Nonprofit Accounting: A Guide to Basics and Best Practices

Before we dive in, it’s important to know the differences between nonprofit organizations and for-profit businesses. For-profit businesses generally have the goal of maximizing revenue, keeping overhead costs low, minimizing tax liability, and generating as much net profit as possible for shareholders and owners. For-profit accounting also considers other revenues and expenses, such as dividends or labor costs. For those new to accounting software, Intacct provides training options for all accounting knowledge levels as well as phone and email support services. Some key features of Intacct include accounts receivable/payable, activity tracking, asset management, bank reconciliation, compliance management, partnership accounting, and purchasing and receiving. To make nonprofit accounting more efficient, organizations can leverage accounting software specifically designed for nonprofits.

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Moving to an outsourced bookkeeping and accounting solution can help nonprofits focus on their mission. The move will offer expertise from tax professionals, and it will reduce expenses and increase revenue. Directors often get caught up daydreaming about all the money they’ll raise while they’re planning their fundraising strategy. Realize there are many other nonprofits out there, all vying for the attention of donors, and all of them believe their mission is important. Nonprofit and for-profit businesses vary in the overall purpose of their existence.

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• Accrual accounting is required by Generally Accepted Accounting Principles (GAAP), which means that you’ll need accrual-based reports to complete a nonprofit audit.
• This statement allows stakeholders to evaluate the organization’s ability to generate funds and use the revenue effectively to support its mission.
• More often than not, it’s provided to serve a specific purpose at your organization, such as fund a specific program or a scholarship.
• In addition, checking in on the budget one or more times each month will allow you to adapt to change.
• Nonprofit accountants must stay updated on these changes to ensure ongoing compliance.
• 11 Financial’s website is limited to the dissemination of general information pertaining to its advisory services, together with access to additional investment-related information, publications, and links.
• Nonprofits are required to provide an analysis of their expenses by nature and function.

The report includes income from operating, investing, or financing activities. Revenue from operating activities will come from membership dues, donations, or fundraising. Income from investing may consist of earnings from the sale of long-term investments or money market investments, such as bonds. The statement of cash flows shows your organization’s sources of cash and how they’re increasing or decreasing in a given period.

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No matter what software you choose, the most important part of nonprofit accounting may be communication. Couch recommends keeping your staff and board members updated on what your accountants do and discover. No matter who does your books, choosing the right accounting software for your nonprofit is crucial.

• Nonprofit accounting has many unique elements, factors, and requirements that organization executives need to consider to be successful.
• The bottom line for nonprofits differs from that of for-profits, focusing on the mission rather than the profit earned.
• FreshBooks’ software stands out for its ability to track expenses and restricted funding.
• If the value of the donation is small (below $5,000) the IRS will let you determine a donation’s fair market value yourself, usually based how much comparable goods and services are selling on the market.
• To stay accountable to your grantors, you’ll need both effective grant management strategies as well as a system of fund accounting to organize the money.

Once you’ve got your bookkeeping system setup and have started generating financial statements, the final piece of the nonprofit accounting puzzle is getting your tax obligations straight. Just like the statement of financial https://www.bookstime.com/articles/construction-billing-methods position, the statement of activities keeps net assets that have conditions and stipulations attached to them separate from unrestricted funds. A nonprofit operates for the betterment of the public and the community at large.

• This allows you to see which funds are available for general use, and which are restricted for specific purposes.
• The final option is the fund accounting method, a type of accrual accounting method specifically used for nonprofit accounting.
• Quicken is best for very small nonprofits that do not have employees for whom they have to process payroll.
• Essentially, this statement will organize and categorize your expenses and revenue sources.
• This document is created by your leadership or finance team using information from your development team and historic spending habits from your organization.

What is the approximate value of your cash savings and other investments?

They have a little more freedom when it comes to budgeting and allocating their money to the various aspects of their organization. Fund accounting is a system of accounting that allows organizations to separate their money into different categories, or “funds,” to stay organized. The funds need to be separated from one another because different contributions made to your organization may have allocations and restrictions set on them from the start.

Nonprofits Focus on Accountability

Your nonprofit should regularly compare your budget to the actual income and expenses throughout the year. Combine historical data, your current budget, and your actuals for the year-to-date to ensure your budget is on track, allowing you to change course as needed throughout the year. At the bottom of the document, a statement of activities would show a “Net Assets” total, while an income statement would list a “Net Income” total instead. A nonprofit’s Statement of Activities is a report generated in place of an Income Statement, which a for-profit business would be required to file.

Mission and Ownership, Tax-Exempt Status

Accounting rules exist to help you record transactions accurately and consistently over time. That’s really all that accounting is, so don’t let the terminology intimidate you. By assigning financial responsibilities nonprofit accounting to multiple people, it creates a layer of accountability among employees. If you notice someone regularly completing tasks assigned to another employee, and you see any discrepancies in the numbers, look into it.

Maintaining GAAP compliance

It is essential for nonprofits to maintain detailed records and documentation of all donations, as this information will be needed for financial reporting and tax compliance purposes. Additionally, tracking contributions helps nonprofits measure the effectiveness of their fundraising strategies and make data-driven decisions for future initiatives. Public viewpoints on overhead expenses hurt the nonprofit industry a great deal. Overhead includes those expenses that nonprofits use to cover administrative costs, market their mission for fundraising, and pay for other internal expenses that help the organization grow.