Nonprofit Accounting: Essential Principles and Best Practices

By assigning financial responsibilities 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. Here’s a helpful guide for these organizations, especially when it comes to political activity and lobbying. In accordance with these standards, there are several types of documentation that your organization should be aware of. We’ll walk through the various types of documents that your finance department will likely be working with most frequently.

Improve your financial stability with this handy guide to nonprofit accounting and bookkeeping, including the basics of seven key money management practices. To ensure proper tax reporting and guarantee that you get the most value from volunteers, nonprofits must establish a system to track and record their work. Updating these records should be part of regular bookkeeping and accounting operations, and the financial tracking system should be standardized across the organization. Volunteers, for example, may provide unpaid labor, but that labor still has value that can affect your taxes and overhead. Here’ we’ll overview the financial reports all nonprofit organizations are required to create regularly, as well as some optional reports that may help you run your business more effectively. This nonprofit accounting statement breaks down the operating, financing, and investing activities to show how cash moves at the organization.

‍4. Fund Accounting for Nonprofits

Jason Ding is a seasoned accountant with over 15 years of progressive experience in senior finance and accounting across multiple industries. The firm specializes in preparing personal and corporate taxation while providing fractional CFO work and leading the accounting and finance function for several small-to-medium-sized businesses. In his free time, you’ll find Jason on the basketball court, travelling, and spending quality time with family.

While there are different types of nonprofit organizations, many of them operate by the same principles when it comes to managing funds, expenses, and external accountability. While there are different public opinions on this, it’s important to remember that nonprofit businesses operate like for-profit businesses. Overhead expenses include anything nonprofits use to cover their internal expenses, administrative costs, and marketing their mission for fundraising–activities that help the nonprofit organization grow. For nonprofits that rely heavily on revenue from donations and grants, tracking and categorizing these income sources accurately is crucial.

Do Nonprofits Need Accountants?

They’re all different, but the one thing they have in common is their funding streams. The majority of these organizations, and thousands of others like them, receive their funds through public support or through grants. Fund accounting is an accounting method used to determine accountability rather than the profitability of an organization.

The difference between the balance sheet and the statement of financial position is that, because nonprofits don’t technically have any owners, the statement of financial position doesn’t have any equity on it. Most nonprofit-friendly accounting software like QuickBooks Aplos or Nonprofit Treasurer will allow you to generate financial statements automatically. Although it’s possible to manually generate financial statements from your ledger or spreadsheet, it takes a ton of accounting knowledge and time to do it right. In most cases, it’s better to let your accounting software or a bookkeeper take care of this step for you.

Nonprofit Budget

When you have accurate numbers for the cost and projected revenue of fundraising campaigns, you can end your campaign in the black and amplify programming. By understanding how well you have kept to your original budget, you can make adjustments that lead your programming through the entire year, nonprofit accounting basics increasing your impact. Effective donor management systems can turn one-time donors into engaged contributors with a greater donor lifetime value. Auditing is the process of inspecting and reviewing your financial statements to guarantee the accuracy and completeness of your financial records.

You may not be the one presenting the financial statements to the board this month. But, every person within an organization represents an activity behind those statements. Taking the time to develop an understanding of your organization’s financial position, challenges, and goals will help you serve with excellence. You’ll learn quickly that “nonprofit” doesn’t mean “no profit.” After all, you need to build sustainable support for your programs. The unfortunate truth is that many nonprofit leaders never receive the education or have the experience necessary to handle executive-level accounting.