Nonprofit Bookkeeping & Accounting for Dummies: A Complete Guide

Nonprofit bookkeeping and accounting can be a daunting task, but it doesn't have to be. In fact, with the right tools and knowledge, you can ensure your nonprofit is running smoothly and efficiently.

The first step is to set up a chart of accounts, which is a list of all the different accounts your nonprofit will need to track. This includes assets, liabilities, equity, revenues, and expenses.

A well-organized chart of accounts will help you keep track of your nonprofit's financials and make it easier to prepare financial statements. This is especially important for tax-exempt organizations, which are required to file Form 990 with the IRS.

To get started, you'll need to determine which accounting method is best for your nonprofit. The accrual method matches revenues and expenses in the same period, while the cash method matches revenues and expenses when cash is received or paid.

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To set up nonprofit bookkeeping, start by creating standard accounting principles (GAAP) as a guide, just like the AICPA and FASB recommend.

You'll need to keep your nonprofit funds separate from your personal account, which is a requirement for transparency and reporting to your board and the IRS. Many nonprofits start with a single account, but it's essential to keep things separate.

Open a dedicated nonprofit bank account to store your funds, and designate someone as a signatory, such as your board president, treasurer, or bookkeeper.

As you collect donations and grants, you'll need to develop fund accounts to track restricted, unrestricted, and temporarily restricted funds. This is where experience in fund accounting comes in handy.

Keep in mind that all funds must be recorded in a chart of accounts to ensure accountability to donors and track allocations.

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Recording every transaction is crucial for accurate financial statements and tax compliance. Every transaction, no matter how small, must be recorded, including purchases like paper clips or larger expenses like a venue for a fundraiser.

Your recordkeeping should be as detailed as possible, noting even the smallest details about each transaction. This includes in-kind donations, such as a car given to your nonprofit, where you should record the model and make of the vehicle.

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Recording transactions is a crucial part of nonprofit bookkeeping. Every transaction, no matter how small, must be recorded.

Whether you spend one dollar on paper clips or $1,000 on a venue for a fundraiser, every transaction must be documented. This includes in-kind donations, like a lawyer volunteering three hours of their time to review a contract for your nonprofit.

The value of in-kind donations should be recorded based on their fair market value, which is what a willing buyer would pay and a willing seller would accept. In this case, if the lawyer's standard hourly rate is $100/hr, you'd record the three donated hours as an in-kind donation of $300.

As a nonprofit bookkeeper, you're responsible for entering cash and in-kind donations, grants, membership payments, and tracking all invoices and payments paid by your organization. This information will be used later to produce financial statements and report your financial information to the IRS.

You must thoroughly and accurately detail each transaction your nonprofit makes, including even the smallest purchases like paper clips. This means noting the model and make of a donated vehicle, for example, or the details of a grant you receive.

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As a nonprofit bookkeeper, entering all revenue and expenses is a primary act of bookkeeping. You'll need to track cash and in-kind donations, grants, membership payments, and invoices and payments paid by your organization.

At the end of the month, you must reconcile revenue and expense reports with your bank account. This ensures your records are up to date.

Reconciling regularly helps prevent errors and discrepancies. By making sure your transactions line up with your records, you can catch accidental mistakes and rectify budgetary errors before they cause problems.

You should reconcile revenue and expense reports with your bank account at the end of each month. This helps keep your accounts and reports accurate and up to date.

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Budgeting and reporting are essential components of nonprofit bookkeeping and accounting. A good budget acts like a roadmap for a nonprofit, determining where and when the organization will deploy its resources.

To create a budget, you'll need to determine what your nonprofit wants to achieve in the coming year, develop realistic estimates for how much it will cost to achieve those goals, estimate your income sources for the year, and alter the budget to align expectations with reality.

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Regularly monitoring expenses and revenue against the budget allows for timely adjustments and ensures fiscal responsibility. Financial reports, including income statements, balance sheets, and cash flow statements, provide a snapshot of the organization's financial health.

To create a comprehensive budget, consider the following factors:

Here's a simple breakdown of the financial statements you should produce:

Regular audits are crucial for safeguarding nonprofit assets, maintaining financial integrity, and upholding the organization's reputation. Audits ensure financial accuracy and compliance, detect errors and potential fraud, enhance transparency, improve decision-making, and identify financial risks.

Nonprofits are taxed differently than for-profit companies, and they can apply to the IRS to become exempt from federal taxes under Section 501.

To become exempt, you'll need to set up a bookkeeping system and generate financial statements to get your tax obligations straight. Nonprofits must file Form 990, which discloses their revenues, expenses, and changes to net assets to the public.

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Most organizations exempt from income tax under section 501 are required to file Form 990, but certain religious, political, and foreign organizations are exempt.

The IRS Form 990 is a comprehensive annual reporting form that most federally tax-exempt organizations must file. It provides the IRS and the public with information about the organization's mission, programs, and finances.

To determine if you need to file Form 990, check if your organization meets either of the following thresholds:

Failure to file Form 990 on time can result in significant penalties, up to $12,000 or 5% of gross receipts, whichever is less.

In nonprofit bookkeeping, accounting is a crucial aspect that ensures accountability to donors and tracks how funds are allocated. Nonprofit fund accounting differs from for-profit accounting.

All funds that come to your organization are restricted, unrestricted, or temporarily restricted. Bookkeepers must record these funds in a chart of accounts to keep track.

A bookkeeper with experience in fund accounting will create detailed fund accounting reports to help your accountant file quarterly statements and perform audits.

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Reconciling your bank accounts is a crucial step in maintaining accurate financial records. You should do this at least once a month to ensure your books are up to date and accurate.

A bank reconciliation involves comparing each transaction from your bank statement with the ones you have in your books. This helps track cash flow, prevents fraud, and detects bank errors.

Regular reconciliations can help you identify any discrepancies between your bank statement and records. This can prevent accidental mistakes from throwing off your entire financial data.

If you have a large number of transactions, you should reconcile your bank statements more frequently. You might start by reconciling every time you receive a bank statement, then schedule additional time as the size and quantity of your transactions grow.

Here are some benefits of regular bank reconciliations:

Reconciling your bank accounts regularly will help you stay on top of your finances and prevent costly mistakes.

Choosing an accounting method is a crucial step in setting up your nonprofit's financial management system. It's essential to choose between a cash or accrual-based accounting system.

The cash-basis accounting method is easier to maintain, making it a good choice for smaller nonprofits. This method records income and expenses when cash is received or paid.

Accrual-based accounting, on the other hand, records income and expenses according to when the transaction occurs, regardless of when the cash was received or paid. This method is more complex but may be necessary if your organization plans to receive funds from prominent donors.

Nonprofits may also use a modified accrual accounting system called "fund accounting", which tracks income and expenses in separate accounts or funds representing different revenue sources, such as grants or donations. This system helps measure charitable goals against financial performance.

Here's a brief comparison of the two main accounting methods:

You need to ensure your accounting system can handle fund accounting. This involves tracking separate buckets of money for different funding sources, which is crucial for nonprofits with specific rules around spending.

Nonprofits have overhead expenses, just like for-profit businesses. Overhead expenses cover internal expenses, administrative costs, and marketing efforts that help grow the organization.

To qualify and maintain nonprofit status with the IRS, you must monitor overhead expenses. The IRS requires nonprofits to spend a certain percentage of revenue on programs.

Nonprofits often have thousands of accounts, including endowments, scholarships, and capital projects funds. Each of these accounts has unique rules about how funds can be spent.

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A cash flow statement is a financial report that summarizes the inflow and outflow of cash during a specific period. It's a crucial tool for non-profit organizations like the World Impact Foundation, which uses it to track its cash flow for the month ended December 31, 2018.

The statement is divided into three main sections: Operating Activities, Investing Activities, and Financing Activities. Operating Activities include cash inflows and outflows from operational activities such as donations, grants, employee salaries, and supplies. The World Impact Foundation's statement lists an Increase in net assets of $2,100, which is a key indicator of its cash flow from operations.

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In the Operating Activities section, you'll also find cash inflows and outflows from items like depreciation, additions to cash, and subtractions from cash. For example, the World Impact Foundation's statement shows a Depreciation of $350, which means they spent $350 on assets that will be used up over time.

Here are the key sections of a cash flow statement:

The cash flow statement provides insights into the organization's ability to generate money from its operations and how it manages its cash resources. For the World Impact Foundation, the statement shows a Net cash flow for month ending December 31, 2018 of $1,400. This means they had a net increase in cash during the month, which is a positive sign for the organization.

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Having working capital can mean having funds to invest in new technologies and growth.

Working capital is essentially the difference between a company's current assets and its current liabilities. It's a measure of a company's liquidity and its ability to meet its short-term financial obligations.

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Current assets include cash, accounts receivable, and inventory, while current liabilities include accounts payable, short-term loans, and taxes owed.

A company's working capital can be calculated by subtracting its current liabilities from its current assets. This can be expressed as a formula: Working Capital = Current Assets - Current Liabilities.

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Developing fund accounts is a crucial aspect of nonprofit accounting. It ensures that donations and grants are used as intended by donors and stakeholders.

Nonprofits must create separate accounts for funds that are restricted for specific purposes. This means that funds must remain separate in your account and reports.

Restricted funds, unrestricted funds, and temporarily restricted funds are the three types of funds that come to a nonprofit organization. A bookkeeper with experience in fund accounting will create detailed fund accounting reports to help your accountant file quarterly statements and perform audits.

Here are the three types of funds that come to a nonprofit organization:

Nonprofit fund accounting is different from for-profit accounting because it emphasizes accountability to the donors' wants and tracks how these funds are allocated.

Internal controls and audits are essential for nonprofit bookkeeping and accounting. A system of checks and balances can prevent and detect fraud or financial mismanagement.

Segregating duties is a key step in establishing internal controls. This means assigning different financial tasks to different individuals to prevent one person from having complete control over any critical process.

Implementing dual control is another crucial step. This requires two or more individuals to approve and execute sensitive transactions, such as check-writing or bank reconciliations.

Regular audits are also vital for nonprofit bookkeeping and accounting. These audits ensure that financial statements are accurate and compliant with accounting standards and donor regulations.

Here are some reasons why regular audits are crucial:

By implementing internal controls and regular audits, nonprofit organizations can safeguard their financial resources, ensure transparency, and maintain their reputation.

Using technology can greatly simplify nonprofit bookkeeping and accounting.

Accounting software and expense management tools can automate tasks such as fund tracking, reporting, and donor management.

Cloud-based solutions make it easier for teams to collaborate and ensure data security and accessibility.

Nonprofits can choose from various accounting software options, including QuickBooks, Aplos, and AccuFund.

Expense management software like Fyle can automate expense reporting, eliminate manual data entry, and provide real-time insights into spending patterns.

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To ensure your accountants make the best financial decisions, they should understand some basic accounting practices.

Accountants should follow nonprofit accounting best practices, such as understanding the difference between revenues and expenses, and properly classifying them in financial statements.

A well-structured chart of accounts is essential for effective financial management, allowing accountants to easily track and categorize financial transactions.

By following these best practices, accountants can ensure that their financial statements accurately reflect the organization's financial situation, enabling informed decision-making.

Properly classifying revenues and expenses, such as program services revenue and fundraising expenses, is crucial for financial reporting and compliance with regulatory requirements.

Accountants should also ensure that financial statements are presented in a clear and transparent manner, providing stakeholders with a comprehensive understanding of the organization's financial health.

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