Nonprofit Accounting: A Guide to Basics and Best Practices

Though many nonprofit organizations are classified as exempt from federal income tax, they still need to prepare tax forms at the end of the year. For instance, when a nonprofit holds a fundraiser, the money received needs nonprofit accounting basics to be tracked separately from other funds. So, if a nonprofit has five active programs for which it regularly obtains funding, it will need to track all income and expenses for each of those programs or funds separately.

• Here’s a helpful guide for these organizations, especially when it comes to political activity and lobbying.
• For instance, a nonprofit that is funded primarily through private donations needs to track funds much differently than a nonprofit that receives grants on a regular basis.
• A qualified accountant will help your nonprofit stay ahead of the game by carrying out all of these activities and more.
• To truly tackle and sustain the monetary health of nonprofits, staff, and team members need a strong understanding of the accounting principles that are unique to this industry.

While most undergraduate programs cover the basics of accounting, the practices of a nonprofit bring a new level of complexity to the art of numbers and reporting. Additionally, many banks offer business checking accounts specifically designed for nonprofits, often with waived fees or reduced transaction costs. These tailored accounts can provide valuable features, such as multiple signatories, online banking tools, and interest-bearing options, further supporting your nonprofit’s financial management needs.

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Their software also features a dashboard view that’s great for a bird’s-eye view of overall expenses, including overhead expenses. Like nonprofit organizations, government entities also use a type of fund accounting, usually referred to as encumbrance accounting, which budgets and reserves funds for specific expenditures. In addition to solid GAAP accounting skills, you’ll need an understanding that money coming into the organization is generally difficult to obtain, so it must be spent wisely. That means not only must you understand the nuances of nonprofit accounting vs. net-income-focused accounting, but you must be able to employ solid management accounting practices across the board. Nonprofit organizations must provide the state with a copy of the IRS Form 990 or an equivalent. For instance, States like Virginia and North Carolina accept audited financial statements.

• Examples of these nonprofits include social organizations, chambers of commerce, college fraternities and sororities, amateur sports clubs, employee organizations, and more.
• To make nonprofit accounting more efficient, organizations can leverage accounting software specifically designed for nonprofits.
• Also, make sure your budget is approved by your board of directors when it’s written up.
• The unfortunate truth is that many nonprofit leaders never receive the education or have the experience necessary to handle executive-level accounting.
• Understanding these fundamentals is vital to maintaining transparency, accountability, and trust among the stakeholders they serve.
• Not only does it centralize your expense data into one system (i.e. no more hunting through masses of unorganized receipts!), but it allows you to submit and track business expense data in real-time, on a 24/7 basis.
• The other resource a nonprofit depends on is a quarterly balance sheet listing the owner’s equity.

This is due to the rules around reporting revenue and expenses for 501(c)(3) organizations. Revenue can come from services the organization provides, admission fees via theaters, art exhibits, museums, etc., fundraising or donations, and other areas. Your nonprofit’s statement of activities is also known as your income statement. Plus, you can use this document to review your change in net assets from the beginning of the year to the end of the year.

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As with any financial statement, ensure that all figures are accurate and up to date before submission. The financial resources, needs, and expenses of nonprofit groups are often incredibly different from other businesses or organizations that exist based on ownership and profit. Using segments enables you to easily track the expenses against any temporarily restricted donation, allowing donors and foundations the ability to see exactly how their funds were used. For instance, a nonprofit organization may receive a donation in the amount of $5,000 that the donor states must be used to pay for a particular program before the end of the year. Grants are also considered temporarily restricted as they also have an expiration date.