Bookkeeping for Nonprofits: A Basic Guide & Best Practices

Bookkeeping for a nonprofit, or nonprofit bookkeeping, represents a unique way a nonprofit organization plans, records, and reports its finances. It involves generally accepted accounting principles and other tasks all businesses employ when reporting finances, along with those specific to nonprofit organizations.

Bookkeeping for a nonprofit is vital because it proves how an organization is spending its funds. Learning how to do nonprofit accounting and understanding which statements a nonprofit needs to prepare is crucial for anyone who wants to run a successful nonprofit.

Table of Contents

What Is Bookkeeping for Nonprofits?

Nonprofit vs. For-Profit Accounting

How to Do Bookkeeping for a Nonprofit

How FreshBooks Can Help

Best Practices of Nonprofit Accounting

Key Takeaways

Frequently Asked Questions

What Is Bookkeeping for Nonprofits?

Bookkeeping for a nonprofit is the process of entering, recording, and classifying an organization’s finances.

Nonprofit accounting and bookkeeping revolve around representing an organization’s financial records in compliance with generally accepted accounting principles (GAAP).

Nonprofit organizations have a tax-exempt status with the Internal Revenue Service (IRS). If they want to maintain this status, they need to do accurate bookkeeping.

Nonprofit vs. For-Profit Accounting

One of the first things we need to clarify before digging deeper into bookkeeping for a nonprofit is the difference between nonprofit and for-profit entities.

For-profit entities are individuals, corporations, or partnerships that conduct business for profit. In this case, shareholders, investors, tax authorities, management, and suppliers are interested in the entity’s financial position, and that’s what for-profit accounting focuses on. 

Nonprofit organizations are entities organized and operated exclusively for educational, social, professional, charitable, health, or other nonprofit purposes. While business stakeholders are concerned with profits, nonprofit stakeholders and board members want to know if the resources are properly utilized and allocated.

Both for-profit and nonprofit organizations usually comply with generally accepted accounting principles (GAAP). These represent accounting rules that standardize reporting of financial statements. Organizations like the American Institute of Certified Public Accountants (AICPA) and the Financial Accounting Standards Board (FASB) outline these principles and present reliable resources for nonprofit and for-profit entities.

How to Do Bookkeeping for a Nonprofit

Every nonprofit organization is unique. However, there are several actions all nonprofits need to take to ensure data quality and reliability.

Find a Nonprofit-Friendly Bookkeeping Solution

The basis for an accurate bookkeeping and accounting system is recording all financial transactions. There are several ways to do this.

• Record them in a physical ledger (also called a general journal)
• Use accounting software
• Use an Excel spreadsheet for Bookkeeping
• Use bookkeeping services

Whatever option you choose, you should be able to do the following:

• Organize receipts from in-kind contributions, donations, etc.
• Record expenditures and payouts
• Record petty cash transactions, payroll, and accounts receivable and accounts payable

The option you go for should also enable you to do fund accounting (i.e., use different accounts for different purposes). Nonprofits have strict rules regarding funding sources and how they should be spent. For example, large organizations like universities often have dozens, if not hundreds, of bank accounts for different purposes like scholarships, tuition, projects, etc.

It goes without saying that you should never use your personal bank account for your nonprofit organization. All transactions should go through dedicated accounts. You can always ask your bank about your account options and use those tailored for nonprofits.

You should also hire a financial officer or a treasurer who knows how to do bookkeeping for a nonprofit and is familiar with specialized accounting software.

Reconcile Bank Accounts

Bank reconciliation is the process of ensuring an organization’s records (balance sheet, general ledger account, cash flow, etc.) are accurate. A nonprofit reconciles bank accounts by comparing the recorded amounts to the amounts on bank statements.

Depending on the size of your nonprofit organization and the number of transactions, it may be wise to do bank reconciliations once a month. That way, you’ll identify potential bank errors, help track cash flow, and prevent fraud.

Use Purchase Orders

As mentioned, nonprofits have to follow strict rules to justify their financial position and fundraising expenses. One way to do this is to use purchase orders.

A purchase order is a document a purchaser (in this case, a nonprofit) sends to a vendor to confirm the purchase of different goods and services. The vendor signs this document and confirms all details of the purchase. To learn more about purchase orders and the numberings involved, check out our post on What is a Purchase Order Number.

Record In-Kind Donations

An in-kind donation or a gift in kind represents a donation of goods or services instead of money for purchasing goods and services.

For example, a lawyer may review a contract for your nonprofit and refuse to charge a fee. Although you didn’t pay the lawyer, you need to record this.

You can do this by opening an income account for in-kind donations and recording the donation’s fair market value. If the donation is less than $5,000, you can determine the value yourself. If it’s more than $5,000, you’ll need to hire an appraisal expert.

Make an Annual Budget Plan

An annual budget plan represents a roadmap for nonprofits and ensures the organization is on the right track.

The plan should consist of 2 main categories: expected income sources and expected expenses. The nature of income sources and expenses depends on the organization.

Create Financial Statements

Financial statements provide insight into how much money your nonprofit has, where you spend it, and how it’s used. Preparing financial statements can be done automatically or manually.

Many accounting software programs allow you to generate financial statements automatically, such as a statement of financial position. This reduces the possibility of errors and guarantees reliability and accuracy. Of course, you can always generate financial statements manually, but this takes a lot of time and skill.

Nonprofits have 3 main types of statements: the statement of financial position, the statement of cash flows, and the statement of activities.

The statement of financial position represents the nonprofit version of the balance sheet. This statement provides insight into how much a nonprofit owes, what it owns, and how much money is left. Unlike for-profits, nonprofits don’t have equity because they don’t have owners, and that’s the biggest difference between a balance sheet and a statement of financial position. Instead, nonprofits have net assets. Some are unrestricted net assets and some are considered restricted net assets.

A nonprofit’s statement of cash flow tracks a nonprofit organization’s cash and financial health. This statement contains information on how much cash an organization generates from investing, financing, and operations.

The statement of activities, also called the operating statement, represents the nonprofit version of an income statement. It shows financial data about your revenue, expenses, and losses. This statement expresses changes in net assets and is divided into 2 sections: unrestricted net assets and restricted net assets.

Pay Attention to Tax Obligations

As mentioned, nonprofit organizations have tax-exempt status, meaning they don’t have to pay federal taxes to the IRS under Section 501. This section regulates the tax status of charities, religious organizations, and nonprofits.

Before applying for tax-exempt status with the IRS, you need to register your nonprofit status with your state.

How FreshBooks Can Help

Although seemingly similar, for-profit and nonprofit accounting processes differ in many ways. Planning a nonprofit’s budget, creating reports and statements on net assets, cash flows, fixed costs, and keeping up with costs, financial transactions, and balancing the bank account can be overwhelming, especially for those with little experience.

Fortunately, nonprofit professionals don’t have to worry about your financial information if you choose FreshBooks.

FreshBooks is a high-quality accounting program that can automate repetitive tasks and daily activities and ensure accurate and reliable bookkeeping.

The program offers numerous integrations and an easy-to-use interface, even for those who aren’t tech-savvy. FreshBooks is available on both computers and mobile devices, so you can stay on top of your nonprofit organization at any time.

From tracking payments and expenses to creating reports and quarterly financial statements, FreshBooks is the go-to program with numerous uses.

Best Practices of Nonprofit Accounting

Here are the best practices for accounting for not for profit organizations:

• Don’t fret too much about functional expenses, as they’re necessary for operation of all not for profits.
• Check your budget frequently to ensure you’re on the right track to achieve your goals and maintain healthy cash flows.
• Implement regular internal controls, even if you don’t have a lot of employees.
• Conduct regular audits to ensure the organization has up to date information and conforms to accounting standards.
• Hire an executive director or other nonprofit leaders that can oversee the operations.
• Keep up with your accounting responsibilities at all times.
• Use specialized accounting software.

Key Takeaways

Since nonprofit organizations don’t center on profit but on a nonprofit mission, they have different bookkeeping practices. While the basic bookkeeping principles may apply in both cases, certain seemingly small details make significant differences in how a nonprofit’s finances are done.

Since nonprofit organizations risk losing their tax-exempt status if they don’t comply with accounting principles, it’s vital to pay attention to proper bookkeeping. For that reason, it may be best to get high-quality accounting software that can automate everyday tasks, create reports, and minimize room for errors.

Frequently Asked Questions

How do you become a bookkeeper for a non-profit?

Nonprofit bookkeepers don’t need to have formal education or a CPA. However, they do need to understand how nonprofits operate. Of course, they should also have some experience in the industry. If you want to become a bookkeeper for a nonprofit, try looking at internships that could help you learn more about the processes. You may want to visit the National Council of Nonprofits to learn more.

What is the best software for nonprofit accounting?

Since every nonprofit is different, it’s impossible to say one software is the best – but there are some excellent options. Look for a program that is easy to use, efficient, and available on numerous devices. The selected program should be able to automate everyday tasks and minimize errors. FreshBooks accounting software accomplishes all of these tasks with ease and is an excellent choice depending on your needs.

How do I record donations for a nonprofit?

The donations should be recorded on the statement of activities. The entry should contain information such as the donor’s name, the amount of money, and the date.

Do nonprofits have to follow GAAP?

Yes, nonprofits have to follow GAAP.

Do nonprofits need accountants?

Yes, nonprofit organizations need accountants. They can choose to hire in-house accountants or outsource their accounting to a specialized firm.

---

RELATED ARTICLES