Accounting for Nonprofits

bookkeeping basics what every nonprofit bookkeeper needs to know

Once your vendor signs it, it’s a binding contract that tells you exactly how much you ordered from your supplier, how much you paid, and when the supplier agreed to deliver your order. You probably didn’t start a nonprofit organization to stare at spreadsheets and Google things like “how to record an in-kind donation.” It is important to take care of overhead before seeking out donors for a nonprofit because it demonstrates financial responsibility and a commitment to efficiency. If your accounting responsibilities still roll up under your executives, consider outsourcing your accounting to the experts at a firm. They’ll help make sure all best practices and internal controls are implemented, ensuring smarter finances.

Jitasa is an outsourced accounting service specifically designed to help nonprofits with their bookkeeping and accounting processes. This tax form is not only necessary for your nonprofit to stay compliant with federal and some states’ regulations, but it can also be key for your fundraising efforts. Some prospective donors will search for your Form 990 to be sure your nonprofit is effectively using your funding before they make a contribution. For example, instead of measuring equity, nonprofits record their net assets in a balance sheet. Because nonprofits are so unique, they leverage a different type of accounting, also known as “fund accounting” to manage their finances. Tax season can be a stressful time for anyone, but for a nonprofit professional who already wears many hats, it can be closer to a nightmare.

If I qualify for tax-exempt status, do I still have to pay some taxes?

Actually, 18% of nonprofits listed limited staff as their greatest challenge in 2019. This means that finding someone to take on these responsibilities (especially as you grow) can be immensely challenging. However, nonprofit accounting isn’t just about pulling important information. You also need to understand how to use this information to implement best practices for effective accounting decisions.

To protect yourself from the liability of being on a nonprofit’s board of directors, it is first essential to always be sure your errors and omissions (E&O) insurance policy is always paid current. We recommend getting in the habit of confirming your E&O policy when you receive your audit financial statement. 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. For-profit companies leverage an income statement to show how much they have earned or lost over a specific period of time. By contrast, nonprofits are less focused on income and more worried about the activities they’ve been able to carry out for their mission.

Statement of Functional Expenses

This allocation, reporting, and financial decision-making is where nonprofit accounting comes into play. Typical categories include program services, management and general, fundraising, and other sources of income. You can use the statement to assess the usage of funds, track performance, and make decisions about future operations. Filing the annual Form 990 is a key aspect of nonprofit accounting, nonprofit bookkeeping services and one that can’t be overlooked. Form 990 is the annual tax form that tax-exempt (e.g. 501(c)3) organizations are required to file each year to remain compliant with the regulations and requirements set by the IRS. For example, if you have $50,000 of restricted assets set aside for your scholarship program, then decide to provide a $5,000 scholarship, you’re not losing those funds.

Financial accounting rules regarding an income statement are more useful for investors seeking to gauge a company’s profitability and external parties looking to assess the risk or consistency of operations. However, there are nonprofits that qualify as tax-exempt but their donors’ contributions do not qualify as charitable deductions (although they may qualify as business expenses). Examples of these nonprofits include social organizations, chambers of commerce, college fraternities and sororities, amateur sports clubs, employee organizations, and more. You’ll most likely use fund accounting on a daily basis, or whenever you receive a donation. For example, you’ve just received a donation for $1,000 to be spent on building repairs.

How Nonprofit Accounting is Different

Like the income statement, it tells you how “profitable” your NFP was over a given period by showing your revenue, minus your expenses and losses. You may also need to provide other information, like unrealized gains or losses on investments and non-cash transactions, such as depreciation or amortization expenses. As with any financial statement, ensure that all figures are accurate and up to date before submission. Delegating accounting tasks in nonprofit organizations ensures the organization is mindful of its financial commitments and adheres to legal and tax requirements. The first step to accounting for nonprofits is choosing whether your organization should use cash-basis or accrual-basis accounting. When deciding between the two, you should consider your nonprofit’s financial and reporting needs and what it’s better equipped for.

  • Financial accounting is the widely accepted method of preparing financial results for external use.
  • There are many things that nonprofits can do to prepare, plan, and keep the audit process going smoothly.
  • Financial statements generated through financial accounting are used by many parties outside of a company, including lenders, government agencies, auditors, insurance agencies, and investors.
  • All of this will hopefully leave your business with more money in its accounts.
  • If you’ve dealt with for-profit cash flow statements before, this should look very familiar.
  • To ensure your nonprofit runs efficiently, small organizations should focus on streamlining solutions like online accounting.

Usually issued on a monthly, a quarterly, or an annual basis, the income statement lists revenue, expenses, and net income of a company for a given period. Financial accounting guidance dictates how a company recognizes revenue, records expenses, and classifies types of expenses. The accounts payable process involves recording, reviewing, approving, and paying invoices, as well as reconciling accounts to ensure accuracy and completeness. It is a critical component of an organization’s financial management system, enabling them to manage their cash flow, maintain accurate records, and fulfill their financial obligations in a timely manner. In a properly set-up system, this fund would have its own asset, liability, equity, income, and expense balances, making it a completely separate entity within your organization.

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