Nonprofit Accounting Basics: Key Things Nonprofits Need to Know

You can ensure that your nonprofit organization remains in compliance. You can also keep your organization ready for tax time. To do so, you must stay updated about the basics of nonprofit accounting. 

Do you remember when you started your nonprofit? You probably didn’t think much about spreadsheets or in-kind donations. Nevertheless, accurate accounting is essential for the survival of your cause. 

Accordingly, you need to learn a few nonprofit accounting basics. You must also understand the difference between for-profit and nonprofit accounting. 

Nonprofit Accounting Basics 

Nearly every nonprofit elects a treasurer or financial officer. The treasurer handles all the organization’s finances. Still, they need tools to help them do their work correctly. 

Your personal bank account and a mountain of receipts aren’t enough. Your treasurer needs specific tools to fulfill their role, such as a journal, a nonprofit bank account, and a budgeting system. 

Your organization must hire a treasurer you can trust. However, they need to have more experience than having read a book called “Nonprofit Accounting for Dummies.” 

Accountants for nonprofits protect your organization from fraud. For example, they can help you follow best practices that suggest that you establish accountability for all staff members. 

You must also develop internal policies and procedures. These rules protect your organization from fraud. Developing a code of ethics is an excellent place to start. 

Also, you must create a yearly budget. Remember, your budget is flexible. You don’t have the follow it to the penny. 

What you do have to follow are IRS and Generally Accepted Accounting Principles (GAAP) guidelines. GAAP guidelines are the standard for any organization, whether nonprofit or for-profit. 

You must also think forward beyond a year. Accordingly, you need to develop a budget and plan for strategic growth covering the next five and ten years. 

If you want to promote growth, for instance, you need to hire more employees or recruit more volunteers. Now is the time to start building support that will enable your nonprofit to reach its objectives in the future. 

Bookkeeping for Nonprofits 

Your treasurer will need some method to create and maintain accurate financial statements. What they will need is a bookkeeping system. 

You want to find an automated system that’s specifically for nonprofit organizations. You’ll use that system to begin recording your organization’s financial transactions. Alternatively, you can seek the aid of a bookkeeping service that’s familiar in working with nonprofits. 

Either way, your treasurer or bookkeeping service will need help. They’ll need to keep receipts organized and record disbursements. Your treasurer or accounting service will also need to keep track of things such as petty cash. 

They’ll also help you structure your finances using fund accounting. All these tasks will require some sort of technological solution. 

Crossing T’s and Dotting I’s: Getting Things in Order 

You must keep track of any money collected or spent by your nonprofit. This information is critical, especially when tax time comes around. 

As an example, some donors may make contributions every month. Others may give your organization one-time gifts. 

For each donation, your organization must provide donors with a receipt. During tax season, your donors can use those receipts to qualify for charitable deductions. A third-party bookkeeping service can help you to keep an accurate record of these many transactions. 

If you choose to hire a treasurer to manage your nonprofit finances, you’ll need an automated system that helps you to manage fund accounting. Fund accounting is an alternative to standard banking, where a business puts put all its money into one account. It allows you to segment money that originates from various sources. 

This segmentation is essential. There are different rules about how nonprofits must manage various funding sources. For example, a large university may have thousands of accounts for things such as endowments, project funding, and scholarships. They must follow the laws regarding funding that originates from these various sources. 

Your treasurer must also track various accounts, such as accounts receivable, accounts payable, cash transactions and payroll. 

Again, never use a personal account for nonprofit transactions. Your treasurer will oversee, with limited authority, a bank account that’s used solely for organizational business. Some banks offer accounts designed specifically for nonprofits. 

With the proper bookkeeping and account structure, your treasurer can perform bank reconciliations. A bank reconciliation ensures that your bookkeeping system aligns with your nonprofit bank account. 

Your treasurer should perform a bank reconciliation at least once a month. Bank reconciliation will help your organization avoid errors and fraud

Maintaining Your Nonprofit Charter 

Fund accounting is the primary difference between for-profit and nonprofit organizations. This method will help you maintain your status as a nonprofit cause. 

For-profit companies use a general ledger. A general ledger is a self-balancing account. 

A nonprofit organization must maintain many ledgers. These ledgers are the heart of the fund accounting system. They will allow you to separate resources as needed. 

As you can imagine, fund accounting can become very complicated. Eventually, your organization will grow. 

When it does, it may make sense to hire a third-party consultant or bookkeeping service. A dedicated consultant can help you keep your nonprofit organization’s finances in order. 

Calling in Help 

You could entrust your treasurer to know nonprofit accounting basics. However, the rules change continually. 

Nonprofits must follow specific rules regarding 501(c)3 organizations. The Internal Revenue Service (IRS) dictates those rules. Your nonprofit must also keep up with changes in the tax code. Also, nonprofits must complete some of the most complicated tax returns among all entities. 

Trust Us With Your Cause 

Knowing the nonprofit accounting basics will help you make better choices for your organization.

By outsourcing your nonprofit’s bookkeeping needs, you can free staff members to focus on your organization’s mission. Now, you can ensure that your organization complies with federal laws and maintains its charitable status. 

The Charity CFO has years of experience in using technology to help nonprofits prosper.

Contact our group today for a free consultation and learn how our full-service firm can help you help others.

Comments (5)

Hello. My name is tim seldin and I am the president of the Montessori Foundation, 501(c)(3) and provides professional advice and services to the 5000-3 schools in North America. Proximately 65% of those schools are nonprofit. I enjoyed your blog post about nonprofit accounting. I wonder if you’d be interested in being a guest on one of our weekly webcasts 4 L of Montessori Schools. We also publish a magazine for Montessori Schook leaders called Montessori leadership. With minor modifications, turning your byline in the something that’s not quite so obvious as a direct sales pitch, I believe that it would make a nice short article. Let me know if you’re interested.

Tim, thank you for your response and interest! Please refer to your email inbox, and TCCFO will communicate with you directly.

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