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How Bookkeeping Impacts Nonprofit Audits in 2024?

Posted on 15/05/2024

What is Bookkeeping for Nonprofits?

Bookkeeping for a nonprofit is entering, recording, and categorizing an organization’s financial data.

Nonprofit accounting and bookkeeping involve presenting an organization’s financial records by generally accepted accounting principles (GAAP).

The Internal Revenue Service (IRS) recognizes nonprofit organizations as tax-exempt. If they want to maintain this status, they must keep accurate records.

Nonprofit vs. For-Profit Accounting:

Before delving into nonprofit bookkeeping, we must first understand the distinction between nonprofit and for-profit entities.

Individuals, corporations, or partnerships that do business for a profit are considered for-profit. In this case, shareholders, investors, tax authorities, management, and suppliers are all interested in the entity’s financial situation, which is what for-profit accounting focuses on.

Nonprofit organisations exist solely for educational, social, professional, charitable, health, or other non-profit purposes. While business stakeholders are concerned with profits, nonprofit stakeholders and board members want to know if resources are being properly used and allocated.

Both for-profit and nonprofit organizations typically follow generally accepted accounting principles (GAAP). These are accounting rules that standardize the reporting of financial statements.

Organizations such as the American Institute of Certified Public Accountants (AICPA) and the Financial Accounting Standards Board (FASB) define these principles and provide reliable resources for both nonprofit and for-profit organizations.

How to Do Bookkeeping for Nonprofits:

Each non-profit organization is unique. However, all nonprofits must take several steps to ensure data quality and reliability.

Find a Nonprofit-Friendly Bookkeeping Solution.

All financial transactions must be recorded for an accurate bookkeeping and accounting system to function properly. There are several ways to accomplish this.

To record transactions, use a physical ledger, accounting software, an Excel spreadsheet, or bookkeeping services.

Whatever choice you make, you should be able to do the following:

  • Organize receipts for in-kind contributions and donations.
  • Record expenses and payouts.
  • Record petty cash transactions, payroll, and accounts receivable/payable.

The option you choose should also allow you to perform fund accounting (i.e., use separate accounts for different purposes). Nonprofits have strict guidelines for funding sources and how they should be spent. For example, large organizations such as universities frequently have dozens, if not hundreds, of bank accounts for various purposes such as scholarships, tuition, projects, and so on.

You should never use your personal bank account to fund your nonprofit organization. All transactions should be routed through dedicated accounts. You can always ask your bank about your account options and choose those designed for nonprofits.

Additionally, you have to appoint a treasurer or financial officer with knowledge of nonprofit bookkeeping and proficiency with specialist accounting software.

Reconcile bank accounts.

Bank reconciliation is the process of verifying that an organization’s records (balance sheet, general ledger account, cash flow, etc.) are correct. A nonprofit reconciles bank accounts by comparing the amounts recorded to those on the bank statements.

Depending on the size of your nonprofit organization and the number of transactions, you may want to perform bank reconciliations once a month. This way, you can detect potential bank errors, track cash flow, and avoid fraud.

Use purchase orders.

As previously stated, nonprofit organizations must adhere to strict guidelines to justify their financial position and fundraising expenses. Purchase orders are one option for accomplishing this.

A purchase order is a document that a buyer (in this case, a nonprofit) sends to a supplier to confirm the purchase of various goods and services. The vendor signs this document and confirms all aspects of the transaction.

Record in-kind donations.

An in-kind donation, also known as a gift in kind, is a donation of goods or services rather than money used to purchase goods and services.

For example, a lawyer may review a contract for your nonprofit without charging a fee. Even though you did not pay the lawyer, you should document this.

You can accomplish this by opening an income account for in-kind donations and recording their fair market value. If the donation is less than $5,000, you can set the value yourself. If it exceeds $5,000, you will need to hire an appraisal specialist.

Prepare an Annual Budget Plan.

An annual budget plan serves as a roadmap for nonprofits, ensuring that the organization stays on track.
The plan should be divided into two main categories: expected income sources and expected expenses. The organization determines the nature of its income sources and expenses.

Create Financial Statements.

Financial statements show how much money your nonprofit has, where it’s spent, and how it’s used. Financial statements can be prepared both automatically and manually.

Many accounting software programs can generate financial statements automatically, such as a statement of financial position. This minimizes the possibility of errors while ensuring reliability and accuracy. Of course, you can always generate financial statements manually, but this requires a significant amount of time and skill.

Nonprofits use three types of statements:

The statement of financial position, the statement of cash flows, and the statement of activities.

The statement of financial position is the non-profit version of the balance sheet. This statement explains how much a nonprofit owes, what it owns, and how much money it has left. Nonprofits, unlike for-profits, lack equity because they do not have owners, which is the primary distinction between a balance sheet and a statement of financial position. Instead, non-profits have net assets.

Some are unrestricted net assets, while others are considered restricted net assets.

A nonprofit’s cash flow statement keeps track of its cash flow and financial health. This statement details how much cash an organization generates through investing, financing, and operations.

The statement of activities, also known as the operating statement, is the nonprofit version of an income statement. It displays financial information on your revenue, expenses, and losses. This statement describes changes in net assets and is divided into two parts: unrestricted net assets and restricted net assets.

Read More: How can nonprofits use bookkeeping for financial planning in 2024?

Pay Attention to Tax Obligations.

As previously stated, nonprofit organizations have tax-exempt status, which means they are not required to pay federal taxes to the IRS under Section 501. This section governs the tax status of charities, religious organizations, and non-profits.

Before applying for tax-exempt status with the IRS, you must first register as a nonprofit with your state.

Best Practices in Nonprofit Accounting

Here are the best practices for accounting in non-profit organizations:

  • Functional expenses are necessary for operations, not profits.
  • Regularly review your budget to stay on track for goals and healthy cash flow.
  • Regularly implement internal controls, even with a small number of employees.
  • Regularly audit the organization to ensure up-to-date information and adherence to accounting standards.
  • Hire an executive director or other nonprofit leaders to oversee operations.
  •  Maintain accounting responsibilities at all times.
  • Use specialized accounting software.

Key Takeaways

Nonprofit organizations have different bookkeeping practices because their focus is on the nonprofit mission rather than profit. While basic bookkeeping principles may apply in both cases, seemingly minor details can make a significant difference in how a nonprofit’s finances are handled.

Nonprofit organizations risk losing their tax-exempt status if they fail to follow accounting principles, so proper bookkeeping is critical. As a result, it may be best to invest in high-quality accounting software that can automate routine tasks, generate reports, and reduce the possibility of errors.

Our Bookkeeping Experts are here to help.

Topics: Non Profit Organization




About the Author:

Pramod has over 11 years of experience relating to finance and accounts in diversified industries. He is an expert in resource and process optimization resulting in greater operational efficiencies.

Author can be reached at [email protected]

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