Bookkeeping Guide for Nonprofits

We understand that bookkeeping for your nonprofit is probably not your favorite task. You started your nonprofit to help others, but now you are wrapped up in financial tasks and questions. It’s easy to see how important accounting is to help your nonprofit organization succeed financially and reach your goals. But how can you get it all done?

By the end of this article, you’ll have a strong foundation for creating bookkeeping systems for your nonprofit. We’ll discuss the differences between for-profit and not-for-profit accounting, do a deep dive into filling out your taxes, how to take the stress out of managing your nonprofit business, and discuss the best nonprofit bookkeeping software.

When you can confidently manage the bookkeeping for a nonprofit organization, you will be able to safeguard funding, attract more investors, and efficiently meet the needs of your nonprofit.

Overview of Nonprofit Accounting

A traditional business may measure success differently than a nonprofit. This is part of the reason that good accounting practices need to be established for your organization. You will want to make sure that your funds are properly handled. 

By getting these systems in place, your nonprofit will be ready to accept, manage, and distribute funds to where they need to go the most. You’ll find more detailed information on some of these sections later on.

Accounting Software 

You could try to manage everything manually, but a reliable accounting software system makes managing financial transactions, invoicing, tracking expenses, generating financial reports, and tracking donor contributions much easier.

Budgeting System 

Non-profit organizations need to create a budgeting system to ensure they are allocating their resources efficiently and effectively. Your budget should include projected income and expenses, which should be updated periodically.

Financial Policies and Procedures

 Non-profit organizations should have financial policies and procedures that guide the organization’s financial management. These policies should include guidelines for financial decision-making, financial reporting, internal controls, and record-keeping.

Cash Management System 

Non-profit organizations should have a system in place to manage cash flow, including processes for invoicing, accounts payable, accounts receivable, and petty cash management.

Donor Management System

Non-profit organizations rely heavily on donations from individuals, corporations, and foundations. A donor management system can help you track donations, monitor donor engagement, and ensure timely and appropriate acknowledgments.

Audit and Compliance System

Non-profit organizations have to comply with various laws and regulations. An audit and compliance system can help you ensure compliance and provide a framework for regular reviews of the organization’s financial practices.

Board Oversight 

Non-profit organizations should have a board of directors or trustees responsible for overseeing financial management. The board should review financial reports, approve budgets, and provide strategic guidance for financial planning.

By implementing these systems, non-profit organizations can ensure that they are managing their finances effectively and efficiently while staying in compliance with laws and regulations.

Best Practices for Nonprofit Accounting

When it comes to tracking finances, staying organized is essential. Being organized alone will save you from issues with taxes, compliance, or regulations for your nonprofit. It will save you time and precious resources. Choose your financial position with this in mind. 

Typically, not-for-profit organizations have a financial officer or treasurer. To be successful, your treasurer will need the support of bookkeeping and accounting tools. Tools you will want your treasurer or financial officer to use:

These tools are just the starting point to carefully managing the bookkeeping for your nonprofit organization. If you or an internal volunteer is doing the bookkeeping, make sure that they follow proper GAAP (generally accepted accounting principles) in everything that they do. Start by reviewing these necessary accounting principles for nonprofit organizations. 

  1. Accurate and Timely Record-Keeping: Non-profit organizations should maintain accurate and up-to-date records of all financial transactions. This includes tracking all income and expenses, as well as maintaining records of all donations and grants received.
  2. Budgeting and Financial Planning: Non-profit organizations should create a budget to help ensure that they are using their resources effectively and efficiently. This can help you make informed decisions about fundraising, program spending, and other financial matters.
  3. Transparency and Accountability: Non-profit organizations need to be transparent about their financial activities, including how they raise and spend money. You should provide regular financial reports to board members, donors, and other stakeholders, and ensure that your financial statements are audited by a reputable third-party accounting firm.
  4. Compliance with Regulatory Requirements: Non-profit organizations must comply with various regulatory requirements, including tax laws, accounting standards, and reporting requirements. Stay up-to-date on these regulations and seek professional advice when necessary.
  5. Donor Management: Non-profit organizations rely heavily on donations and grants from individuals, corporations, and foundations. You should have a system in place for managing and tracking these donations, as well as for acknowledging and thanking donors.

If your financial officer can abide by these guidelines for bookkeeping, your nonprofit should be in good standing. 

Nonprofit organization meets around a table to discuss their bookkeeping needs

Solutions for Not-For-Profit Bookkeeping

Any accounting or bookkeeping system that’s worth investing in will record every financial transaction for your organization. For nonprofits, it is extremely important to keep transparent records that show where every dollar is spent. Here are some options to help you achieve this:

Manual entry accounting or physical ledger will quickly become tedious as your nonprofit grows. There are many great software and automation tools that can save you time and resources. Be mindful that your bookkeeping does not need to consume all of your time. Get the necessary support when you need it. But no matter how you choose to track your expenses, you need to make sure that you can do the following:

Smart bookkeeping. Powered by professionals. Backed by technology.

Smart bookkeeping. Powered by professionals. Backed by technology.

Let us do it all for you!

  • Reconcile your accounts
  • Provide you with clean books every month
  • Ensure accurate records for seamless tax filing
  • Track your business financial health

How To Do Bookkeeping For Nonprofits

Nonprofit bookkeeping can take away your time from fundraising, raising awareness, and finding potential partners. However, nonprofit bookkeeping and accounting are essential elements for the nonprofit’s success. Follow the best practices mentioned below for bookkeeping for nonprofit organizations.

Ensure That Fund Accounting Can be Done

Your bookkeeping method should support “fund accounting.” This means that you can track separate folders of money, instead of storing it all in one cash account.

Nonprofits, like universities, follow strict budgeting rules. Money that’s acquired in different ways, needs to be spent in different ways. Scholarships aren’t paid the same way as capital project funds. The same goes for operating funds, endowments, and more. Those different courses of funds need to be put in separate accounts to be used properly. 

You may not operate a university, but you still want to see where you can spend your money, and if restrictions apply to you based on how your funds were acquired.

Have a Separate Bank Account

Your organization should have its own bank account.  It’ll handle all the money your nonprofit brings in and sends out. Ask your bank about your options regarding not-for-profit accounts or check out this list of best non-profit bank accounts.

Perform Bank Account Reconciliation

Now that you have your bookkeeping system ready, you need to ensure all information coming in and out of your company matches up. Reconciling your bank accounts every month is a great way to ensure accuracy in your books. 

To reconcile your bank account, you will go through every transaction line to make sure your bank account and accounting system align perfectly. Reconciliations performed each month will help you track your cash flow better, keep accurate books, and detect bank errors or fraud.

Utilize Purchase Orders

Nonprofits need to order purchases ahead of time, budget for them and adequately fulfill them from the start. Purchases need to be orderly because of the strict rules on what you can spend your money on in a not-for-profit organization. 

A great way to help you organize your purchases is by using a purchase order. Purchase orders are sent from the purchaser to a vendor for confirmation of a specific purchase. Essentially purchase orders are made to double-check if you and the supplier are on the same page. Vendors will sign and approve the purchase order, which tells you how much you paid, the quantity of what you ordered from them, and when the purchase will be delivered.

Educate yourself on How In-Kind Donations Work

Is it recorded as a gift if a web designer volunteers eight hours of their time to help you revamp your website? 

Typically, this is set up as an income amount separate from your typical books for an in-kind donation. You will enter a receipt for the in-kind donation based on the fair market value of the donation.

What the volunteer would have charged any regular client for the same amount of work is what fair market value is. So you would ask your volunteer web developer how much would it cost to have this work done as a regular client or how much they charge per hour. If their rate is $100 an hour, the IRS would have you record eight in-kind hours donated for a total of $800.

According to the IRS, any in-kind donation under $5,000 can be calculated as fair market value. If the donation goes over the $5,000 mark, you should formally get an appraisal from an expert in the field.

Budget Creation

Most businesses and nonprofit organizations operate on annual budgets throughout their calendar year. Well planned out budgets guide nonprofit’s down a path of knowledge of how to best use their resources to remain financially healthy.

Budgets will usually have a duration of one calendar year and be written out with two main categories:

In general, an operating budget will involve these steps:

Today, software for accounting can help you design professional-level budgets. Not only do they look good, but they perform at a high level. They allow you to compare your budget’s goals to the income and spending over the budgeted year.

Nonprofit organization working together to deliver supplies to the needy

Not-For-Profit Financial Statements

Financial statements give you a clear understanding of how much money you have and how it is being used. Once you have your bookkeeping software set up, we recommend starting to generate financial statements to help guide your business.

Most accounting software will allow you to click a few buttons and automatically create financial statements. You can also make financial statements from your manually entered Excel spreadsheet. However, this takes a lot more time, effort, and accounting knowledge. Most organizations will let a software, accountant, or professional bookkeeper to create these statements for them. 

The following are the three financial statements that you will use as a nonprofit organization:

Statement of Financial Position

A statement of financial position is a nonprofit organization’s version of a balance sheet statement. Balance sheets will show a snapshot of a company and its financials at an exact moment in time. The financial position statement gives you a look at that and lets you see what you own, owe, and how much money is left in the pot after.

A balance sheet will show the owner’s equity. Since nonprofits technically do not have owners, there is no owner’s equity shown in a statement of financial position. Instead, it offers its net assets. Net assets are what is left after you subtract your liabilities from your assets.

Assets – liabilities = net assets

Statement of Activities

A statement of activities is also referred to as the operating statement. If you are familiar with a for-profit organization using an income statement, the statement of activities is similar. This statement will look at a certain period and show you how profitable your nonprofit was. It will give you your revenue subtracted from your losses and expenses. 

There is one significant difference between a statement of activities and an income statement. Income statements figure out what the net profit is. A statement of activities figures out what the changes in net assets are.

Statement of Cash Flows

The statement of cash flows is a financial statement many people understand from nonprofits to for-profit businesses. A cash flow statement tells you how much money your organization has through its portfolio of investments, operations, and financing. 

The main difference is the language when referring to profits or income. Instead of saying “net income,” as a for-profit company would, a nonprofit considers that a “change in net assets.”

Other than that, nonprofits and for-profit organizations look at a statement of cash flows similarly.

Nonprofit Taxation

After setting up their bookkeeping systems, a top priority for all nonprofits should be to understand their tax requirements.

As you likely know, nonprofits are not taxed the same as for-profit businesses. Once nonprofits achieve nonprofit status from their state, Section 501 allows not-for-profit organizations to apply to the IRS for federal tax-exempt status. 

When applying under Section 501, you will be looking to achieve status as a:

Every year the IRS goes through 70,000 nonprofit applications that are applying for federal tax-exempt status. So, be patient with them and give them at least 90 days to respond.

Just because your organization qualifies to become a tax-exempt nonprofit does not mean that taxes never need to be paid. Employees of your company are still responsible for employment taxes. Your nonprofit can also be responsible for taxes on sales, real estate, and more, depending on your state of operation.

Choosing the Path

Many of us start businesses to follow our passions, and for most, that does not include accounting and bookkeeping. However, we all soon realize how essential tracking money is to keep our organizations organized to thrive.

Now you are equipped to make educated decisions on the financial basics of your nonprofit organization. You can now decide on hiring your accounting and bookkeeping needs out to a professional or doing it in-house with your treasurer or financial officer.

Although your company is different from many other nonprofit organizations, you all have similar needs when it comes to keeping your books straight.

Smart bookkeeping. Powered by professionals. Backed by technology.

Smart bookkeeping. Powered by professionals. Backed by technology.

Let us do it all for you!

  • Reconcile your accounts
  • Provide you with clean books every month
  • Ensure accurate records for seamless tax filing
  • Track your business financial health

You must research and acquire the use of a nonprofit bookkeeping system that works for you and your staff. We also suggest that you find an accounting system that can perform fund accounting. You will want to open a bank account that is separate from your personal bank account. Always look at where your company is at and plan for the future.

This is why we encourage you to learn about the three primary financial statements and utilize a budget. Understanding financial statements and budgeting will help you plan and strategize for the future of your organization. 

Best Bookkeeping Software for Nonprofits

LessAccounting is a comprehensive online accounting software that is specifically designed for non-profit, charitable, and church organizations. It is the easiest way for nonprofits to track donations and expenses. Access real-time financial performance data, gain budget insight, and stay compliant with automated workflows. It’s easy to learn and use so your volunteers and staff can focus on your mission, not bookkeeping.

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