Misconceptions in Not-For-Profit Accounting

In this guide, we talk about the essential components of bookkeeping for nonprofits and provide handy tips for keeping your paperwork impeccable and your compliance squeaky clean. Now, more than https://nerdbot.com/2025/06/10/the-key-benefits-of-accounting-services-for-nonprofit-organizations/ ever, financial clarity and transparency are critical to your organization’s success. We recognize that accounting never stops, and nonprofits need our help no matter where they’re located. Your statement of functional expenses enables you to allocate your expenses according to their use at your organization. Essentially, it classifies your expenses according to your use of your organization’s funds.

Create invoices for goods, services, and donations

As a bookkeeper, it may be necessary to meet with your nonprofit’s accountant weekly, monthly, quarterly, and yearly. Weekly meetings with an accountant should go over how to adhere to your budget goals and track fund accounting. Looking up a nonprofit’s Form 990—using services like Guidestar.org—can tell you a lot about its financial state.

A Guide to Nonprofit Accounting (for Non-Accountants)

Nonprofits have tight rules around what they can and can’t spend money on. They need an organized system that makes sure purchases are ordered, budgeted for, and fulfilled properly from the get go. Fortunately, nonprofit professionals don’t have to worry about your financial information if you choose FreshBooks. Before applying for tax-exempt status with the IRS, you need to register your nonprofit status with your state. One of the first things we need to clarify before digging deeper into bookkeeping for a nonprofit is the difference between nonprofit and for-profit entities.

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Otherwise, there are free accounting choices, but you should consult a professional before making final judgments about your non-profit’s financial software. That is why to perform all accounting activities smoothly and error-free a non-profit will require bookkeeping. Your accounting obligations differ from those of for profit organizations if you operate a non-profit group. Your expenditures will be influenced by how your accounting systems, processes, reporting requirements, and laws are established and handled, in addition to these core bookkeeping duties.

• Choose software that supports fund accounting, generates Form 990 reports, and integrates with donor management tools.
• We don’t guarantee that our suggestions will work best for each individual or business, so consider your unique needs when choosing products and services.
• But expense allocation is even more complex in nonprofit bookkeeping, thanks to the need for functional expense reporting.
• This way, all of your data will be consistent, and it’ll be easier to review your funding model and make adjustments to increase your organization’s financial stability.
• The Canadian Revenue Association (CRA) requires you to keep track of each one so you can report it at the end of the year — even if you’re tax exempt.
• The IRS receives more than 70,000 applications for tax-exempt status every year, so be patient when submitting your application.

Statement of Activities (Income Statement)

Document all expenses related to the nonprofit’s programs and services. This may include costs for staff salaries, supplies, equipment, and other program-related expenditures. Proper recording of program expenses enables evaluation of program efficiency and impact. Bookkeeping captures day‑to‑day transactions, while accounting interprets those numbers into strategic insight.

• After setting up their bookkeeping systems, a top priority for all nonprofits should be to understand their tax requirements.
• Since nonprofit organizations risk losing their tax-exempt status if they don’t comply with accounting principles, it’s vital to pay attention to proper bookkeeping.
• Key components include a well-structured chart of accounts, fund accounting, accurate tracking of donor contributions and grants, and regular financial reporting.
• Your IRS Form 990 is the annual tax form that your nonprofit accounting team submits to maintain your tax-exempt status with the federal government.
• Purchases need to be orderly because of the strict rules on what you can spend your money on in a not-for-profit organization.

More and more nonprofits are operating and/or expanding internationally. Implementing robust financial controls and conducting internal audits helps identify and mitigate potential risks, errors, or fraud. Internal controls may include segregation of duties, regular bank reconciliations, and review processes for financial transactions. Separating financial duties among multiple individuals is crucial to prevent fraud or errors.

• When you first start a nonprofit organization, you might be bringing in money from grants and a few donors.
• From tracking payments and expenses to creating reports and quarterly financial statements, FreshBooks is the go-to program with numerous uses.
• It emphasizes fund management, budget planning, program costing, and allocation of funds, in order to ensure financial transparency and accountability.
• A nonprofit accountant helps interpret financial data to guide organizational strategy and ensure that operations align with the organization’s mission.

Generate the three core statements each month and share them with the executive director and finance committee. Track pledges and grant installments so you can follow up before due dates slip by. Quick reconciliations reveal fraud faster and ensure cash balances remain trustworthy. Typically, this is set up as an income amount separate from your typical books for an in-kind donation. You will enter a receipt for the in-kind donation based on the fair market value of the donation. If the value of the donation is small (below $5,000) the IRS will let you determine a donation’s fair market value yourself, usually based how much comparable goods and services are selling on the market.