Nonprofit Bookkeeping: Our Guide to Best Practices and Yearly Tasks
Just like a for-profit business, your nonprofit organization has to use
bookkeeping to stay on top of its funds and expenses. Though many of the same
bookkeeping principles apply, there are some differences between business and nonprofit accounting. For example, instead of tracking income from selling products or services, you track funding from grants, donations, and member dues. This guide explores this difference and other nonprofit accounting basics.
- What Is Bookkeeping?
- Nonprofit Bookkeeping Best Practices
- Nonprofit Bookkeeping Tasks
- Final Thoughts
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What Is Bookkeeping?
Bookkeeping is the process of recording and organizing your company’s financial transactions on a daily, monthly, quarterly, and yearly basis. When you are running a business, you need to be able to get a complete financial snapshot of any point in time. Books record this financial movement as well as show the financial health.
Though bookkeeping is primarily associated with for-profit businesses, hence the above definition, it also applies to nonprofit organizations. This type of organization primarily uses bookkeeping for accountability, as it must be able to prove that it is using the funding it receives for the purpose of its mission statement.
Additionally, in order to maintain its tax-exempt status, a nonprofit needs to be able to prove to the IRS on a yearly basis that it meets certain nonprofit tax filing guidelines. Or else, it runs the risk of undergoing a nonprofit audit or losing its tax-exempt status.
Nonprofit Bookkeeping Best Practices
In the interest of accountability and transparency, a nonprofit needs to keep track of many more financial details than a standard business. As just one example, most nonprofits have to keep track of restricted funds because donors often earmark their donations with specific purposes in mind.
Sadie is ready to explore the world of nonprofit bookkeeping!
The below best practices provide you with the most efficient and sensible ways of keeping your restricted funds as well as your other nonprofit bookkeeping elements organized.
Follow Accounting Standards
Like in most industries, there are generally agreed-upon standards for accounting. Both the recording of financial information and the handling of funding come with a high degree of responsibility. To uphold this responsibility, the American Institute of Certified Public Accountants (AICPA) and the Financial Accounting Standards Board (FASB) put generally accepted accounting principles (GAAP) into place. The AICPA and FASB and their principles are considered reliable for both profit-seeking businesses and nonprofit organizations.
Hire a Treasurer or Accountant
You will need a designated professional to manage your records. At the beginning, it is common for the executive director to take on the role of the nonprofit treasurer or accountant. However, as the organization grows, this responsibility follows suit. One option would be to hire an in-house staff member.
However, if you cannot afford to hire a full-time person, you can outsource your accounting needs. By outsourcing, you work with a professional who has experience with a wide range of clients and situations.
Use Accounting Tools
While your nonprofit can use a physical ledger or an Excel spreadsheet to keep track of its finances, a dedicated accounting software can do more. Here is a list of some useful tools on the market that accounting firms commonly use:
Sunrise by Lendio
Pro Tip: Springly also has an accounting suite for churches, sports clubs, and other organizations! It is one of the many features built into our software to help you manage your organization.
Open a Dedicated Bank Account
A nonprofit should have its own dedicated bank account so that all of the money that comes and goes is easy to find in one place. This account should be separate from the bank accounts of any staff members, including the executive director. This maintains organization and accountability.
Account for In-Kind Donations
In-kind donations are goods or services that donors give to your nonprofit at no cost to you. It is just as important to keep track of these kinds of donations as it is monetary donations because the IRS requires them to have traceable monetary value.
Create a Budget
You need a budget to make sure your organization stays on track of its spending and funding. Most budgets are set up on a yearly basis. There are two parts to a budget: expected expenses and expected sources of income.
Expected expenses are:
Expected income includes:
Pro Tip: Both expected expenses and expected revenues for the upcoming year’s budget come from information gleaned from the past year. These numbers are not going to be the same from year to year, but looking at past years is a good starting point.
Understand Financial Statements
To run smoothly, you need to understand and use several types of nonprofit financial statements. These records not only give your leadership team the information they need to make sound decisions, they also ensure that you are remaining transparent with your supporters and the government.
Ellie is taking notes on some best practices to keep in mind.
Statement of Financial Position
This is known as a balance sheet in the for-profit world. It shows you a snapshot of your financial health at any point in time. It is essentially all of your assets less all of your liabilities.
Statement of Activities
Again, this is the nonprofit equivalent of the for-profit income statement. It shows your revenue and expenses over time, categorizing them to show that they are going toward their intended purposes.
Statement of Cash Flows
This statement shows how funding moves through your organization. It is useful in seeing how much liquid cash exists to pay your expenses at any given time. Remember to account for restricted grants or funds in this statement to give a complete, accurate picture of your cash flow.
Learn Tax Requirements
Nonprofit tax requirements are different from business tax requirements, so it is important to look into the tax code on the federal, state, and municipal level. Can my nonprofit make money? How do I account for donations to my nonprofit organization? Do I have to pay real estate tax, sales tax, or other types of taxes? You need to know the answer to these questions and others.
Nonprofit Bookkeeping Tasks
You need to complete various accounting tasks throughout the year. An accountant or treasurer completes most of these tasks, but they sometimes require executives to contribute.
Monthly Bookkeeping Tasks
Your monthly tasks mainly focus on optimizing your resources.
Review Budget Projections
Each month, compare your spending against your budget. After you complete a cost-benefit analysis, bring this information to a budget meeting to evaluate how this month may affect the rest of the year. It might be necessary to make adjustments to your costs to still come in under budget by the end of the year.
Look for Ways To Cut Costs
Read every line item as a team to evaluate its value. If the budget seems to be getting off track, cut superfluous expenses. For example, maybe you are spending too much on office snacks. While these items are valuable to some degree, if you spend too much on them, they take funding away from your mission.
In addition to cutting unnecessary spending, think about how you can accomplish the same tasks in more efficient, streamlined ways. Someone on the team could find a new vendor who provides the same office supplies for less. Or maybe, a new software comes out that combines three of the marketing tools you are currently paying for into one.
As you eliminate expenses, make sure to redistribute those funds to somewhere else.
Submit Grant Proposals
Organize a team of staff members to help you write grant proposals. It is important to be able to comprehend the guidelines to every grant, so only choose people who are detail-oriented enough to adhere to them.
Be aggressive when you are going after grants. They add reliable revenue streams to your budget, so they are well worth the work involved to get them.
Quarterly Bookkeeping Tasks
A financial quarter is an important indicator of success or failure for any business. Back-to-back quarters demonstrate trends that may or may not be in line with your long-term goals.
Report Quarterly Payroll Taxes With Form 941
Just like a for-profit business, a nonprofit organization must make payments to the Federal Insurance Contributions Act (FICA). These are also known as payroll taxes. Employers need to pay 7.65% of an employee’s salary to the IRS each quarter. You can do this with Form 941 on the IRS website.
Prepare Financial Statements for the Board
Each quarter, you need to prepare a statement of financial position, a statement of activities, a statement of cash flows, and anything else that your board requests. The board members need this information to make clear decisions about the direction and future of your nonprofit.
Complete Reports for Grants
When you receive a grant, both government and public entities expect you to keep track of how you use it. Each grant may have different reporting requirements. However, at the very least, draft a Performance Progress Report (PPR) to show how you are using this funding with your projects or programs in mind. On top of sending this PPR to any required parties, also make it publicly available on your website for your stakeholders to see.
Annually Bookkeeping Tasks
Each year, you must complete Form 990, Form 1099, Form 941, and others to remain compliant with the tax-exempt code. You must also look forward to the coming year with a little bit of planning.
Submit Form 990
The government requires nearly all nonprofits to file a Form 990 annually with the IRS to maintain their tax-exempt status. On this form, you document all of your spending and funding to ensure that you are acting true to your privileged tax status.
Emily is feeling great about her newfound bookkeeping knowledge!
Report Annual Payroll Taxes With Form 941
Just as a for-profit business does, your nonprofit must submit all information regarding W-2s, W-3s, and 1099s for the previous year at the beginning of the next year. Form 941 keeps track of all income taxes, social security taxes, and medicare taxes paid out the previous tax year.
Conduct an Independent Audit
Even if an audit is not required for you to maintain your grant funding, it is still best practice to hire an outside accountant to conduct one at the end of the fiscal year. It ensures the accuracy of your financial records. There is also a section where the accountant gives their personal opinion on your financial health and stability.
Create Next Year’s Budget
As the year comes to a close, it is time to create a new budget. Look at last year’s budget for inspiration. However, also consider what new goals, projects, or programs you want to tackle in the new year that could change your budget.
Pro Tip: To help you create a budget, assemble a budget task force. These individuals should show a propensity for frugality and see the world from an analytical point of view.
Bookkeeping is an integral part of running a successful nonprofit. After all, you do not want administrative tasks to be the reason your organization can longer serve its community. By following our guide on what to do when you first form a nonprofit and throughout the year after that, you can continue to make the world a better place.
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💡What does a nonprofit bookkeeper do?
In accordance with GAAP standards, your nonprofit’s bookkeeper or accountant records all of your financial details in an organized way. From there, they can ensure that you stay on budget and follow all tax requirements. Find out more.
🔑 Is QuickBooks good for nonprofits?
Yes! QuickBooks is an accounting software that can help your bookkeeper stay organized. There are also numerous other tools like QuickBooks, including our very own Springly accounting suite. Find out more.
📝 What bookkeeping tasks should nonprofits do on an annual basis?
Nonprofits should submit their annual tax forms, which include Form 990 and Form 941. Additionally, they need to close out the year with an independent audit and a new budget. Find out more.