Accounting Terms to Know

Accrual-Basis Accounting – An accounting method where revenue and expenses are recorded when incurred versus when a payment is received or made.

Accounts Payable – Accounts payable (AP) is short-term debt that an organization owes to its vendors for products received before a payment is made.

Accounts Receivable – Accounts Receivable (AR) is the balance of money due to an organization for goods or services delivered or used without being paid for by the customer. Examples include Contributions Receivable & Grants Receivable.

Amortization – Paying off a debt over time in equal installments. The term is used for two separate processes: amortization of loans and amortization of assets.

Audit – Occurs when a third-party auditor or auditing firm examines your nonprofit’s financial statements, records, transactions, accounting practices, and internal controls.

Balance Sheet/Statement of Financial Position – A balance sheet is essentially a report that shows a snapshot of your organization’s financial health. It measures your  assets, liabilities, and net assets in a single document at a point in time.

Bank Reconciliation – a bank reconciliation is the process by which the bank account balance in an entity’s books of account is reconciled to the balance reported by the financial institution in the most recent bank statement. Any difference between the two figures needs to be examined and, if appropriate, rectified.

Cash-Basis Accounting – An accounting method where revenue and expenses are recognized at the time cash is received or paid out.

Chart of AccountsA chart of accounts is the backbone for all accounting procedures. Accounting is based on the reports and statements that organizations use to track their finances. Your COA lists out these various accounts and ledgers to keep track of all financial transactions and elements.

Coding – The process of assigning numbers to data to organize transactions. Accounting codes are not universal as every organization may create its own coding system in accounting tailored to its own organizational needs.

Current Assets – A current asset is an item on an organization’s balance sheet that is either cash, a cash equivalent, or which can be converted into cash within one year. Examples include: cash, short term investments, prepaid expenses, accounts receivable, and inventory.

Current Liabilities – An organization’s debts or obligations that are due to be paid to creditors within one year, such as accruals.

Deferred Revenue – is a liability on the organization’s balance sheet that represents a prepayment by its customers for goods or services that have yet to be delivered.

Depreciation – an accounting method used to allocate the cost of a tangible or physical asset over its useful life. Depreciation represents how much of an asset’s value has been used. Typically done with fixed assets.

Direct Costs – a price that can be directly tied to the production of specific goods or services.

Donor Advised Fund – or DAF, is a giving account established at a public charity. It allows donors to make a charitable contribution, receive an immediate tax deduction and then recommend grants from the fund over time.

Fixed Assets – Assets which are purchased for long-term use and are not likely to be converted quickly into cash, such as land, buildings, and equipment.

Functional Expense Report – is a financial report used by not-for-profit organizations to present the functional classification of expenses in addition to the natural classifications of expenses. Functional expense classification further classifies natural expenses into three areas: program, management and general, and fundraising.

Forecast – An estimate of future financial outcomes for an organization. It informs major financial decisions, such as whether to fund a capital project, undertake a staffing increase or seek funding. Organizations use material information from their financial forecasts on their balance sheets and other disclosures.

Form 990The Form 990 series is a series of Annual Compliance forms filed with the IRS and select states. Tax-exempt organizations must file a 990 each year to maintain their status. The IRS, donors, and watchdogs use these forms to ensure organizations remain reliable and honest.

Grants – A nonprofit grant, sometimes referred to as a fundraising grant, is a financial donation given to an organization. Grants are typically given by a foundation, corporation, or government agency.

Income statement/Statement of Activities  – This report shows your organization’s revenue and expenses for a specific time period. It’s also used to categorize your revenue and expenses.

Indirect Costs – Indirect costs include costs which are frequently referred to as overhead expenses (for example, rent and utilities) and general and administrative expenses.

In-Kind Contribution – In-kind donations are non-monetary donations made to nonprofit organizations. These nontraditional donations include the transfer of any asset, usually goods or services, and can be contributed by individuals or other organizations and companies.

Journal Entry – a method of recording a business transaction or adjusting balances.

Liability – Something a person or organization owes, usually money. They are settled over time through the transfer of economic benefits including money, goods, or services.

Liquidity – The degree to which a security can be quickly purchased or sold in the market.

Management Letter – A form letter written by a company’s external auditors, which is signed by senior company management. The letter attests to the accuracy of the financial statements that the company has submitted to the auditors for their analysis.

Net Assets – The total assets of an organization, minus its total liabilities. Also referred to net worth.

Pledge – Donors’ promises to give a certain amount of money to an organization over a set amount of time. Donors can make pledges that are conditional, meaning payment will only be made once a condition is met, or unconditional with no strings attached.

Prepaid Expense – Future expenses that are paid in advance. After the benefits of the assets are realized over time, the amount is then recorded as an expense.

Release from Restriction – The process for moving funds from the “with donor restriction” category to the “without donor restriction” category.

Statement of Cashflows – A statement of cash flows is a financial report that shows how cash moves in and out of an organization on a regular basis. These sections include the cash flows from: operating activities, investing activities, and financing activities.

Unrealized Gain or Loss – An unrealized gain is an increase in the value of an asset or investment that an investor has not sold, such as an open stock position. An unrealized loss is a decrease in the value of an ongoing investment. A gain or loss on an investment is realized when it is sold.

Working Capital Ratio – Often used by for-profit and nonprofit organizations alike to measure the short-term financial health of the organization. You may also hear it referred to as the “current ratio.”