A Guide to Accounting for a Nonprofit Organization

It includes recording revenues and expenditures, tracking expenses, preparing financial statements and analysis reports, budgeting, and ensuring compliance with relevant laws and regulations. In the nonprofit sector, revenue management involves tracking and reporting on various sources of income. These sources can include fundraising campaigns, donations, grants, and contributions. https://www.bookstime.com/articles/cannabis-accounting It is critical for nonprofits to accurately recognize and record these revenue sources to maintain financial transparency and ensure compliance with Generally Accepted Accounting Principles (GAAP). Good nonprofit financial management should ensure that the organization can function and grow. However, if your functional expenses become too large, donors might hesitate to give.

Nonprofit Accounting Compliance Requirements

Nonprofits have unique tax requirements that they’ll need to abide by to keep their tax-exempt status. Internal Revenue Code 557 is a good resource that thoroughly breaks down the steps you’ll need to take to ensure your nonprofit maintains its tax-exempt status. This page also describes the tax reporting, filing, and notification rules for nonprofits. 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.

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This statement allows stakeholders to evaluate the organization’s ability to generate funds and use the revenue effectively to support its mission. Nonprofit accounting provides financial transparency that makes donors feel comfortable and assured that the organization is spending money wisely to further its goals. Additionally, sloppy or inaccurate accounting can lead to problems with the IRS, which include possibly losing nonprofit status, hefty fines, and even criminal charges. The statement of activities (also sometimes called the operating statement) is like the nonprofit version of the income statement. 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. The difference between the balance sheet and the statement of financial position is that, because nonprofits don’t technically have any owners, the statement of financial position doesn’t have any equity on it.

• Not only is a financial audit NOT a bad thing, it can actually be a very good thing.
• When you can’t reduce an expense, be sure to find ways to describe its impact on the organization’s mission.
• Using a personal bank account and keeping a shoebox full of receipts isn’t going to cut it.
• IRS Code Section 501(c)3 may be classified as either a public charity or a private foundation.

PROFESSIONAL RESOURCES

• Donors will be more likely to give if they feel confident that you will use their money wisely.
• You’ll need an accounting program to track everything and be prepared when tax season rolls around.
• The final option is the fund accounting method, a type of accrual accounting method specifically used for nonprofit accounting.
• You should check in with your budget monthly, comparing and evaluating your budgeted revenue and expenses against your actual revenue and expenses.
• The other resource a nonprofit depends on is a quarterly balance sheet listing the owner’s equity.

Discover the challenges surrounding the use of paper checks and how best to migrate to e-payments. External financial audits can be expensive; however, your nonprofit may not need an audit. Find out if an audit is required for your nonprofit before you venture down this path, and learn about times when an audit is not only recommended, but required by law.

Tax accounting for nonprofits

For a nonprofit, this often includes donations or grants that have been promised but won’t be delivered until a future date. And it’s the core metric that outside observers will use to measure your organization’s financial value (and viability). They’ll also be used throughout the year as a way to compare actual income and expenses versus the projections listed in the budget. Nonprofit accounting shares much in common with for-profit accounting, but there are some key distinctions that nonprofit entities need to keep in mind. With Kindful’s QuickBooks integration, users get all the power of QuickBooks accounting combined with Kindful’s intuitive donor database.

With a two-way sync between QuickBooks and Kindful, all of your data flows seamlessly between your donor database and your accounting software. QuickBooks is known and loved by many specifically for its polished, no-fuss desktop and user-friendly interface. It has an impressive suite of core features including billing and invoicing, collections, cash management, fixed asset management, and even payroll capabilities. Technological advances have revolutionized the way organizations operate, and the continued prevalence of paper checks in payment processes stands out as a bottleneck for many nonprofits.

Creating internal policies and controls will significantly improve your fraud protection. Start by implementing a code of ethics, which will also show your donors, board of directors, and employees the values of your organization. Below is a list of best practices while managing your books, which will help protect your organization’s financial data. It is recommended nonprofit accounting you read up on the IRS’s latest rules and regulations to supplement these best practices. Deciding which form to file depends on the organization’s classification and whether or not the nonprofit reaches certain spending thresholds. Read more about the various forms available and learn about filing deadlines and penalties for non- and late filings.

Payroll Tax

Your nonprofit budget is the planning document used to predict expenses and allocate resources for your organization. It details both the costs that your organization will incur as well as the revenue you expect to receive over a set period of time, usually a year. Get our FREE guide to nonprofit financial reports, featuring illustrations, annotations, and insights to help you better understand your organization’s finances. But, more importantly, they are often generated monthly (or quarterly) to help you keep an eye on your financial health. Get our FREE GUIDE to nonprofit financial reports, featuring illustrations, annotations, and insights to help you better understand your organization’s finances. And then, there are a series of reports and financial statements you’ll use to communicate the financial reality of your organization to potential donors, the IRS, watchdog agencies, and other stakeholders.

• In this document, you’ll record your nonprofit’s revenue and expenses from the year, to demonstrate how finances have been utilized.
• If a donor does not restrict the donations they provide, that money can be added to your organization’s annual fund and used for overhead, programs, or any other expenses.
• This form is required for most tax-exempt organizations that receive more than $200,000 in annual revenue or hold more than $500,000 in assets.
• Nonprofits in the United States who function as public charities must pass the IRS public support test in order to remain classified as a public charity.
• Then, return to your annual budget and make updates according to your actual expenses and revenue results from these shorter initiatives.

Statement of cash flows

Tiffany Couch, CEO of forensic accounting firm Acuity Forensics, says this is one of the biggest mistakes not-for-profit organizations make. Once you’ve got your bookkeeping system setup and have started generating financial statements, the final piece of the nonprofit accounting puzzle is getting your tax obligations straight. The general idea of accrual accounting is to match revenues and expenses in the same period. But this rule for nonprofit revenue recognition can throw a wrench into the works and lead to some big “gains” or “losses” on your financial statements. Accrual accounting is required by Generally Accepted Accounting Principles (GAAP), which means that you’ll need accrual-based reports to complete a nonprofit audit. It also more accurately captures your ‘economic reality’ and helps you predict your finances better.