In a nonprofit organization it is important to make sure we are utilizing the best accounting system for our organization. Organizations that are non-profit are expected to provide financial statements that are based upon the accrual method of accounting. The accrual method of accounting differs from cash basis accounting. In the accrual method, income is recognized when services are rendered (Kokemuller, 2013).
The accrual method focuses on recording revenue and expenses when the transaction occurs. Cash basis of accounting records income as money is received. An example of cash basis accounting is when a non-profit uses their checkbook to record debits and transactions as they occur. Accrual accounting is important because it ensures accountability in a non-profit organization.
In an accrual system revenue does not equal cash. Expenses and revenue in an accrual system is based on the time frame in which they were earned. The cash basis accounting is based upon the actual payment. Revenue on an accrual system is not related to the cash basis system as cash accounts are.
The statement of cash flow in the financial management of a human services organization is very important. This statement provides a financial record of the cash received and spent within a specific time period, for example on a yearly quarterly basis. The non-profit and human services organizations are kept informed by the statement of cash flow and how finances are managed and disbursed.
In the financial management of a nonprofit organization it is important to understand the difference between accrual and cash basis methods of accounting. The accrual method is used most often in nonprofit organizations because it demonstrates the correlation between costs and income the most precisely.
1. Kokemuller, N. (June, 2013). Does Revenue Equal Cash In An Accrual System? Retrieved from: http://smallbusiness.chron.com/revenue-equal-cash-accrual- system-68175.html