Nonprofit Bookkeeping and Accounting 101: Best Practices and Expert Tips

We know that reconciling your nonprofit organization’s books is probably not one of the parts of bookkeeping you look forward to doing. You created your nonprofit to help other people, but now you have thousands of dollars in bills and questions. Accounting plays a very important part in the well-being of your nonprofit organization. However, how will you do that?

By the end of this article, you will have a lens that gives structure to your efforts to build world-class accounting systems within your nonprofit. In this blog post, we are going to look into the differences between profit and non-profit accounting, walk you through how filing taxes works in a nonprofit organization such as a 501c3 or charity across different countries, identify effective non-profit bookkeeping software verticals, and discuss the dilemmas of nonprofit business management.

When you are capable of managing bookkeeping for a nonprofit organization, it will help to efficiently fulfil the needs of your organization and also attract more investors who can guarantee funding.

Nonprofit Accounting Overview

For a nonprofit, success may be measured in ways that do not look the same as they would for a traditional business. This is one reason why it is absolutely vital to have solid accounting practices of your own. Be sure that you manage your funds correctly.

By implementing these systems, you can ensure that the funds your nonprofit receives are managed and distributed through a process that ensures only the most critical needs are fully funded. Specific sections will be elaborated upon further down the track.

• Fund accounting is a feature of accounting systems designed specifically for nonprofit organizations.
• There is a dedicated bank account.
• A basic understanding of financial statements is necessary to understand their purpose and application.
• An understanding of the procedure for accepting and recording in-kind contributions is essential.
• A budget that is well organized and uncluttered.

Accounting Software

A dependable accounting software system simplifies the process of managing financial transactions, invoicing, monitoring expenses, generating financial reports, and tracking donor contributions, despite the possibility of manually managing everything.

Budgeting System

Nonprofit organizations must establish a budgeting system to ensure the effective and efficient allocation of their resources. Regularly update the projected income and expenses in your budget.

Financial Policies and Procedures

For nonprofit organizations, financial policies and procedures that direct the organization’s financial administration are essential. These policies should incorporate guidelines for financial decision-making, financial reporting, internal controls, and record-keeping.

Cash Management System 

Non-profit organizations should establish a financial flow management system that encompasses the management of petty cash, accounts receivable, accounts payable, and invoicing.

Donor Management System

Individuals, corporations, and foundations are the primary sources of funding for nonprofit organizations. A donor management system can be used to track donations, monitor donor engagement, and provide timely and appropriate acknowledgements.

System for Audit and Compliance

Non-profit organizations are required to adhere to a variety of laws and regulations. Implementing an audit and compliance system can establish a framework for regular evaluations of the organization’s financial practices, thereby ensuring compliance. read more: How Bookkeeping Impacts Nonprofit Audits in 2024?

Board Supervision

A board of directors, or trustees if the nonprofit so chooses to be governed under them, can also employ an accountant. Financial Reporting; Budget Approval; Strategic Financial Planning Pieces The board then proceeds to evaluate financial reports, approve budgets for the year, and offer strategic supervision of current practices with suggestions on things that should be firmly looked into or refashioned.

These systems allow non-profit organizations to be compliant with laws and regulations when it comes to stewarding their money in a clear, efficient manner.

Nonprofit Accounting Best Practices

Staying organized is crucial when it comes to managing finances. Being self-organized will prevent you from encountering complications regarding taxes, compliance, or regulations for your nonprofit. It will enable you to conserve valuable resources and time. Keep this in mind when selecting your financial situation.

Nonprofit organizations typically employ a financial officer or treasurer. To achieve success, your treasurer will require the assistance of accounting and ledger tools. The following are the tools that your treasurer or financial officer should utilize:

• A solely dedicated company bank account.
• An accounting software or journal system.
• A method for generating financial statements that are both precise and dependable.
• A method for establishing a budget.

These instruments are only the first step in meticulously supervising your nonprofit organization’s accounting. Ensure that the bookkeeping is conducted under the appropriate GAAP (generally accepted accounting principles), regardless of whether you or an internal volunteer is completing it. Begin by revisiting these essential accounting principles for nonprofit organizations.

Accurate and Timely Record-Keeping: Nonprofit organizations must maintain records of all financial transactions that are both accurate and current. This includes keeping records of all donations and grants received, as well as monitoring all income and expenses.

Setting up the Budget for Financial Management: Nonprofit organizations must plan a budget to make their money useful and efficient. This will help you make data-driven decisions about your account, other things that cost money for your program to spend on, or ways of raising some cash.

Economic and regulatory conditions Within the domain of non-profit organizations, it is important for them to remain financially transparent concerning their fundraising and financial spending practices. Financial statements should be audited by a quality third-party accounting firm, and financial reporting needs to occur on an ongoing basis for board members (as well as donors and other stakeholders).

Government Regulation: Non-profits are required to follow numerous regulatory protocols, particularly concerning tax laws and accounting standards as well as reporting needs. Stay up-to-date on these regulations and seek the advice of a professional when needed.

Donor Management: Non-profit organizations depend significantly on donations and grants from corporations, foundations, and individuals. You must establish a system for managing and monitoring these donations, as well as the acknowledgement and gratitude of donors.

If your organization’s financial controller follows these bookkeeping tips, you can feel good knowing that your nonprofit is in great condition.

Bookkeeping Solutions for Nonprofit Organizations

A good accounting or bookkeeping system will account for the whole of your organization. Every financial transaction was recorded. Nonprofit groups need to keep records that show how every dollar is spent. Some ways to do that are:

• Hire accounting services that specialize in nonprofit organizations to handle your fund.
• Your financial records should be part of non-profit organizations’ accounting software.
• Key in all of your data by hand and track it down through Excel.
• Use a paper ledger to record your data.

Manual entry accounting or digging through physical file folders becomes more and more tedious as your nonprofit grows. Numerous effective automation and software tools can save you both time and resources. Just remember that bookkeeping doesn’t take all your time. At the appropriate time, obtain the necessary assistance. Regardless of the method you choose for tracking expenses, you must be capable of performing the following tasks:

• Monitor your payroll, personal cash transactions, accounts receivable, and accounts payable.
• Maintain disbursement records.
• Maintain and arrange your receipts.

Methods for Keeping Financial Records for Nonprofits 

If you have nonprofit bookkeeping to do, you would be better off spending your time on fundraising, raising awareness, and finding potential partners. Still, nonprofit accounting and bookkeeping are essential aspects of any organization. Follow the nonprofit organization’s accounting best practices below.

Ensure investment in fund accounting.

Your bookkeeping system ought to conform very well with what is referred to as “fund accounting,” which most likely requires checking out various money pockets, not simply one universal currency account.

Both universities and nonprofits operate under strict budget guidelines. Money raised from many sources needs to be spent. The compensation for scholarships is different from capital project funds. This basic principle applies regardless of whether we discuss endowments, operating revenues, enterprises, or other assets.

Effective utilization requires placing the funds from the various courses of action in distinct accounts.

Although you’re not running a university, you want to know how to use your funds wisely, and if they’re restricted by how you got them.

Keep a separate bank account.

Your organization must maintain its bank account. It will manage all of the revenue that your nonprofit generates and distributes. Check out this list of the top non-profit bank accounts, or ask your bank about your options for not-for-profit accounts.

Conduct a reconciliation of bank accounts.

Upon completion of your accounting system, all data entering and exiting your organization must be consistent. It is an excellent method to guarantee the accuracy of your records by reconciling your bank accounts monthly.

You will need to be precise in your review of each transaction line so that you can see whether it perfectly aligns with your bank account and accounting system. Regular monthly reconciliations will enable you to track your cash flow better, keep records accurate, and be in a good position to pick up bank errors or fraud.

Utilize purchase orders.

Nonprofits should undergo proper purchasing right from the planning phase so that they can plan, budget, and purchase correctly. Because of the strict policies around fund use in a not-for-profit, procurement needs to be approached systematically.

Ways to simplify your purchases.

To confirm a particular purchase, the purchaser sends purchase orders to the vendor. Essentially, the purpose of purchase orders is to confirm the agreement between you and your supplier. Vendors will sign and approve the purchase order, which specifies the sum paid, the quantity of the item ordered, and the delivery date.

Gain knowledge about the mechanics of in-kind donations.

If a web designer volunteers to help redesign your website, is eight hours of their time documented as a gift?

We typically define this as a distinct income quantity, different from the usual in-kind book donations. We will generate a receipt for the donation using the fair market value of the in-kind donation.

Fair market value is the amount that the volunteer would have charged a regular client for the same quantity of work. Therefore, you would inquire with your volunteer web developer about the cost of completing this task as a regular client or the hourly rate. The IRS would require you to document eight in-kind hours donated for a total of $800.

The Internal Revenue Service determines a fair market value for any in-kind donation less than $5,000. We recommend obtaining an appraisal from a professional in the field if the donation exceeds $5,000.

Establishment of the Budget

The majority of corporations and charitable organizations conduct their operations with annual budgets based on the calendar year, but this is not the case for all of them. Proper budget management helps those who run a nonprofit successfully because you know how to spend less, it keeps your resource utilization at its maximum, and it also allows nonprofits to achieve financial sustainability.

A budget typically breaks spending into two major categories and covers just one calendar year.

1. This is the category where you expect costs for fundraising, insurance, payroll, or contractor depths.
2. Expected income sources: This should include donations in kind, fundraising revenue, insurance, payroll, or contractor expenses.

An operating budget will typically cover the following stages:

• Create a nonprofit plan for 2021 and the goals you want to achieve.
• Create realistic project cost estimates.
• Project income that we can receive in the budget year. Simply change your budget to match present-day requirements.
• Nowadays, accounting software can help create professional budgets. These are as functional as they look. They permit you to assess your financial targets with the budgeted year’s income and expenditures.

Nonprofits partner to secure basic support for the homeless.

Financial Statements for Nonprofit Organizations

Financial statements give a complete view of your finances and how you use them. After you have set up your accounting software, we recommend that you start to produce financial statements to properly guide what is happening with the business.

Most accounting software allows you to create financial statements with just a few clicks. You can create financial statements by uploading an Excel spreadsheet on an ad hoc basis. However, this takes a lot of time and effort and is not the easiest thing to calculate if you are not an accountant. Most organizations will allow a professional bookkeeper, accountant, or software to create these statements for them.

As a nonprofit organization, you will utilize the subsequent three financial statements:

Financial Position Statement

A nonprofit organization’s rendition of a balance sheet statement is a statement of financial position. A balance sheet will provide a precise representation of a company’s financials at a specific point in time. The financial position statement offers a summary of the remaining funds, outstanding debts, and assets.

A balance sheet will display the proprietor’s equity. Since nonprofits are technically not owned, there is no owner’s equity represented in a statement of financial position. Rather, it provides its net assets. After subtracting liabilities from assets, net assets are the remaining assets.

Statement of Activities

The operating statement is also known as a statement of activities. The statement of activities is comparable to an income statement utilized by a for-profit organization. This statement will examine a specific period and demonstrate your nonprofit’s profitability. It will provide you with revenue after deducting your losses and expenses.

One important distinction exists between an income statement and a statement of activities. Income statements determine the net profit. A statement of activities determines net asset variations.

Cash Flow Statement

People, from nonprofit organizations to for-profit businesses, widely understand cash flows as a financial statement. A cash flow statement provides information regarding the amount of money that an organization possesses as a result of its operations, investments, and financing.

The primary distinction is the terminology used to describe income or revenues. A nonprofit organization refers to this as a “change in net assets” rather than “net income,” as a for-profit company would.

Except for that, nonprofits and for-profit organizations evaluate a statement of cash flows in a similar manner.

Taxation of Nonprofit Organizations

Following the establishment of their bookkeeping systems, nonprofit organizations must prioritize understanding their tax obligations.

Many people are aware of the tax differences between nonprofits and for-profit businesses. Section 501 enables not-for-profit organizations to petition the IRS for federal tax-exempt status after they have obtained nonprofit status from their state.

You will be seeking to obtain the status of a: when petitioning under Section 501.

• 501© (3) nonprofit organizations that are charitable, educational, or religious.
• 501©(4) Established for social welfare programs.

Tax-exempt or not-for-profit organizations are exempt from paying taxes under section 501(a).

The IRS reviews approximately 70,000 nonprofit applications annually that are seeking federal tax-exempt status. Therefore, exercise patience and provide them with a minimum of 90 days to respond.

• Your organization’s eligibility to become a tax-exempt nonprofit does not negate the need to pay taxes.
• Your company’s employees are still responsible for paying employment taxes.
• Your nonprofit may also be responsible for sales taxes, real estate taxes, and other expenses, depending on your state of operation.

Choosing the route

Many of us establish enterprises to pursue our passions, and for the majority of us, this does not involve accounting and bookkeeping. Nevertheless, we all quickly realize that to maintain the organization and growth of our organizations, it is imperative to monitor money.

You are now prepared to make informed decisions regarding the financial fundamentals of your nonprofit organization. You are now able to determine whether to outsource your accounting and bookkeeping requirements to a professional or to perform them in-house with the assistance of your treasurer or financial officer.

Although your organization is distinct from numerous other nonprofit organizations, you all share comparable requirements for maintaining your financial records.

Allow us to handle everything for you!

• Complete the reconciliation of your accounts.
• Provide you with clean files every month.
• Maintain precise records to facilitate tax filing with ease.
• Monitor the financial well-being of your enterprise.

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You must conduct research and implement a nonprofit accounting system that is suitable for both you and your staff. Furthermore, we recommend that you identify an accounting system that can handle fund accounting. Open a bank account that is distinct from your personal bank account. Consistently assess the current state of your organization and formulate strategies for the future.

This is the reason we recommend that you familiarize yourself with the three primary financial statements and implement a budget. Understanding financial statements and budgeting will help you plan and strategize for your organization’s future.