Accounting information falls into two general categories: financial and managerial. The main purpose of financial accounting is to provide information to outside parties; managerial accounting provides information to an organization’s managers.
In some cases, the recipient of an organization’s financial statements can prescribe the principles and rules used to prepare them. The result is a set of special-purpose reports. Nonprofit organizations, for example, must furnish information annually to the Internal Revenue Service in a specific format, using a report called Form 990. IRS Form 990 filings provide a detailed breakdown of an organization's revenues and expenses, including compensation paid to executives and outside individuals and companies that do business with the organization. The filings also indicate whether the organization has any for-profit or not-for-profit affiliates and whether executives receive any compensation from those affiliates.
Similarly, some organizations must prepare special reports for their third-party payers, governed by some specific guidelines. When recipients do not prescribe the principles and rules; the resulting reports are called general-purpose financial statements. A nonprofit organization’s annual report usually includes a set of general purpose financial statements. Indeed, some nonprofits provide financial reports on the Internet. 1
The preparation of general-purpose financial statements is governed by a variety of rules, called Generally Accepted Accounting Principles, or GAAP. By following GAAP, an organization attempts to ensure that the information in its general purpose financial statements is reasonably comparable, both over time and with other organizations. To help achieve this comparability, the general purpose financial statements are subject to audit by an independent auditor, usually a certified public accountant. The organization must follow GAAP if it is to obtain a satisfactory auditor’s opinion on its financial statements.
Although the principles governing the preparation of financial statements are largely the same for both business and nonprofit organizations, there a few important differences. This Note provides an overview of GAAP as it is applied to nonprofit organizations. We begin with a discussion of the three main standard setting bodies, followed by one section on each of the three main categories of nonprofit organizations: private nonprofits, governments other than the federal government, and the federal government.2 As this note indicates, the accounting principles for each of these groups differ considerably.
STANDARD SETTING BODIES
Four bodies set standards for nonprofit organizations. The Financial Accounting Standards Board (FASB) sets GAAP for nongovernmental organizations, both business enterprises and nonprofits. The Governmental Accounting Standard Board (GASB), sets standards for state and municipal government, and for similar organizations. The Federal Accounting Standards Advisory Board (FASAB) sets standards for federal government agencies. And the Congress sets its own standards for certain types of accounting transactions. The standards promulgated by these boards differ from one another, partly because of inherent differences among the kinds of organizations affected, and partly because members of each rule-making body have different opinions as to the best method of accounting.
STANDARDS FOR PRIVATE NONPROFIT ORGANIZATIONS
Until recently, there were separate standards for four different categories of private nonprofit organizations . . .
1 See Simon Petravick and John Gillett, “Financial Reporting on the World Wide Web,” Management Accounting, July 1996, for a discussion of some of the more important considerations in doing so. These include designing financial statements for on-screen viewing, allowing users to request additional information via e-mail, and using generally-accepted software.
2 The discussion assumes that readers are familiar with the basic principles of accounting. For readers who do not have this familiarity, an introduction to the basics of financial accounting can be found in Robert N. Anthony and Leslie K. Pearlman, Essentials of Accounting, 7th edition, Prentice-Hall, 2000. This is a programmed text focusing on accounting in business organizations. Readers who are familiar with the basics of accounting, but who want a refresher, should see David W. Young, Primer on Financial Accounting, Edition 1.2, Cambridge, MA., The Crimson Press Curriculum Center, 2002.