Consider you have a nonprofit organization. It is trying to make the world a better place. But, nonprofits receive generous tax breaks. So, it must be responsible to its donors. So, guaranteeing you a proper account is important. After all, reporting your incoming and outgoing money is also essential.
Nonprofit accounting supplies financial transparency that makes donors feel comfortable. It assures that the organization is spending cash wisely for its aims. After all, sloppy or inaccurate accounting can lead to issues with the IRS. It includes losing nonprofit status, hefty fines, criminal charges, etc.
This article will help nonprofits improve their accounting skills, handle unique challenges, and remain compliant.
What is Nonprofit accounting?
Nonprofit accounting is a financial management system that records and reports for nonprofit organizations. Nonprofits are organizations involved:
- Have no ownership interests
- Receive contributions from third parties that don't expect a return
- Have a plan other than creating a profit
Nonprofit accounting employs specific language and designations to note funded activities. It creates records to show donors how their cash is being used. Some examples are as follows:
- Programs: The aids a nonprofit gives are called programs. Each program generally has its revenue, records, expenses, etc.
- Donor limitations: Some donors limit their contributions to specific purposes. Nonprofits must account for these limitations in their economic management. Funds not donor-restricted can be used for any program. It can also used for administrative expenses or other purposes
- Fundraising: Fundraising means activities that raise an organization's activities. These areas involve direct mail campaigns, email newsletters, etc.
- Administration: Funds for directing a nonprofit are called administration or overhead funds. These funds must keep the nonprofit process. They must be noted in all accounting. It also reported to donors. Donors prefer that nonprofits keep their overhead costs. It includes salaries, as low as possible, to direct most funds toward programs.
Whether nonprofits require accountants or not?
Every organization handles cash flow and pays taxes. Likewise, nonprofits should invest in a professional accounting group.
But, many nonprofit organizations don't allocate resources to a professional accountant. After all, they assign the task to an untrained staff member or volunteer.
Nonprofits run the risk of fraudulent activity. It will happen if they don't manage bookkeeping properly. Problems are often unintentional. It arises from a lack of oversight or experience. Volunteers comprise an essential part of the staff of nonprofit organizations. This may leave an organization with short notice, which can cause recordkeeping gaps.
Documents needed
Nonprofit accounting needs to maintain detailed records. It helps to ensure financial transparency. Here are the necessary documents that nonprofits maintain:
- Balance sheet: This document gives a snapshot of a nonprofit's financial position. It outlines certain things. It includes assets, liabilities, net assets, etc.
- Income statement: This statement summarizes a nonprofit's revenue and expenses. It shows the income of organizations from donations, grants, etc. It also expresses how those funds were used to cover expenses.
- Cash flow statement: It is the cash movement in and out of a nonprofit organization. It differentiates cash flow from certain activities. It involves operating, investing, financing, etc.
- IRS form 990: This annual tax form is essential for managing a nonprofit's tax-exempt status. It records an organization's economic activities, mission fulfilment, etc.
- State & local tax returns: A nonprofit organization needs to file extra tax returns with state or local authorities. It depends on your location.
Extra supporting documentation nonprofits must monitor and maintain involved:
- Expense receipts
- Bank statements
- Board meeting minutes
- Grant agreements
- Payroll records
- Donor records
Tax accounting for nonprofits
The tax code for nonprofits can be complex. Tax reforms can also affect how you record income and how you maintain volunteers. Nonprofits should focus on the following parts.
Handling and recording earnings
Some of a nonprofit's earnings can be taxable. That happens if things are not reported or managed correctly. Whenever new tax laws pass, the rules outline how nonprofits must handle and report income change.
Recording benefits
Nonprofits must record the valuation of specific employee benefits. It can count as taxable income if not appropriately documented.
Trackin services
Tax accounting for nonprofits doesn't include costs and donations. You also need systems to follow labour and services. Volunteers, for example, may provide unpaid labour, but that labour still has a value that can affect your taxes and overhead.
Practices for nonprofit accounting
Nonprofit organizations must juggle impactful missions. It might be with the necessity of responsible economic management. Here are some essential best practices that should be followed by nonprofits:
Establish internal authorities
A robust system of internal authority is vital for any nonprofit organization. Internal authority controls and safeguards valuable resources. It helps you foster trust with donors. They also involve processes to resist accounting errors. Consider the following best practices:
- Segregate duties: Decrease the risk of mistakes by separating essential accounting tasks between different staff.
- Implement approval procedure: Establish clear approval procedures for expenses. It is especially more significant purchases that ensure proper oversight and budget adherence.
- Systematic reviews: Conduct systematic reviews of accounting processes to identify and address any weaknesses.
Track GAAP rules
GAAP principles are mostly accepted accounting principles. They are a set of accounting processes and standards given by the Financial Accounting Standards Board (FASB). The public organizations in the U.S. should track GAAP. After all, private industries do this as well. Nonprofits must also track GAAP standards. Although their regulations sometimes differ slightly from those of for-profit organizations.
GAAP's aim is to confirm companies' financial statements. They are consistent across establishments. It allows investors and the government to interpret them easily. GAAP rules for nonprofits are intended to create transparency for donors. They also help the government monitor the organization’s tax-exempt status.
In addition to general GAAP rules, there are specific rules that apply only to nonprofits:
- Labelling net assets: Assets in a nonprofit's statement of financial position should be labelled according to whether they are limited by donors.
- Explaining cash flow: In addition to quantitative information on the financial position statement, nonprofits must provide qualitative information that explains how they maintain their liquid resources to meet everyday costs. In particular, nonprofits must show any restrictions that impact their cash flow.
- Investments: While nonprofits should know investment management fees, they don't have to record these separately. But, nonprofits must report investment income net of external and internal costs.
- Donations: Your accountants should also monitor donations closely. They also record them in compliance with GAAP. You must record promises of future contributions when you receive the pledge instead of when your nonprofit gets the donation.
Use the accounting software for nonprofits
Choosing the proper accounting software for your nonprofit is necessary. It is regardless of who does your books. You'll need an accounting program to track everything and be prepared for tax season.
Nonprofits should look for the best accounting software for general bookkeeping and accounting. It should also cover specific nonprofit needs. It involves donor management, FASB compliance, grant management, etc.
Keep lines of conveying open
No matter what software you choose. The most essential part of nonprofit accounting may be conveying.
Invest in skilled personnel
Expert accountants are familiar with nonprofit accounting standards. They can ensure accurate recordkeeping, timely reporting and adherence to regulations. This personnel investment helps minimize errors and fraud. It also frees up valuable time for staff to focus on core mission activities. Training existing staff or outsourcing specific tasks to qualified professionals allows a nonprofit to leverage financial expertise without taking on additional overhead costs.
Winding Up Note
Not-for-profit groups use nonprofit accounting as a system of financial management and recordkeeping. They report financial information through this system to ensure financial transparency, making donors feel comfortable and assured that their money is being wisely spent to further the organization's goals.
Nonprofit organizations use specialized accounting software to manage their finances, keep track of donations, and generate reports to comply with nonprofit rules.
You'll spend less time worrying about accounting and more time focusing on delivering excellent customer service. Fino Partners can help alleviate your accounting burden.
