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7 Tips and Best Practices to Follow for Nonprofit Accounting

nonprofit accounting

Nonprofit organizations play an incredibly important role in society and culture. From social justice groups to religious organizations and education to community resources, these organizations provide helpful services and drive change on a global scale.

From an operational perspective, nonprofit organizations must maintain good business practices and compliance, which includes nonprofit accounting.

The financial resources, needs, and expenses of nonprofit groups are often incredibly different from other businesses or organizations that exist based on ownership and profit.

To truly tackle and sustain the monetary health of nonprofits, staff and team members need a strong understanding of the accounting principles that are unique to this industry. 

Here’s What We’ll Cover:

What Is Nonprofit Accounting?

How Is Nonprofit Accounting Different Than in Other Industries?

7 Best Practices for Nonprofit Accounting

Managing Nonprofit Tax Obligations

Choosing the Best Nonprofit Accounting Software

Get Started on Your Nonprofit Accounting Today

More Resources for Nonprofit Accounting

What Is Nonprofit Accounting?

Nonprofit accounting involves an in-depth system of financial management and bookkeeping that directly serves nonprofit groups, which often have no ownership or profit interests.

Financial officers and other handlers must ethically and responsibly manage donations, funds, and third-party contributions and report how the money is being used to advance the mission of the group or organization.

While there are different types of nonprofit organizations, many of them operate by the same principles when it comes to managing funds, expenses, and external accountability.

How Is Nonprofit Accounting Different Than in Other Industries?

Nonprofit accounting is different from most other forms of business accounting in that the money that these groups collect is not used to generate profit.

Contributors and donors seldom expect a monetary return on their investments, which is different than a business venture in which profits can be shared and redistributed. Practices are also subject to:

  • Restrictions based on locality or jurisdiction
  • Federal tax laws and filing requirements 
  • Operational rules set by a governing board or committee 

Because nonprofit groups often receive special tax privileges, the pressure to have transparent and accurate accounting practices is even greater. 

Fund Accounting Principles

In the nonprofit world, fund accounting refers to the financial process of measuring accountability instead of profitability. This distinction provides transparency into the way that a nonprofit is managed. There are generally two categories in fund accounting:

  • Restricted funds: Money in this category has a very specific purpose, which is often defined or dictated by the donor who awards it to the nonprofit group.
  • Unrestricted funds: Money in this category can be used for any general purpose, which includes larger purchases like land holdings. 

Fund accounting is not only helpful for donors who want to monitor their contributions, but it also provides helpful parameters and boundaries for nonprofit staff members who must prioritize and manage new projects and initiatives. 

7 Best Practices for Nonprofit Accounting

Nonprofit organizations often operate on lean budgets, which means there’s not always space for a dedicated financial manager or accountant on staff.

With that being the case, all team members who spend or distribute funds should stay up-to-date on the best practices. Below are several tips and rules to follow to maintain a thriving nonprofit budget.

1. Abide by Strict Internal Policies and Ethics

One of the first steps to take when managing your accounting practices is to hire ethically responsible staff members. Many well-meaning organizations have been thwarted by individuals within the organization who took advantage of having access to monetary contributions. 

You can avoid undue harm by taking the following steps:

  • Performing background checks on new hires, interns, and staff members
  • Developing a well-rounded code of ethics for the entire team
  • Maintaining strict and transparent policies when it comes to handling money
  • Requiring receipts and other proofs to monitor spending

2. Develop a Statement of Financial Position

In the world of nonprofit work, the term “statement of financial position” is widely used to describe how an organization plans to use its money. The official financial position is similar to a balance sheet in that it provides visibility into what a group owes, owns, or has in cash reserves at any given moment.

Since nonprofits don’t have owners, the financial position document is a summary of total liabilities and net assets

3. Develop a Realistic Annual Operating Budget

Just because a nonprofit group doesn’t churn a profit, doesn’t mean that it should forsake having a responsible and realistic budget. Depending on the type of work an organization does, the day-to-day costs could actually be substantial. When setting a complete budget, factor in things like:

  • Staff salaries (both full-time and part-time)
  • Expenses associated with programming and events
  • Costs to maintain facilities or rented spaces
  • Advertising and promotional material

4. Use Specific Language to Define Events, Activities, and Funding

Some groups may choose to use an official statement of activities. In general, a statement of activities illustrates how an organization plans to use donor funding to meet the needs of a community or specific population. 

A statement of activities often outlines restricted and non-restricted funds from donors, while clearly defining amounts associated with:

  • Grants
  • Membership dues
  • Net assets (including money earned from sold assets)
  • General contributions

5. Maintain an Accurate Ledger

Bookkeeping is incredibly important in the world of nonprofits. Not only is this helpful for general administrative purposes, but it also provides the transparency and accountability that nonprofits rely on to stay operational. 

Additionally, accurate records help ensure that tax time goes smoothly. In order to reap the benefits of important tax benefits, a nonprofit organization should maintain accurate and up-to-date financial documents and spending reports.

6. Develop a Long-term Strategic Plan

The success of your nonprofit organization hinges on a number of unique factors, but having a long-term strategy in place can encourage longevity. How does accounting fit into the long-term strategic plan at your organization?

By maintaining more rigorous financial standards, you’ll be able to see exactly what expenses and contributions are needed for the future. In turn, this helps encourage growth while developing new programs or deciding which ones to discontinue. 

Long-term strategies can also be helpful in recruiting new members, donors, community supporters, and more. 

7. Set Sustainable Goals for Fundraising

Growing a nonprofit from the ground up hinges on the ability of organizers to fundraise at a certain level. Depending on the size of your organization, which territories it serves, and how many people are working on projects, specific fundraising and monetary goals may differ. Regardless, it’s important to monitor this metric carefully and to share results with donors and key stakeholders.

Additionally, there may be certain costs that a nonprofit group should allocate to fundraising efforts. It’s necessary to report all solicitation activities, event-related costs, and grant-writing fees or applications. Be sure to incorporate these numbers accurately and in real-time to your accounting program.

Managing Nonprofit Tax Obligations

Nonprofit groups are often eligible for beneficial tax adjustments, which reduce the overall tax burden for organizations that perform vital community work without generating profit. These benefits factor into the accounting structure of a nonprofit, and they require accurate reporting and accounting procedures.

In order to qualify for tax incentives, your nonprofit organization should:

  • File for tax-exempt status, as defined by the Internal Revenue Service (IRS)
  • File for official nonprofit status, as determined by laws in individual states
  • Utilize Section 501 to receive tax-exempt benefits
  • Responsibly pay for any non-tax-exempt activities, such as employment, sales, and real estate taxes
  • Utilize Form 990 to accurately disclose any assets or revenue amounts to the public

Maintaining strong tax preparation according to state and federal policies should always play a role in any procedures.

Choosing the Best Nonprofit Accounting Software

When accounting for nonprofit practices, it’s helpful to choose and use affordable technology that meets your needs. 

When comparing accounting solutions for a nonprofit, consider the following:

  • What basic services does the platform provide?
  • Does it meet your standards for essential bookkeeping practices?
  • Is it relatively affordable while offering competitive features?
  • Is it easy to renew or share licenses?
  • How many additional features or add-ons would you need to purchase?

Get Started on Your Nonprofit Accounting Today

It’s never too late to get a leg up on managing your nonprofit accounting practices in a way that’s responsible, ethical, and practical.

Having the right tools and technology solutions at your disposal can help you avoid mistakes and promote long-term financial health within your organization. 

Explore the many ways that FreshBooks’ accounting software can provide specific accounting support to non-governmental organizations (NGOs), nonprofits, and charities.

More Resources for Nonprofit Accounting

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