When you joined your nonprofit, it was probably the task that motivated you, not the numbers or paperwork. But, running a nonprofit also means handling finances, which can feel overpowering.
Accounting and bookkeeping are usually difficult, but they’re not equal. Bookkeeping is recording and managing financial transactions. Accounting is interpreting that data to make reports and inform decisions.
Nonprofit bookkeeping comes with extraordinary challenges, such as tracking grants, limited funds, and donations. This blog covers nonprofit accounting basics and how a bookkeeper eases finances.
Table of Contents
Understanding Nonprofit Bookkeeping
Nonprofit bookkeeping tracks financial activities such as payroll, expenses, and donations. These records assist nonprofits:
- Stay compliant with IRS rules.
- Follow accounting standards (GAAP).
- Maintain transparency with donors.
Without proper bookkeeping, tracking funds and maintaining tax-exempt status is difficult. Maintaining transparent and proper financial records enables your nonprofit in many ways:
- Builds Trust: Clarity in your records makes trust from donors, regulators, and stakeholders.
- Stays Compliant: Proper bookkeeping makes sure you follow tax and legal regulations, including audits and filings.
- Informed Decisions: Up-to-date finances help leaders make smart choices and manage resources well.
- Budget Control: Tracking income and expenses keeps your nonprofit on budget and ready for future needs.
- Grant-Ready: Organized records are key when applying for and managing grants.
- Spot Issues Early: Regular recordkeeping and account checks help catch errors or fraud.
- Simplifies Work: Good bookkeeping makes financial processes smoother, especially during tax time.
How Nonprofit Accounting is Unique
Nonprofit accounting focuses on financial accountability. Donors and grant funders often restrict how they use their money. Nonprofits use fund accounting to track and ensure they spend funds as intended.
Nonprofits organize their funds into categories like:
- Restricted funds: You must spend it on specific projects.
- Short-term restricted funds: Used for certain purposes until a set time, after which they become unrestricted.
- Unrestricted funds: You can use it for any urgent needs.
Unlike businesses, nonprofits cannot allocate additional revenues to authorities. For instance, If a nonprofit sees an additional $10,000, it must reinvest the amount into the task, not pay it to administrators.
Key Nonprofit Accounting Reports
- Budget: Predicts expenses and allocates resources.
- Statement of Financial Position: Displays investments and liabilities, reflecting financial health.
- Statement of Activities: Tracks income and expenditures over time.
- Statement of Functional Expense: Break down expenses into classes such as programs or fundraising.
- Statement of Cash Flow: Tracks how money transfers to and fro of the association.
Best Practices for Nonprofit Accounting
- Track your budget: Check monthly to stay on track.
- Set internal controls: Divide financial duties to reduce errors and prevent fraud.
- Conduct audits: Ensure accuracy and build donor trust.
- Use specialized software: Nonprofit-specific tools simplify tracking and reporting.
How to Start Bookkeeping for Nonprofits
Getting started with nonprofit bookkeeping is simple! Follow these five easy steps:
1- Find a Bookkeeper
Choose whether to handle your books on-site or employ an expert. Look for a person experienced in bookkeeping software like QuickBooks. They should know nonprofit rules and have experience managing nonprofit finances. A dedicated bookkeeper keeps your records accurate and well-maintained.
2- Track Every Transaction
Record all income and expenses, big or small. For example, if someone donates a car, log it as an in-kind donation with details like the make and model.
3- Reconcile Bank Statements
Compare your bank statements with your records to catch mistakes, fix budget errors, and spot any suspicious activity. Begin by reconciling monthly, and adjust the frequency as your transactions increase.
4- Create a Budget
Use your records to plan how you’ll spend your funds. Set clear goals and divide money to support your mission.
5- Make Financial Statements
Your bookkeeper should prepare activity reports to track income and expenses. They should also create reports on financial position, assets, liabilities, and cash flow. These reports provide a clear understanding of your finances and help with future planning.
Key Tasks of Nonprofit Bookkeepers
1- Handling Payroll
Payroll involves more than paying staff; it includes calculating taxes, benefits, and dividing costs across programs or funds. Managing all these details can be complex, but using a payroll service can make the process much easier and more accurate. The right system ensures you handle payroll tasks on time, keeping your nonprofit organized and compliant.
2- Tracking Income and Invoices
Nonprofits often collect revenue through donations, memberships, or sales. Bookkeepers manage invoices to keep income organized and provide donation proof to donors.
3- Recording Expenses
Record every expense, from office supplies to program costs, in the correct category. Nonprofits group costs into three major types: administrative expenses, fundraising expenses, and program costs. This classification helps show donors how their contributions are being used. By keeping expenses organized, nonprofits can maintain transparency and build trust with their supporters.
4- Keeping Transactions Updated
Bookkeepers ensure your records stay up to date by handling tasks like recording deposits and payments. They also manage unpaid bills, money owed, and balance bank and credit card statements. By sticking to a regular schedule for daily or weekly updates, they keep everything organized and accurate. This uniform procedure makes it manageable to sustain proper financial records and avoid any problems down the bar.
Bookkeeping vs. Accounting
Bookkeeping and accounting are both vital but have dissimilar objectives for a nonprofit. Bookkeeping records and organizes financial transactions for easy tracking. It also includes generating reports that give an overview of the nonprofit’s financial activity.
But, accounting involves reviewing and analyzing the financial data to ensure everything is accurate. Accountants use bookkeeping data to describe the financial condition and prepare for the future. In short, bookkeeping is about following everyday finances, while accounting assists make sense of the data and prepare for the future. Both are essential to keeping a nonprofit’s finances in order.
Why Hire a Bookkeeper?
Managing nonprofit finances can get complicated fast. Hiring a bookkeeper helps you:
- Avoid mistakes with payroll, taxes, or expenses.
- Save time so you can focus on your mission.
- Stay compliant with tax rules and standards.
A good bookkeeper ensures your finances are accurate and organized, giving you peace of mind.
Conclusion
Bookkeeping is the basis of an organized nonprofit. It maintains your finances compliant and clear, allowing you to concentrate on making a distinction.
By picking to hire a bookkeeper, you bring in expertise to ease your financial processes and keep everything running smoothly. It’s an asset to your nonprofit’s success.
