Project Accounting for Non-Profit Organizations: Accounting Principles

In these challenging times, as we face new challenges due to Russia's full-scale military aggression against Ukraine, the role of the non-profit sector in overcoming its consequences and assisting vulnerable populations is growing. The entire civilized world is helping Ukraine, particularly through the financing of social projects by international donors implemented by Ukrainian NGOs. However, grantors, when funding them, require a transparent system of accounting and reporting from organizations. There are also other requirements for spending funds:

• targeted spending,
• adherence to procurement rules,
• prohibition of funding certain categories of expenses, etc.

Donor Requirements for Accounting and Reporting

The main requirements include a clear accounting system that ensures accurate reflection of all project-related income and expenses. Accounting should be structured in such a way that the sources of funds and directions of financial use can be easily traced. Furthermore, donors often insist on regular reporting: both financial and programmatic. This means that the organization must not only detail how funds were spent but also report on the achieved project results.

Key donor requirements for accounting:

• Targeted use of funds.
• Adherence to procurement rules.
• Prohibition of funding certain expenses.
• Timely submission of financial and programmatic reports.

Differences Between Accounting in Non-Profit and Commercial Organizations

Accounting in non-profit organizations has significant differences from accounting in commercial enterprises. The primary goal of commercial organizations is to generate profit, while non-profit organizations work for the benefit of society, and all received funds are directed towards the implementation of social projects. Consequently, non-profit organizations conduct accounting and reporting not to assess financial success, but to demonstrate the targeted use of resources.

Key differences:

• Absence of profit-making objective.
• Focus on targeted use of funds.
• Mandatory reporting to donors and government bodies.
• Specific requirements for transparency and accountability.

Principles of Accounting for Non-Profit Organizations

Non-profit organizations must adhere to several important principles when conducting accounting. Firstly, accounting must be transparent, allowing all interested parties to verify how financial resources are used. Secondly, clear segregation of funds must be ensured: money designated for one project should not be used for another. Furthermore, accounting in non-profit organizations must comply with the requirements of national legislation and donors.

Key principles:

• Transparency and accountability.
• Segregation of funds.
• Adherence to donor requirements.
• Timely preparation of financial reports.

Main Stages of Project Accounting

Project accounting in a non-profit organization consists of several important stages. In the first stage, even before the project implementation begins, a budget must be developed and approved. Subsequently, during project implementation, ongoing accounting of all financial operations is conducted. This includes receiving and recording funds, accounting for expenses, procurements, and salaries. After project completion, the organization prepares a final financial report, which reflects all expenses and compares them with the approved budget.

Accounting stages:

1. Budget preparation.
2. Ongoing accounting of expenses and income.
3. Preparation of interim reports.
4. Preparation of the final report.

Types of Required Accounting Documentation for Non-Profit Organizations

For accounting and reporting, a non-profit organization must ensure proper documentation. Every financial transaction must be supported by a corresponding document to ensure transparency and accountability.

Main types of documents:

• Project budget and estimate.
• Payment orders and bank statements.
• Acts of completed works and invoices.
• Reports on the targeted use of funds.

Who are the Users of Project Accounting

The receipt of subsequent tranches and donors' willingness to fund new projects directly depend on the timely, accurate, and complete reporting of expenses by NGOs. If funds are spent improperly, the donor may not recognize these expenses and demand their return.

Who Supports Project Accounting — Requirements

Most donors require an independent audit upon project completion. Auditors typically communicate with the project accountant or financial manager. Whether the reporting will be confirmed without comments and recommendations depends on their qualifications.

Therefore, the accountant (financial manager) plays a key role in the successful implementation of a project and in the ability to secure funding for subsequent projects. It is important for the NGO head to carefully select specialists for this. After all, NGO accounting in general and individual project accounting differ. A project accountant must possess specific knowledge and skills, particularly regarding donor requirements, which an NGO's chief accountant may not have.

Advantages of Cooperation with UHY Prostir

UHY Prostir specialists have significant experience in accounting for NGOs and individual entrepreneurs. Over the past 15 years, they have become thoroughly familiar with the requirements of international donors represented in Ukraine. Furthermore, they have extensive experience in conducting independent project audits, which allows them to understand what auditors will focus on after project completion.

Our specialists not only conduct accounting and prepare project reports but also help NGO management resolve many related important issues:

• Collection, preparation, analysis, and adjustment of primary documents related to project implementation.
• Consultations on the employment of full-time staff and other individuals working on the project.
• Consultations on potential tax and accounting risks associated with project operations, as well as risks of losing "non-profit organization" status. One of the most common risks is exclusion from the Register of Non-Profit Organizations with subsequent additional assessment of corporate income tax.
• Control of fund balances within individual budget lines.
• Consultations on the acceptability or unacceptability of expenses from the perspective of donor requirements and the grant agreement.
• Communication with donors on financial matters, including after project completion.

What Determines the Cost of Services

The price of services depends on the following factors:

• overall project budget,
• project implementation period,
• nature of planned activities,
• presence or absence of sub-grants,
• frequency of reporting to donors,
• additional tasks to be assigned to the accountant.

In our experience, the cost of such services can be comparable to the monthly salary of a project accountant for the duration of its implementation, and in some cases, even lower. Moreover, we are ready to provide services that go beyond ordinary bookkeeping and financial reporting.

Furthermore, with several specialists, we can guarantee uninterrupted project service, regardless of possible force majeure circumstances such as illness, relocation, or dismissal of the accountant.

Therefore, by choosing UHY Prostir specialists, you can be confident in complying with all donor requirements regarding financial reporting and targeted use of funds, as well as save on service costs, directing the saved funds to more important project needs.

Any questions? Call or write to us.