5 Accounting Practices for Nonprofits

From community aid groups to religious organizations to amateur sports leagues, nonprofit organizations fill a vast range of different roles in our communities. However, there’s a lot more to running a nonprofit than choosing a mission and setting up a donation site. One part that can be especially tricky for those just entering the nonprofit world is mastering the principles of nonprofit accounting.

What are the most important practices to follow to keep your tax-exempt organization in good standing with donors and regulators? Let’s get a quick introduction to five of the most important concepts in nonprofit accounting and how they affect your organization’s day-to-day bookkeeping.

1. Get familiar with FASB 958 and other nonprofit accounting standards

The Financial Accounting Standards Board (FASB) maintains FASB 958 as the benchmark accounting standard for nonprofits, large and small. Anyone involved in financial record-keeping and decision-making at a nonprofit should be familiar with its provisions, including:

● Requirements for nonprofit financial position and cashflow statements

● Rules for accepting and reporting donated funds and/or goods

● Classification requirements for restricted and unrestricted funding sources

● Expense reporting and classification standards

It’s also important to know the basics of the Generally Accepted Accounting Principles (GAAP) standard. Many nonprofits are required by law to follow GAAP, and even those that aren’t required follow it as a best practice. That’s because GAAP provides a universal set of standards that makes compliance, reporting, and audits more manageable for all parties involved.

2. Learn all about fund accounting, including how to track and report various fund sources

Fund accounting is a foundational element of FASB-compliant nonprofit finance. It divides a nonprofit’s cash flow into multiple buckets according to the source of the funds and how they’re used. It’s essential because, rather than having a single cash pool allocated at the organization’s discretion, most nonprofits have different restrictions for various cash flows based on the source of their fundraising (such as donations or grants).

The difference between restricted and unrestricted funds is one of the most important to know about. Restricted funds can only be used for certain purposes, while unrestricted funds allow wider discretion in spending. For example, a grant from a government program may be restricted to spending only on equipment for a youth softball league, while general membership fees may go into an unrestricted fund for overhead costs.

Whether funds are restricted or unrestricted, a nonprofit must account for how each dollar is spent to ensure accountability to its donors, grantors, and other stakeholders. That means filing various disclosures, including annual or quarterly reports with the IRS, plus various types of public financial transparency disclosure.

3. Determine what kind of forms your nonprofit will need to file with the IRS

To maintain tax-exempt nonprofit status with the US Internal Revenue Service, most nonprofits will need to file Form 990 every year. Some of the key info you’ll need to have ready when preparing a Form 990 includes:

● Basic information about your organization (such as its name, address, and purpose)

● Governance details, including compensation structure and conflict of interest policies

● Full disclosure and funding categorization of assets, liabilities, revenues, and expenses

● Impact and accomplishments of your most important programs and services

● Information on political activities such as lobbying government entities

Smaller organizations may be able to file a Form 990-EZ, while the smallest nonprofits can file a Form 990-N. Some religious organizations, such as churches, may not have to file a 990 at all. It’s important to examine your filing requirements on a case-by-case basis and not assume your organization is exempt, so check the IRS’s Form 990 exemptions. State and local tax jurisdictions may have additional requirements, so be sure to read these rules thoroughly as well.

4. Understand when and how your nonprofit’s finances will require auditing

Accountability is the cornerstone of nonprofit financial compliance, and regular auditing is one crucial way to create a robust culture of accountability in a nonprofit organization. Note that, in this case, we’re generally not talking about the kind of audits the IRS does. While nonprofits do sometimes get audited by government revenue organizations, independent audits are far more common (and, in many cases, required).

In an independent audit, a qualified CPA or accounting firm from outside your organization examines your financial statements for accuracy and compliance with GAAP/FASB standards. This doesn’t mean your organization is suspected of any wrongdoing — rather, it’s a standard practice designed to help every nonprofit stay in compliance and maintain a sterling record of accountability.

The federal government requires nonprofits to conduct regular independent audits if they accept over a certain amount of federal funds each year, and many state and local governments have similar laws. Check out a guide to state nonprofit audit laws to learn about your state’s specific requirements. Finally, even if you’re not required to conduct an audit, it can still be a good idea for the sake of compliance and transparency.

5. Use accounting software with features suitable for nonprofits

Generic accounting software is often geared toward for-profit businesses rather than nonprofits. It may lack essential features like fund accounting, accepting and tracking donations, or creating specialized reports for stakeholders and regulators. Moreover, smaller organizations that use volunteers to help with accounting often find it challenging to teach their volunteers to navigate the complexities of business bookkeeping software.

Instead, look for an accounting suite with built-in features for nonprofit accounting. Some popular small business accounting software packages include “nonprofit mode” options that streamline financial reporting with automated templates for nonprofit use. These easy-to-use features make them an ideal choice for organizations with volunteer accounting while remaining compliant with relevant legal and accounting standards.

Other software options are purpose-built specifically for nonprofits. Whichever you choose, note that software companies may offer discounts on nonprofit accounting software, so check with your software vendor to see if special arrangements are available.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes.