To fulfill your mission and impact the communities you serve, you have to raise and allocate funds wisely—That’s why bookkeeping for nonprofits is an essential part of what you do. Unfortunately, this is an area we frequently see relegated to “we’ll get around to it” status, especially with smaller nonprofits. It’s usually more a situation where no one in leadership is an accounting professional, but they feel that they cannot afford to hire outside help. So it gets put off until the finances are a mess and it is virtually impossible to prepare and file an accurate IRS Form 990 or state fundraising registration report. Your Form 990 is a publicly available document that describes your nonprofit’s annual financial position and how you’ve allocated functional expenses (similar to your statement of functional expense).

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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. Nonprofits must also be careful The Key Benefits of Accounting Services for Nonprofit Organizations to record and report the valuation of specific employee benefits, which can count as taxable income if not reported properly. “A nonprofit’s UBTI includes any qualified transportation fringe benefits and on-premises athletic facilities provided to employees,” Treppa noted. Like any organization that handles cash flow and pays taxes, nonprofits should invest in a professional accounting and finance team. This guide will help you stay on top of your nonprofit accounting responsibilities.

Bookkeeping for Nonprofits – All You Should Know

This guide strikes a balance between basic nonprofit bookkeeping and complex nonprofit accounting practices. It covers everything from basic principles to financial statements and compliance requirements, explained in clear, practical terms that are easy to understand and apply. Nonprofit organizations typically use fund accounting, which involves segregating financial resources into separate funds based on their intended purpose or restrictions. This approach allows nonprofits to track and report on funds designated for specific programs, projects, or donor restrictions.

Set Up a Nonprofit Chart of Accounts (Free Template)

• Nonprofit accounting systems and best practices are established to keep you accountable to the public, your board, funders, grantors, and the government.
• The reason for the difference is that non-profit organizations do not have owners, meaning there can’t be shareholders’ equity.
• If basic bookkeeping is all that your organization needs, you’ll need to decide whether to do the bookkeeping in-house or if you should outsource.
• One of the most commonly used dedicated accounting solutions for nonprofits is the Intuit QuickBooks suite.
• You simply cannot fulfill even the most basic of legal and fiduciary duties if thorough recordkeeping isn’t an ingrained part of your standard operating procedures.
• If you’re handling the accounting for a nonprofit with multiple entities or related organizations, you know how quickly things can get complicated.

In summary, managing expenses and planning cash flow are essential aspects of nonprofit accounting. Good nonprofit financial management should ensure that the organization can function and grow. However, donors might hesitate to give if your functional expenses become too large. The best accounting software programs all provide similar features, so when considering which one is best for your business, you need to consider which features are the most important to your situation. This will help you decide which accounting software meets your needs best.

Best Accounting Practices for Nonprofits

Instead of identifying these assets with the intention of distributing them to stockholders, they are intended to be reinvested into the nonprofit. Donor data is useful for building relationships, but it can clog up your accounting system. Separate financial information from donor information to keep your data organized. Because nonprofits are so unique, they leverage a different type of accounting, also known as “fund accounting” to manage their finances.