If you’re operating a nonprofit organization or have a role of responsibility within, you should be familiar with a few certain key terms to understand its financials better.
1. FINANCIAL STATEMENTS
It’s important to be familiar with the various financial statements that a nonprofit organization uses in its accounting services in Dubai, as the titles differ slightly from for-profit entities. These include:
- Statement of Financial Position. This statement provides an overview of the nonprofit’s finances at a given point in time. It is similar to a balance sheet.
- Statement of Activities. This statement details the revenues and expenses for a nonprofit organization within a reporting period. It is similar to an income statement.
- Statement of Functional Expenses. This statement provides greater detail of the expenses that a nonprofit incurs and lists the various items that fall under each functional expense category (such as rent, utilities, salaries, benefits, and so forth). It is unique to nonprofits.
- Statement of Cash Flows. This statement reports the change in a nonprofit’s cash and cash equivalents during a reporting period. It is the same as a for-profit entity.
2. FUNCTIONAL EXPENSES
There are three basic functional expense classifications:
- Program Expense
- Management and General Expense
- Fundraising Expense
Expenses are classified based on how they are used within the entity. If the expense furthers the mission of the nonprofit, it is treated as a program expense. If the expense is not specifically used to further the mission of the nonprofit, it is treated as either a fundraising or a management and general expense.
3. GRANTS VS. CONTRIBUTIONS
The key differences between a grant and a contribution are that:
- Grants are usually tied to a specific activity, whereas contributions can often be used as the nonprofit sees fit.
- Grants may have a deadline for their use, while contributions typically don’t come with such a condition.
- Grants often require reporting to the grantee throughout the grant period, as opposed to contributions that do not have any reporting requirements.
4. RESTRICTIONS VS. CONDITIONS
Some contributions do come with restrictions from the donor. These restrictions may be related to the contribution’s purpose (e.g., the money can only be used for a particular project), the location at which the contribution, or the time frame of audit firms in Dubai is used or received.
5. BYLAWS
A nonprofit’s bylaws are important for at least two reasons:
- They are a legal document that helps to establish the nonprofit as a recognized corporation. Among other things, this allows the nonprofit to operate as a tax-exempt organization.
- They function as a “roadmap” for the nonprofit’s actions. Bylaws are a type of agreement between the corporation and its owners that the nonprofit organization will conduct itself according to a prescribed pattern of behavior.
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