Bookkeeping for Nonprofits: Definitive Guide and Best Practices

Bookkeeping for Nonprofits: Definitive Guide and Best Practices

Keeping track of documents and updating spreadsheets was likely not what you had in mind when you started a nonprofit organization. You started your nonprofit to help others, but now you see how important accounting is to help your nonprofit organization succeed financially to help others.

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

Overview of Nonprofit Accounting

So, how do successful nonprofit organizations stay on top of their finances?

Nonprofit Bookkeeping

When it comes to tracking finances, organization is essential. 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:

Solutions for Not-For-Profit Bookkeeping

Any accounting or bookkeeping system that’s worth investing in will record every financial transaction for your organization. Here are some options to help you achieve this:

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.

Bookkeeping for Nonprofits: Definitive Guide and Best Practices

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

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.

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.

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.

Bookkeeping for Nonprofits: Definitive Guide and Best Practices

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.