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.
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Bottom Line
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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Our church uses the accrual method but our treasurer is inexperienced and presents the monthly income and costs in broad strokes. My concern is that if each transaction is not carefully documented we could lose our status. Should I be concerned?
Tim,
I’m not sure what you mean by “Our treasurer is inexperienced and presents the monthly income and costs in broad strokes.” If you mean he is presenting inaccurate financial statements that are misleading and do not reflect the current financial health of your church, then yes, you should be concerned.
Does a cash-basis non-profit church need to depreciate its building? If yes, how it’s reported the depreciation expenses on Form 990 ez? I am confused since under cash basis, long term assets are not capitalized and no depreciation is recorded, right? Thanks
Tam
Kim,
To be in compliance with Generally Accepted Accounting Principles, you should record depreciation for the building. The expense is recorded as Other Expense and the value of the asset is recorded under Land and Buildings on the Balance Sheet Part II of the 990EZ.
Joe Scarano