How to Organize Nonprofit Bookkeeping
Most nonprofits elect a treasurer or financial officer who manages the organization’s books, but this person may not understand the nuances of nonprofit finances and what must be tracked to keep accurate financial statements. While every nonprofit organization is different, organizing nonprofit bookkeeping generally requires the same tasks.
Start With the Basics
At a minimum, nonprofits must find a bookkeeping solution that works for nonprofit accounting, which means a solution that does fund accounting. Setting up some type of journal system or accounting software is a must. It’s also vital to have a separate bank account for the nonprofit to avoid blending personal funds with nonprofit funds, which is a big no-no. Setting up a dedicated bank account should be one of the first things on a nonprofit’s organization list. Nonprofits also must learn to effectively create annual budgets, record in-kind donations and create accurate financial statements. Basically, a nonprofit needs a relevant nonprofit bookkeeping system.
Differences Between Nonprofit and For-Profit Accounting
Both nonprofit and for-profit organizations must comply with Generally Accepted Accounting Principles, which standardize the reporting of financial statements. Following GAAP also reassures a nonprofit’s stakeholders that its financial reports accurately reflect its financial position. The primary difference between nonprofit and for-profit bookkeeping is the use of fund accounting, which focuses on accountability instead of profitability. While a for-profit business would likely have a single general ledger and cash account, a nonprofit typically has numerous general ledgers to track different funds.
The Importance of Fund Accounting
It’s critical for a nonprofit to set up different funds for different activities. Fund accounting allows the nonprofit to organize its funds in separate accounts and identify the individual sources of these funds and how funds are to be used. Each fund may have a different purpose and must be balanced individually. However, fund accounting allows the separation of funds but not necessarily a physical separation of resources, which can get complicated.
Understanding Core Financial Statements
Because funds are organized differently for nonprofits, financial reports are also different compared to for-profits. Businesses usually retain individual revenue and expense accounts but blend balance sheet accounts. Plus, they focus on returns on investment, net income and meeting lending agreements. Nonprofits focus on assets available for future services and creating accurate financial statements for stakeholders.
- The Statement of Financial Position is essentially a nonprofit’s balance sheet and provides an overview of the organization’s financials at any moment based on the Assets – Liabilities = Net Assets financial equation.
- The Statement of Activities is a nonprofit’s income statement and is used to report how profitable an organization was over a specific period.
- The Cash Flow Statement is like a for-profit’s cash flow statement and tracks all the nonprofit’s cash by reporting changes in cash and cash equivalents during an accounting cycle.
Choosing a Nonprofit Bookkeeping Solution
A nonprofit can record transactions in a paper ledger or an Excel spreadsheet, but these methods can get challenging for organizations with numerous separate funds to track. Nonprofit-friendly software programs are a more robust option, but a treasurer who isn’t used to these programs may initially struggle and need some assistance setting up the system.
Working with an outsourced bookkeeping service experienced in nonprofit accounting may be ideal in the interim or even on a permanent basis. Professional bookkeepers can help with inputting data during a nonprofit’s initial organization or perform ongoing number-crunching.
No matter the bookkeeping solution, it must be capable of recording and organizing donations, in-kind contributions and other receipts. It must also record disbursements and track payroll, petty cash transactions and accounts payable and receivable.
Basic Bookkeeping Tasks
Once a nonprofit sets up its bank account and bookkeeping system, it’s time to start organizing specific bookkeeping tasks. Some are familiar, such as reconciling bank accounts. About once a month, compare each transaction from the bank statement to what’s been recorded in the books to ensure they match, detect bank errors and prevent fraud.
Creating and using purchase orders is vital because nonprofits have specific rules on what they can spend their money on. Set up an organized system that ensures purchases are budgeted for, ordered and properly fulfilled using purchase orders. These documents are sent to vendors for specific goods and become a binding contract once the vendor signs them. They also specifically outline what the organization ordered, how much they paid and when they can expect delivery.
An annual operating budget is essentially a nonprofit’s road map, helping them stay on track financially and determining where and when to deploy its resources. Budgets should be created approximately the same time each year and include a list of expected income sources and expected expenses. A budget should determine what a nonprofit wants to achieve in the upcoming year, develop realistic estimates for what it will cost to achieve these goals and determine income sources to meet these estimates. Nonprofit accounting software should be able to help with creating budgets and tracking income and spending throughout the year based on this budget.
Recording in-kind donations is a relatively straightforward process. When a professional volunteers time to a nonprofit organization, those hours must be accounted for. The donation of time, or in-kind donation, is recorded based on the donation’s fair market value. Determining this value usually just requires asking the professional to issue an invoice showing the number of hours, hourly rate, and total due. The invoice would include a separate line to deduct that total to arrive at a $0 balance. The in-kind donation is then entered in the Statement of Activities as revenue as well as an expense so the transaction nets to zero.Hire a Nonprofit Accounting Specialist
Navitance accounting professionals understand the nuances and complexities of nonprofit bookkeeping—it’s one of our specialties. We help new and established nonprofits set up an accounting system that works for them. Navitance tailors your service by offering you the flexibility and scalability your organization needs as it grows. Nonprofits benefit from our extensive financial experience and the knowledge that their books are in good hands. Contact us at 978-809-3282 to learn more about our nonprofit bookkeeping services or request a consultation online.