The accrual method of accounting focuses on when revenue was actually earned and when expenses were actually incurred. For example, let’s say you hire a lawyer to prepare contracts in June, but the bill is received in July and paid in August. Cash vs accrual handles this differently. With cash accounting, you record the expense in August. With accrual accounting, you record the expense as a payable in June, the date the expense incurred.
Best Method for Budgets
The other main difference between accrual accounting vs cash accounting is the ability to budget accurately. The accrual method of accounting allows for better budgeting and planning because it looks at when expenses are incurred and revenue earned and not when cash is paid or received.
Choosing cash vs accrual accounting for your nonprofit comes down to size and funding. The cash-basis method of accounting is the easiest method, but not the most accurate. If you present financial statements that don’t reflect uncollected receivables, or does not include a folder filled with unpaid bills, the financials will not be accurate and will present a misleading financial picture.
The accrual-basis accounting method should be used by organizations with larger amounts of funding, paid staff, and plans to raise additional funds from larger donors such as foundations or government entities. Generally accepted accounting principles also require the use of the accrual method of accounting.
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