If you serve on a nonprofit board, you’ve probably seen those fellow members who look like a deer in the headlights when presented with financial statements. Maybe that’s even you. While everyone is recruited to serve because of a unique skill set, it’s important for all board members to understand the financial statements presented to them.

As best practices and BoardSource tell us, providing oversight is one of the board’s three key roles. This includes maintaining financial accountability of their organizations. Board members are trustees of their organization’s assets and must ensure the organization is well managed. Financial statements show whether this is the case.

Some smaller nonprofits use cash basis accounting, which operates like our personal checking accounts. An expense is recognized when it’s paid, regardless of the period the expense covers. This doesn’t present an accurate picture of what’s really going on. Accrual accounting is designed to better match revenue and expenses to give a truer picture of an organization’s financial position.

Another tricky concept is depreciation. In our personal lives we tend to think of depreciation as what happens as our cars get older. In accrual accounting, depreciation is allocating the cost of a capital purchase (think computers, furniture, a new roof—most expensive physical or technological purchases) over its useful life.

Now that you have a grasp of the trickier nonprofit accounting concepts, where can you go learn more? A great resource is Understanding Nonprofit Financial Statements, Third Edition, by Steven Berger, CPA. Another helpful resource is your organization’s auditor. Most are happy to attend board meetings and go in-depth explaining the financial statements in the audit as well as the accompanying notes.

Read the full article about financial statements by  Stephanie Cory at BoardSource.