When you first started working at your nonprofit, what made you excited? It probably wasn’t the boring paperwork, tricky math, and rules to follow. What inspired you to join was the nonprofit’s mission. But, to run a nonprofit well, you also need to do things like paperwork and handling money properly. One thing that can be tricky is nonprofit accounting.
The good news is that here at BookkeeperLive, we don’t find nonprofit accounting boring at all! As a dedicated accountant for nonprofit organizations, we’ve happily supported many organizations with their money and records. We love what we do, and we’ve got lots of experience. So, we put together a helpful guide to make it easier for nonprofits like yours to understand their financial needs.
What is nonprofit accounting?
Nonprofit accounting is the process of managing the financial transactions and records of nonprofit organizations. These organizations include charities, foundations, educational institutions, religious entities, and other community-focused groups. Nonprofit accounting is all about ensuring that every dollar received is used for its intended purpose and is in compliance with the organization’s mission and relevant laws.
How is nonprofit accounting different?
NPO accounting has some key differences when compared to for-profit accounting. Here are a few distinctions to keep in mind:
- Mission-centric: Nonprofits focus on achieving their mission, not making a profit. Their accounting practices revolve around ensuring that funds are used to further their cause.
- Fund accounting: Nonprofits often use fund accounting, also known as NPO fund accounting, to track resources dedicated to specific purposes like programs, operations, and capital projects. This method ensures transparency and accountability in managing funds effectively.
- Donor contributions: Nonprofits rely heavily on donations, grants, and other contributions. Properly accounting for these is crucial, as donors expect their funds to be used as intended.
Another important part of nonprofit accounting that ensures organizations remain responsible with their money is the Non distribution constraint. This is a crucial rule that distinguishes nonprofits from for-profit businesses. Nonprofits are obligated not to share their leftover money (net earnings) with their leaders or officials.
For instance, let’s say the Nature’s Harmony Environmental Conservation Group discovered an extra $5,000 in their budget. They wouldn’t be allowed to give that money to their leaders or board members. Instead, this extra funding must be put back into their mission.
Nonprofit accounting statements and reports
Nonprofit organizations use several financial statements and reports to keep track of their finances and communicate their financial health to stakeholders:
- Statement of activities (income statement): This report shows revenues, expenses, and changes in net assets over a specific period, providing a clear picture of the organization’s financial performance.
- Statement of financial position (balance sheet): This document presents the nonprofit’s assets, liabilities, and net assets at a specific point in time, giving insights into its financial standing.
- Statement of cash flows: This statement outlines cash inflows and outflows, categorizing them into operating, investing, and financing activities.
- Notes to financial statements: These provide additional information about the organization’s accounting policies, significant accounting estimates, and other important details.
- Form 990: Completing the yearly Form 990 is a crucial part of nonprofit accounting that you can’t ignore. Form 990 is a special tax form that organizations with tax-exempt status, like 501(c)(3) nonprofits, must fill out every year. This is a way to follow the rules set by the IRS and stay in line with the law. In this form, you’ll write down how much money your nonprofit got and how it was spent during the year. It’s like a report card for your nonprofit’s finances that the IRS uses to check that everything is going well and your nonprofit is honest and real.
Best practices for nonprofit accounting
Achieving success in nonprofit accounting requires adopting some best practices:
- Separate funds: Use fund accounting to separate resources dedicated to different programs or purposes. This ensures funds are used as intended and helps with reporting.
- Regular reconciliation: Reconcile bank accounts, grants, and other financial data regularly to catch errors and discrepancies early.
- Transparency: Maintain transparency in financial reporting to build trust with donors and stakeholders. Be clear about how funds are used.
- Compliance: Staying compliant with nonprofit accounting regulations, including tax laws, is crucial. A non-profit tax accountant can help ensure compliance and maximize tax benefits. Nonprofit accounting, like building a sturdy financial house, with bookkeeping as the foundation, is essential for managing resources effectively.
How is nonprofit accounting different from bookkeeping?
Nonprofit accounting is similar to building a sturdy financial house. Bookkeeping acts as the foundation, recording daily financial activities like money coming in and going out. Nonprofit accounting adds the essential structure by analyzing this data, creating budgets, generating reports, and ensuring compliance with regulations. Together, they provide the tools and insights needed for nonprofits to manage their resources wisely and fulfill their missions effectively, especially when it comes to bookkeeping for nonprofit organizations.
To hire or outsource for nonprofit accounting
Does your nonprofit have someone who’s good at handling the money stuff and has enough time to do it? Many smaller nonprofits struggle to find the right person for this job. In fact, in 2019, 18% of nonprofits said that having limited staff was their biggest problem. So, finding the right person to handle the money (especially as you grow) can be really tough.
But don’t worry, there are some options to think about when you’re looking for someone to take care of your nonprofit’s money. Here are a few:
- Have a team member do it: You can ask your boss or executive director to handle the money stuff. Some new organizations start like this, but it can be tricky when your nonprofit gets bigger. The money stuff gets more complicated, and your boss has other important things to do.
- Hire a full-time accountant: You can hire someone just to take care of the money. Big nonprofits often do this. But if your nonprofit is small and doesn’t have a lot of money, hiring a new person can be expensive.
- Outsource to experts: Many nonprofits find it helpful to get experts from nonprofit outsourced accounting services to handle their money. These experts work for firms that specialize in nonprofit finances and have experience with it. They’re often more affordable than hiring a new person just for this job. Outsourcing can be a cost-effective solution for managing nonprofit finances efficiently.
In our professional opinion, most nonprofits benefit from getting experts to handle their money. It’s a cost-effective option, and you get access to people who really know nonprofit money.
If you like the idea of getting experts to handle your money, look for a firm that specializes in working with nonprofits. This way, you can be sure they understand how nonprofit money works and can answer your specific questions.
Our nonprofit accounting recommendations
Based on the key tips mentioned above, we recommend the following steps for nonprofit accounting success:
- Implement fund accounting: If you’re not already using fund accounting, consider adopting this method to ensure your financial resources are tracked accurately.
- Regular training: Invest in training for your accounting staff or, if outsourcing, choose a certified nonprofit accounting professional or a firm that specializes in nonprofit accounting.
- Embrace technology: Use accounting software tailored to nonprofit organizations to streamline your financial management processes.
- Transparency and communication: Keep donors and stakeholders informed about your financial activities and how their contributions are being utilized.
Nonprofit accounting is really important for organizations that want to do good things for the community. To do it right, nonprofits should learn about what makes their money different, do things the best way, and decide if they need to hire someone or get help from experts in accounting for a non-profit organization. This helps them use their money wisely to do more good things.
We can help nonprofit organizations manage their finances better. Our services include expertise in nonprofit accounting, creating budgets, financial reports, and ensuring they follow all the rules. With our support, nonprofits can focus on their missions and do more for the community, knowing their finances are in good hands.
Q1: What is the difference between for-profit and nonprofit accounting?
The main difference is that nonprofit accounting focuses on using funds to achieve a mission, while for-profit accounting is concerned with generating profits for shareholders.
Q2: What is fund accounting, and why is it important for nonprofits?
Fund accounting is a method that separates financial resources into distinct funds, allowing nonprofits to track and manage resources dedicated to specific purposes. It ensures accountability and transparency.
Q3: How can I ensure compliance with nonprofit accounting regulations?
Stay informed about local regulations and seek the assistance of experts who are well-versed in nonprofit accounting and tax laws.
Q4: Should I hire an in-house accountant or outsource nonprofit accounting services?
The decision depends on the size, complexity, budget, and expertise of your organization. Smaller nonprofits often benefit from outsourcing, while larger ones may prefer in-house accountants.
Q5: What software is recommended for nonprofit accounting?
There are several options available, including QuickBooks for Nonprofits, Aplos, and Blackbaud Financial Edge NXT. Choose the one that best fits your organization’s needs and budget.