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The realm of nonprofits is decidedly different than than most industries. It’s a business in every sense of the word because it needs to operate efficiently, it needs to meet demands, and it should be solvent enough to stay successful and relevant. On the other hand, a nonprofit doesn’t function for the sole purpose of making money as for-profit organizations do. As you can imagine, this makes running or working in a nonprofit very unique – especially in terms of financial stability. Whether you’re a bookkeeper for a nonprofit or trying to understand the best accounting practices for nonprofits – this article is for you.
What is Bookkeeping for Nonprofits?
You might think bookkeeping for nonprofits is all about keeping track of finances and accounting, and you’d be right – but there’s more to it than that. This position requires keeping track of financial transactions so that accurate reporting can be done in order for a nonprofit to continue to abide by regulations and stay in compliance. This includes maintaining records of donations, grants, fundraising events, and expenses. Unlike for-profit entities, nonprofits must adhere to specific guidelines and standards to maintain their tax-exempt status and demonstrate their financial stewardship to donors and stakeholders.
Best Practices for Nonprofit Bookkeeping
Bookkeepers for a nonprofit are responsible for various tasks, and in order to uphold an organization’s standards, here are some best practices this position is expected to execute:
- To maintain financial health and donor trust, implement best practices in nonprofit bookkeeping.
- Regularly reconcile bank statements and maintain accurate records of financial transactions.
- Segregate duties to prevent fraud by dividing financial tasks among different individuals.
- Establish and consistently follow clear financial policies and procedures.
- Ensure transparency and accountability by providing detailed financial reports to stakeholders.
- Use accounting software designed for nonprofits to streamline processes.
- Lastly, comply with all federal and state regulations, including timely filing of IRS Forms.
Nonprofit vs. For-Profit Bookkeeping
While both nonprofit and for-profit bookkeeping involve tracking financial transactions, there are key differences. Namely, nonprofit bookkeeping focuses on accountability and transparency to donors, grantors, and regulatory bodies. It includes tracking restricted and unrestricted funds and ensuring that donations are used for their intended purposes.
For-profit bookkeeping, on the other hand, emphasizes profitability and investor returns. Nonprofit bookkeepers must be familiar with specific regulations, such as IRS Form 990, which is required for tax-exempt status.
What Does a Nonprofit Bookkeeper Do?
Now that you’re getting up to speed with bookkeeping roles in both nonprofit and for-profit environments let’s take a look at what this position actually does. Here are the primary functions expected from a bookkeeper who works for a nonprofit organization:
- Recording Financial Transactions: Keeping detailed records of all financial activities, including donations, grants, and expenses.
- Managing Accounts Payable and Receivable: Ensuring that bills are paid on time and donations or other receivables are recorded accurately is an integral role, and bookkeepers are relied upon for accurate reporting and tracking of the accounts payable and receivable aspects of nonprofits.
- Reconciling Bank Statements: Comparing bank statements with internal records to ensure accuracy.
- Preparing Financial Statements: Create income statements, and balance sheets, and prepare cash flow reports to provide a clear picture of the organization’s financial status.
- Budgeting and Forecasting: Assisting in creating and maintaining budgets to ensure the organization can meet its financial obligations and goals.
- Ensuring Compliance: Making sure the organization adheres to federal and state regulations, including preparing necessary tax documents like IRS Form 990.
Bookkeeping vs. Accounting
In short, bookkeeping involves the day-to-day recording of financial transactions, whereas accounting takes a broader view and summarizes financial data. Another big difference between bookkeeping vs accounting is that bookkeepers provide the foundation to accountants, whereas accountants prepare financial statements and conduct audits.
Best Accounting Practices for Nonprofits
Adopting best accounting practices for nonprofits is crucial for the financial health of any organization. These practices include:
- Accurate Record-Keeping: Maintaining detailed and organized records of all financial transactions.
- Regular Reconciliation: Frequently reconciling bank statements with internal records.
- Segregation of Duties: Dividing responsibilities among different people to prevent fraud.
- Clear Policies and Procedures: Establishing and adhering to clear financial policies and procedures.
- Transparency and Accountability: Ensuring transparency in financial reporting to maintain donor trust and comply with regulatory requirements.
Nonprofit Bookkeeping Services
The main services of a nonprofit bookkeeper are to curate accurate financial records for your nonprofit, ensure compliance with regulations, and provide financial transparency. These services often include:
- Day-to-Day Transaction Recording
- Monthly Reconciliation
- Financial Reporting
- Budgeting Assistance
- Tax Preparation and Filing
- Grant Tracking and Reporting
Frequently Asked Questions About Nonprofit Bookkeeping
How is nonprofit bookkeeping different?
Nonprofit bookkeeping focuses on accountability and transparency. It makes sure funds are used according to donor intentions and regulatory requirements. It also involves tracking both restricted and unrestricted funds and adhering to specific reporting standards to governing authorities such as the IRS.
What accounting method do most nonprofits use?
Most nonprofits use the accrual accounting method. This method tracks income and expenses when they are earned or incurred (not at the time money is exchanged). The accrual method is considered a more accurate financial picture of the organization’s activities.
Why is accurate record-keeping important for nonprofits?
Maintaining donor trust is a big reason. Other reasons include making sure the organization is compliant with regulations and providing a clear financial picture for decision-making. It also helps in preparing necessary financial statements and tax filings.
What is the role of a nonprofit treasurer?
The treasurer works closely with the bookkeeper to maintain accurate financial records. A person in this position will oversee budgeting, reporting, and will also take care of the regulations and policies of the nonprofit.
How can nonprofit organizations ensure financial transparency?
Nonprofits can secure financial transparency by regularly publishing detailed financial reports, adhering to best accounting practices, conducting external audits, and openly communicating with donors and stakeholders about financial activities and outcomes.
What are restricted and unrestricted funds?
Restricted funds are donations or grants given for a specific purpose or project and must be used accordingly. Unrestricted funds can be used at the nonprofit’s discretion for any operational needs, providing greater flexibility in managing resources.
Why is it important for nonprofits to segregate financial duties?
Segregating financial duties among different individuals helps prevent fraud and errors by ensuring that no single person has control over all aspects of financial transactions. It enhances internal controls and accountability within the organization.
What is IRS Form 990?
Tax-exempt organizations (such as nonprofits) must file annually with the IRS Form 990. It provides a comprehensive overview of the nonprofit’s financial actions, governance, and compliance with tax regulations.
What should nonprofits look for in bookkeeping software?
That depends on the type of nonprofit. Most organizations look for bookkeeping software that covers the basics while also addressing individual needs. The basic functions should include fund accounting, donor management, grant tracking, and compliance reporting. The software should also be user-friendly and scalable to accommodate the organization’s growth.
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Matt Garrett is the Founder and Chief Executive Officer of TGG. He is a regular speaker across the country on behalf of Vistage educating business owners on the need for sound financial practices, and is Vice President of the Board of Directors of FINACA. Under Matt’s leadership, TGG has received the following recognition: INC. 5000 top companies in the U.S. five years in a row; one of “San Diego’s Fastest Growing Companies” the past four years; and is among San Diego’s “Best Places to Work.”
