Advantages for Nonprofits
The biggest advantage of accrual-basis accounting is that it provides nonprofits with a more accurate picture of the group’s finances than cash accounting does. Using accrual-basis accounting, nonprofits can see expected payables and receivables and get a “big picture” of their financial health that helps them more accurately analyze and plan for growth. Budgeting is easier with the accrual method because revenues and expenses can be more easily anticipated. The accrual basis of accounting also is the only method that complies with GAAP(Generally Accepted Accounting Principles) and thus, facilitates larger nonprofits’ preparation of required financial statements. As nonprofits engage with large donors, foundations and government agencies, accrual-basis accounting is the only method that will support the audits and financial documents required by those funders.
- Offers accurate financial overview
- Shows expected payables and receivables
- Simplifies budgeting and planning
- Complies with GAAP for statement preparation
- Meets audit and document requirements for major funders
Disadvantages for Nonprofits
Accrual-basis accounting is much more complicated than cash-basis. Nonprofits that use accrual accounting need the support of specialized software and expert accounting staff in order to accurately track the many transactions and “reversals.” Reversals occur because, when a donor makes a pledge, for example, that amount is immediately recognized as revenue under accrual accounting — but the donor may actually send a different amount. When the monies are received the original estimate of the donation is reversed and the actual amount recorded, so that the books are accurate and nothing is counted twice. This continuous process of estimates and reversals is one of the main things that makes accrual-basis accounting so complex. And since the receipt of revenue or the payout of expenses may not sync with the organization’s cash on hand in this method, additional cash flow statements become necessary to get an accurate picture of the group’s cash position. Finally, should a large enough portion of donors fail to follow through with their commitments, the nonprofit will need to adjust any plans it made based on those pledges.
- More complex than cash-basis accounting
- Requires specialized software and expert staff
- Involves complex transactions and reversals
- Estimates and reversals add to complexity
- Cash flow statements needed for accurate cash position
- Adjustments necessary if donors don’t fulfill pledges