Nonprofit Accounting Explained: How-Tos & Best Practices

nonprofit accounting

Another difference between nonprofits and for-profits are its financial statements. A for-profit puts together an income statement each quarter, which assesses a company’s financial performance. On the flip side, nonprofit organizations write up a statement of activities that includes revenues, expenses, and net assets, which it gives to its donors and board of directors. The other resource a nonprofit depends on is a quarterly balance sheet listing the owner’s equity. Since nonprofit organizations don’t necessarily operate with an owner or owners, they’ll produce a document showing the organization’s liabilities and assets, known as a statement of financial position.

In addition to tracking income and expenses, it also ensures that the organization is using its resources efficiently. Nonprofit cash flow statements will refer to “change in net assets” instead of “net income,” and will sometimes list cash flows that are restricted to certain uses. 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. When you outsource your finances to us, you’ll have access to professionals who are not only experts in finance, but also understand the intricacies of the nonprofit world.

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This report provides information on where resources have been committed and allocated within an organization. Delegating accounting tasks in nonprofit organizations ensures the organization is mindful of its financial commitments and adheres to legal and tax requirements. Your nonprofit’s statement of cash flow shows how funding and cash moves in and out of the organization.

nonprofit accounting

Almost 1.4 million accountants work in the United States, and that number will grow substantially in the coming years. Professionals with the right combination of knowledge, skills, and experience will benefit from this growth and the many career options accounting provides. While we don’t provide this specific service, we have plenty of trusted CPAs we can refer you to. Consistency is a priority for us, and that’s why we’ll provide 1-2 dedicated accountants for your organization. If someone goes out of town, you have a team that will take care of your account while they are away. Hear a panel of guests dissect the latest headlines and provide expert analysis on the top stories from across the world of business, finance and accountancy.

Use Specific Language to Define Events, Activities, and Funding

Nonprofit accounting is the process of recording, tracking, and reporting the financial activities of a nonprofit organization. With a properly maintained accounting system in place, your nonprofit organization will be better able to plan expenses and support your initiatives. Because there are specialized software platforms out there for large and small organizations, and everything in between, it’s important you find one best suited to your needs.

If you’re running a small team, their online software allows you to pay employees on the fly. Their software also features a dashboard view that’s great for a bird’s-eye view of overall expenses, including overhead expenses. 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. From an operational perspective, nonprofit organizations must maintain good business practices and compliance, which includes nonprofit accounting.

Nonprofit Budget

Many small to midsize organizations struggle to find someone to fill this role. Actually, 18% of nonprofits listed limited staff as their greatest challenge in 2019. This means that finding someone to take on these responsibilities (especially as you grow) can be immensely challenging. You should check in with your budget monthly, comparing and evaluating your budgeted revenue and expenses against your actual revenue and expenses.

If Form 990 (or Form 990-EZ or 990-N) is due while the organization is awaiting approval, the nonprofit should file the appropriate form by its due date (including extensions). In this case, the organization should check the “Application pending” box at the top of Form 990 or 990-EZ. Once the nonprofit is granted tax-exempt status, it is crucial to adhere to ongoing compliance requirements. This includes filing annual information returns (Form 990, 990-EZ, or 990-N) and keeping proper records of the organization’s activities and finances. Failure to file the proper information return for three consecutive years will lead to automatic revocation of tax-exempt status by the IRS. The most important thing to remember when entering transactions is that if you’re funded by donors or grants, you need to track how that money is spent.

Bookkeeping for nonprofits

Touro University Worldwide is accredited by the WASC Senior College and University Commission (WSCUC). Touro College Los Angeles (Lander Campus) is a division of Touro University Worldwide. For more information on WSCUC, visit  or write WSCUC at 1080 Marina Village Parkway, Suite Accounting for Lawyers: What to look for in a legal bookkeeper 500, Alameda, CA 94501. Nonprofit management is an opportunity to build a career working with interesting people helping to change the world. The BLS projects 7 percent growth in the accounting profession through 2030, with 96,000 new accounting jobs added across the country.

While you might think that you can forgo hiring an accountant because you’re not running a for-profit business, you should reconsider. Having an accountant, or better yet, a dedicated financial team can help your organization ensure that its financials are always in order and that funds are being used as effectively as possible. Basic accounting software might meet your needs in the beginning when you only have a few funding sources. However, once you begin to bring in more funding from many different sources, you’ll likely need a more sophisticated accounting system in place. So, what do you do to make sure your payroll is processed correctly and on time?

Paying employees

Before a nonprofit begins the budgeting process, there are key concepts and terms that all members of the organization should understand. Typical categories include program services, management and general, fundraising, and other sources of income. You can use the statement to assess the usage of funds, track performance, and make decisions about future operations. It also outlines the reporting, filing, and notification requirements related to a nonprofit’s activities.

  • When filing the Form 1023, 1023-EZ or 1024-A or Form 1024, organizations should be sure to pay the applicable user fee.
  • Rather than track how much profit is earned like small businesses, nonprofit organizations track how money is spent.
  • Your nonprofit’s budget is the document that individuals at your organization are more likely to be familiar with.
  • IRS Code Section 501(c)3 may be classified as either a public charity or a private foundation.
  • It’s an affordable option that can provide access to deep nonprofit accounting experience and expertise.