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While accounting itself can present numerous challenges to the non-accountant business owner, nonprofit accounting can pose an even greater level of confusion.
Of course, all businesses need to deposit funds, track expenses, and pay vendors and employees, but nonprofit organizations also need to track donations (both monetary and in-kind), handle tax receipts and thank you letters, manage volunteer staff, and track funds provided via grants or sponsorships.
That’s where nonprofit or fund accounting comes in. While fund accounting may sound complicated, it simply means that instead of tracking money for a single business or entity, you’re tracking income and expenses using multiple funds.
For instance, when a nonprofit holds a fundraiser, the money received needs to be tracked separately from other funds. So, if a nonprofit has five active programs for which it regularly obtains funding, it will need to track all income and expenses for each of those programs or funds separately.
The same principle applies to grant or endowment funding.
When a nonprofit obtains a grant from a foundation, that money needs to be accounted for in a separate fund, with a report provided to the foundation at the end of the grant term that provides detailed information on how the grant funds were used. Endowments are managed the same way.
While creating multiple fund accounts can certainly be done manually or by using standard accounting software, it’s a more cumbersome process that involves additional data entry, the need to create a specialized chart of accounts, as well as the need to add sub-accounts to your general ledger, making the entire process more confusing.
On the other hand, nonprofit or fund accounting software offers a more flexible chart of accounts structure that is specifically tailored to nonprofit organizations.
Like for-profit businesses, there are different types of nonprofits, each with their own specific needs. For instance, a nonprofit that is funded primarily through private donations needs to track funds much differently than a nonprofit that receives grants on a regular basis.
There are numerous ways in which a nonprofit differs from a for-profit business. Here are just a few:
Nonprofit Financial Statements | For-Profit Financial Statements |
---|---|
Statement of financial position | Balance sheet |
Statement of activities | Income statement |
Statement of functional expenses | Cash flow statement |
Cash flow statement |
Here is how you can go about setting up your accounting system for your nonprofit.
Doing bookkeeping manually is a tough job, but it’s even tougher if you’re trying to do bookkeeping for a nonprofit organization. While you can use T-accounts to help with your transactions, keeping track of multiple funds, programs, or grants on a spreadsheet is a recipe for disaster.
Spend some time to find a nonprofit accounting software application that fits your needs and your budget. You won’t regret it.
Nonprofits need to track both income and expenses in three distinct areas: programs, administrative costs, and fundraising. If you apply for and receive grants or sponsorships, you’ll need to account for those areas as well.
With areas such as fundraising and grants, you’ll also have to account for fund status, such as restricted, unrestricted, and temporarily restricted funds.
If you use nonprofit accounting software, your chart of accounts will include the option to use multiple segments to manage multiple funds, which is a necessity for adequately managing funds, programs, and grants.
For example, in a standard chart of accounts, an expense account would appear as follows:
5000 - Salary Expenses
However, if you wish to track salary expenses for a particular program, your chart of accounts structure would look like this:
01-02-5000
The 01 segment indicates the specific fund involved. The 02 segment indicates the specific department, program, or grant, and 5000 is the standard expense account number.
All businesses -- nonprofit organizations and for-profit companies -- need to use either cash or accrual accounting in their bookkeeping. Here’s the difference.
There are four nonprofit financial statements that are typically used.
Though many nonprofit organizations are classified as exempt from federal income tax, they still need to prepare tax forms at the end of the year.
Form 990 is due by the 15th day of the fifth month after the organization's accounting period or fiscal year ends, so if your fiscal year ends on December 31, Form 990 would be due by May 15 of the following year.
It’s important to note that Form 990 is available for public inspection at all times once filed, and it will need to be filed annually in order for your organization to maintain its nonprofit status.
With the majority of the setup work now completed, you’re ready to start entering transactions for your nonprofit.
The most important thing to remember when entering transactions is that if you’re funded by donors or grants, you need to track how that money is spent. Budgets are also used more widely in nonprofits, with multiple budgets typically prepared for each program or grant.
In addition, if you accept in-kind donations, you will also need to know how to properly record them.
While smaller nonprofits can certainly get by with standard accounting software, in order to properly track multiple programs, funds, and grants, you’ll be best served if you use nonprofit or fund accounting software.
Nonprofit accounting basics are more complex than accounting for a for-profit business, but using industry-specific software will make the process much easier.
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