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everything-you-need-to-get-started-in-501c3-accounting

Everything You Need to Get Started With 501c3 Accounting

Corinne

When starting a nonprofit, there are a lot of preliminary responsibilities. Some of these include creating your nonprofit bylaws and completing your articles of incorporation worksheet

Once you have accomplished this monumental task, and filed your 501c3 application, you are ready to establish your accounting procedures to comply with 501c3 regulations. While they do share a few similarities, accounting for nonprofit organizations has different requirements than traditional for-profit businesses. 

Because additional transparency and specifically detailed accounting documentation is needed to satisfy IRS requirements, adhering to proper guidelines is essential. 

From GAAP and the different accounting methods to our top nonprofit tips, here is everything that you need to know to get started in 501c3 accounting. 

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GAAP and FASB

Generally Accepted Accounting Practices (GAAP) are practices are designed to establish baseline procedures that ensure bookkeeping within organizations is both consistent and transparent

There are three agencies that have a hand in establishing policies for the GAAP:

  • The Financial Accounting Standards Board (FASB) is the advisory committee that establishes GAAP for federal entities.

  • American Institute of Certified Public Accountants (AICPA) is a national professional organization of certified public accountants that sets ethical standards for accounting and auditing standards. 

  • Securities and Exchange Commission (SEC) sets regulations that the AICPA must abide by when determining guidelines. 

The FASB, which is not affiliated with the AICPA, issues the accounting rules. Once published by the FASB, the AICPA helps to turn certain pronouncements into procedures. They outline the best methodology to accomplish the accounting tasks required to meet the FASB rules.

These accounting principles do not generally discriminate between nonprofits and for-profits, although there are special considerations that apply to each scenario. 

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How Is Nonprofit Accounting Different than For Profit Accounting?

The major purpose of each classification is right there in the name: for-profits are seeking to acquire and build money while non-profits’ interests lie elsewhere. These entities have a mission in mind which differs depending on the type of nonprofit, charitable organization, or religious organization. 

everything-you-need-to-get-started-in-501c3-accounting-differencesHow are profit and nonprofit accounting different? Oliver is deep in thought on it!

There are specific accounting requirements for nonprofit organizations focusing on transparency and accountability for not only their donor base but also for government agencies. These public disclosures are found within the annual 990 tax return filed with the IRS. 

These organizations are held to a higher standard because they are expected to use funding to directly support their mission statement. Nonprofit data records are carefully scrutinized to make sure that donors’ funds are legitimately used for the intended purpose and not misappropriated, intentionally or unintentionally. 

Nonprofit only requirements include:

  • Restricted and unrestricted donations must be labeled and differentiated within the required documentation

  • Nonprofits must justify how their funding is used to support the organization itself and promote its mission

  • Rather than list investment management fees individually, they are reported within internal and external expensive along with other expenditures

  • Nonprofits must report any gift pledge immediately and record all types of contributions in immaculate detail

Pro Tip: While trying to ensure compliance with the complex level of detail required for each type of donation and entry within accounting documents, don’t forget that there are many options available that can break this information down in an easy-to-understand format. Many websites, like the Springly blog offer templates to simplify the process and demonstrate what information you need to provide for specific documents. Furthermore, as IRS and other legal documents require nonprofits to make their information available to the public, there are plenty of examples you can find for each type of document to give you an idea of how to prepare your own! 

On the bright side, the detailed nature of financial reporting for nonprofits provides an accurate and useful snapshot of how the organization is performing at particular times, which are invaluable tools to help with budgeting, planning, and growth. 

In addition, publicly displaying your financial capability and mission accomplishments can improve your reputation and actually attract new donors, members, sponsors, and other stakeholders to your cause!

The GAAP requirements help donors track exactly how the nonprofit is spending their money, particularly if they have mandated special restrictions for its usage. 

To adapt to these necessities, many nonprofits make use of specific types of accounting. 

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The Different Types of Nonprofit Accounting

There are two major types of nonprofit accounting methods, accrual accounting, and cash accounting. 

Accrual Accounting

In accrual accounting, the funds go on the books the moment the money is promised, even before the actual funding exchanges hands. For example, if a donor pledges $500 dollars online, even if that money is not expected to be transferred into the nonprofit’s banking until the end of the month, that money is recorded as received. 

This provides a great overview of how well your organization is doing but is sometimes inconvenient when you need to plan or budget short-term projects as you can only spend what is actually in your account, not what is promised. 

Pro Tip: While accrual accounting is not required, it is the standard for nonprofits because it provides a complete picture of the overall financial state of the organization. Note also that accrual accounting is often required in order to apply for public and private grants. 

Cash Accounting

This type of accounting is the opposite of accrual accounting in that you only record transactions when the money has officially exchanged hands. In other words, no matter how much donors have promised to give to your organization, those funds will not go into your recordkeeping until the moment the money arrives. 

everything-you-need-to-get-started-in-501c3-accounting-different-typesDavid is feeling good about gaining knowledge on nonprofit accounting!

The cash method assures that your accounting team always has an up-to-date record of what is currently available to finance projects at some expense to the big picture. 

Pro Tip: The cash accounting method is preferable for small nonprofits with few revenue streams. 

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The Different Types of Statements and Reports

As there are many documents with various purposes, it’s important to become familiar with the major reports and their roles in nonprofit accounting. 

Here is an overview of some of the major players in accounting reports. 

Balance Sheet

The balance sheet, also known as the Statement of Financial position for nonprofits, is used to get an accurate depiction of your nonprofit’s current financial statement. The most important information involves finding your organization’s net worth.

Net worth is the value of the organization’s assets (what you have that provides or can provide income) minus your liabilities (what the organization owes).

The balance sheet contains an in-depth analysis of both your company’s assets and liabilities. 

Assets - Liabilities = Net Worth (Equity)

Income Statement

Another report intended to generate a picture of the state of your organization during a specified time frame is the income statement (aka the Statement of Activities for nonprofits). This report is used to measure your organization's financial performance over a specific period of time. It is concerned with three concepts: 

  • Revenue - Incoming funding, whether through program fees, membership dues, donations, investment income, and other contributions. 

  • Expenses - Costs associated with fundraising, management, programs, and general expenditures. 

  • Net Assets Change - The difference between revenue and expenses.

The main difference between this report and similar documents is that the focus here is determining whether your nonprofit has accumulated more expenses during this snapshot time frame or whether it has generated revenue. 

In other words: are you gaining more money now than at a previous time or losing more?

Statement of Functional Expenses

This statement breaks down expenses into what are considered functional expenses and then further classifies these into natural expenses. The simplest way to think about these two types of categories is like this: 

  • Functional expenses are larger groups showing categories in which money can be spent, such as programs, management, and fundraising, for example.

  • Natural expenses are specifically what the money was used for within the functional category. For example, you may have a natural expense which is "Rent and Utilities" which may fall under different functional expense categories such as management and fundraising. The data would show how much money within each functional expense category was used for the natural expense for "Rent and Utilities." 

It is just a detailed breakdown of expenses into different major categories and then specific items that fall under each umbrella. The purpose is to demonstrate where specifically your total expenses are allocated. 

everything-you-need-to-get-started-in-501c3-accounting-statements-and-reportsSam is putting together his statement of functional expenses.

Statement of Cash Flows

The statement of cash flows breaks down revenue into three different divisions over a set period of time: 

  • Cash flow from general operations

  • Cash flow from investment activities

  • Cash flow from financial activities

This is an important document because it explains where your nonprofit’s revenue comes from and as part of the reporting, designates how this funding is used, which is important for funder transparency, as they can see how their donations are used to fulfill the mission or sustain the facility itself. 

The categories separate the revenue into money generated through internal or external methods. 

In short, this document answers the questions: where is your money coming from and where is it going?

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Tips to Get Started

Now that you have a general understanding of 501c3 accounting, here are a few parting tips to get you started in your accounting journey. 

  • Learn to record in-kind donations - In-kind donations are an alternate form of giving that involves non-monetary gifts, such as facilities, time, labor, services, equipment, and even stocks! As you will be responsible for categorizing and documenting each of these, do the research to make sure you know how to do it properly! 

  • Make budgets - With all of this accounting information at your fingertips, make the best use of it by creating budgets to set goals and control funding. 

  • Adopt a non-profit-friendly accounting software -  Time is money, so you can save a lot of money by finding the right software resources that offer automation, multiple users, and faster ways to perform standard operations. Your time is better spent making an impact with your mission!

    • Here are some useful programs you might consider: 

      • Springly

      • Aplos

      • Quickbooks

      • Moneyminder

      • Sync

  • Get help from a professional - There is nothing wrong with asking for help. If you and your team find yourselves overwhelmed by accounting procedures and policies, there are plenty of trained professionals and CPAs available who can help you establish the basics. Once you know the fundamentals, you will be able to adjust your templates and processes as you gain more experience.

Pro Tip: Learning as much as possible about nonprofit accounting is extremely useful even if you plan to leave most of the accounting duties up to your bookkeeping staff and accountants. Having this fundamental basis of knowledge enables you to make financially-informed decisions with many other aspects of nonprofit management.

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Springly is trusted by over 20,000 nonprofits to help them run their organizations on a daily basis. Try it, test it, love it with a 14-day free trial!

 

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