Accounting Made Simple: What Every Not-for-Profit Board Should Know

 

Accounting Made Simple: What Every Not-for-Profit Board Should Know

What is Accounting? 

Accounting is simply the reporting of financial transactions that relate to a business. It is the process of identifying these transactions and systematically categorising and recording them in accordance with guidelines (laws). 

The role of an accountant is to ensure that all financial activity for a business has been recorded in a certain period of time (usually the financial year or calendar year) and reported in the financial statements (discussed briefly below). The role of an accountant can be broken up into three broad categories.  

Decoding the Lingo

Accounting is full of lingo and even accountants use different words to describe the same thing, no wonder it can get confusing. This section will hopefully decode some of the accounting lingo for the uninitiated. 

The first thing every board should understand is that there are two methods of recording income and expenses - cash v accrual accounting. 

Type	How it Works	Benefits	Limitations	Example
Cash	Records transaction only when cash is received or paid.	This method is usually used by small businesses as it is more straightforward.	Does not provide an accurate picture of total liabilities incurred, but not yet paid for.	A $20,000 grant received in July is recorded in July.
Accrual	Records income and expenses when they are earned or incurred, even if cash has not been received or paid.	Assists in providing a full financial picture of business.	It is more complex and time consuming as it tracks money before it is actually received or paid.	A $20,000 grant approved in June but received in July, is recorded in June.

More lingo that boards need to decode are: 

• Assets: What the organisation owns (cash, property, equipment, investments).

• Liabilities: What the organisation owes (loans, unpaid bills, grants received in advance).

• Equity / Net Assets: The difference between assets and liabilities — the organisation’s accumulated wealth or reserves.

• Revenue: Income from grants, donations, fees, or sales.

• Expenses: Costs of running programs, wages, operations, and administration.
  Surplus / Deficit: What’s left when you subtract expenses from revenue — similar to profit or loss.

The Big 3 Financial Statements? 

There are three core financial statements, each telling part of the business's story and need to be read together in order to get the full picture of the financial status of the organisation. 

Financial Statement	What It Is / What It Tells You	Why It Matters to the Board
Profit and Loss Statement (P&L)	Shows how much money the business made or lost over a period (income minus expenses).	Helps the board understand if the business is profitable and where money is being earned or spent.
Balance Sheet	A snapshot of what the business owns (assets), owes (liabilities), and what’s left over (equity) at a specific point in time.	Gives the board a clear view of financial health and stability—what the business has and what it owes.
Cash Flow Statement	Tracks actual cash coming in and going out, showing how money moves through the business.	Helps the board see if the business can pay its bills and fund operations, even if it looks profitable on paper.

Key Takeaways

Getting comfortable with accounting terms like assets, liabilities, equity, revenue, and expenses is essential for every board member. These words form the foundation of financial understanding and help translate complex reports into meaningful insights. When board members grasp what these terms mean — and how they connect through the financial statements — they can ask better questions, identify risks early, and make more informed decisions that protect the organisation’s future.

Can I confidently explain what key financial terms like “liabilities” or “equity” mean — and what they reveal about our organisation’s financial position?

Next in the Series: How to Read a Profit and Loss Statement (Income Statement): A Guide for NFP Boards