Nonprofit accounting shares similarities to for-profit bookkeeping. Although a nonprofit organization's main objective is not to turn a profit, it still has to generate enough income to operate and manage expenses. These transactions need to be carefully tracked for tax-filing purposes, cash-flow management, third-party audits and to ensure financial stability.
Create the Accounting Structure
Create a chart of accounts beginning with your bank and credit card accounts. Be sure to enter opening balances as of the date your start your accounting year. Even in a very small nonprofit it is extremely important that it maintain its own bank account.
Create your liability accounts. Liabilities are anything that your nonprofit owes or will owe. Payroll taxes are a very common liability.
Set up any fixed assets. These will be items that are owned by the nonprofit and are not consumed or used up within one year. It is up to you or your CPA to decide the dollar amount threshold for determining which purchases will be fixed assets and which will be an expense. A common threshold for a small organization is around $500.
Fixed assets are depreciated each year based on the IRS depreciation schedule.
Create expense accounts. Most accounting programs will set up a basic chart of accounts that will include expenses related to your industry. It is advisable to separate operations expenses from program and fund-raising expenses. Some government grant funding requires that a nonprofit organization's fund-raising expense not exceed certain percentage of the total expenses.
Set up customers. These will often be your donors. It is especially important to track donations, because donors who donate over a certain amount each year are reported on your tax return. Also, if your organization is recognized by the IRS as a 501(c)(3), donations are tax-deductible, and your donors will want a receipt.
Set up all vendors and track carefully. If your organization is receiving federal stimulus funding you will likely be required to provide reporting on how much you paid each of your vendors.
Create a Procedure
Be audit-ready. If your organization receives any government grants or plans on applying for any type of loan or bond, you will most likely be subject to an annual third-party audit. Auditors will look at your accounting process closely.
Keep copies of all documents. In the nonprofit world, it is essential to duplicate and keep accurate records. Auditors will often ask for copies of checks written or even checks received. Copy all written checks and deposits and store in a binder. Reconcile your bank and credit accounts each month and keep copies of reconciliation reports attached to your bank statements.
Obtain written approval for all expenses, including regularly paid bills. This is especially true for nonprofits with a board of directors.
Create a set of reports each month. Profit-and-loss and balance-sheet reports are recommended. Set up files for all vendors Create binders or files for all major fundraising events. Include all supporting documentation for income and expenses. Most accounting software programs will offer a suggested chart of accounts. Alternatively, you can edit or create a chart of accounts from scratch. It is important to keep it as simple as possible by refraining from creating accounts for items you only use once or twice.
- Create a set of reports each month. Profit-and-loss and balance-sheet reports are recommended.
- Set up files for all vendors
- Create binders or files for all major fundraising events. Include all supporting documentation for income and expenses.
- Most accounting software programs will offer a suggested chart of accounts. Alternatively, you can edit or create a chart of accounts from scratch. It is important to keep it as simple as possible by refraining from creating accounts for items you only use once or twice.