A Guide to Accounting for a Nonprofit Organization

To learn more about exactly which taxes your tax-exempt nonprofit might still be on the hook for, consult IRS Publication 557, or better yet, consult with a nonprofit tax specialist. They’ll have experience helping organizations like yours minimize their tax bill and make sure you aren’t breaking any tax code rules. The IRS provides this handy questionnaire to help you figure out exactly which parts of the tax code apply to your organization, and which form you’ll use to apply for tax-exempt status.

Nonprofit Accounting Basics for Founders, Board Members & Executives

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Best for Managing Large, Global Nonprofit Financials

The operating budget is a financial plan that outlines the expected revenues and expenses for an organization during a specific period, typically a fiscal year. It includes all program costs, which are the direct expenses incurred in carrying out the organization’s mission, as well as general administrative expenses and fundraising costs. Looking up a nonprofit’s Form 990—using services like Guidestar.org—can tell you a lot about its financial state. GAAP’s goal https://www.bookstime.com/articles/truckers-bookkeeping-services is to ensure that companies’ financial statements are consistent across industries, allowing investors and the government to interpret them more easily. GAAP rules for nonprofits are intended to create transparency for donors and grant-makers and help the government monitor whether an organization should retain its tax-exempt status. An income statement for nonprofits is a financial statement that shows the sources and uses of funds over a set period of time.

Creating a Budget

Assets are resources owned or controlled by the nonprofit, while liabilities represent obligations the organization owes to others. The net assets indicate the difference between the two, reflecting the resources the nonprofit has nonprofit accounting to further its mission. We’ve mentioned accounting practices to keep a current pulse on your organization, but it’s always good to think long-term, too. Your budget and financial statements will help you plan to scale your mission.

Statement of Financial Position

Their analyses can greatly impact the organization’s financial stability and its ability to fulfill its mission. A few accountants choose to obtain a Certified Nonprofit Accounting Professional (CNAP) certification, which specifically targets the skills needed in the nonprofit sector. The Statement of Functional Expenses reports expenses based on their nature and function. It allows you to remain transparent about your resource allocations to stakeholders and report expenses on your Form 990.

For-profit entities have a general ledger, which is a single self-balancing account, and nonprofits have a number of general ledgers. Funds allow organizations to separate resources into various accounts to identify where those resources came from and how they are used. Since nonprofit organizations receive benefits from being tax-exempt, they must keep detailed records while bookkeeping. In nonprofit accounting, the statement of activities represents an organization’s bottom line, reporting on the changes in net assets of the nonprofit and characterizing the revenue and expenses accordingly. For example, if a donor restricts their donation to ensure it’s only used to fund that organization’s scholarship fund, that money would be added to a restricted fund set aside for the scholarship. If a donor does not restrict the donations they provide, that money can be added to your organization’s annual fund and used for overhead, programs, or any other expenses.

These organizations can also be tax-exempt under different sections of the IRS code, such as 501(c)(7) for social and recreational clubs, 501(c)(4) for social welfare organizations or other applicable sections. First, find out which considered software offers a free trial or a version you can use to try the software before buying. Managing a nonprofit’s grants and contracts process is a multifaceted and complex task. Learn four best practices that any organization receiving grants should adhere to and the roles and responsibilities of the various staff and team members.

• Or each fund may have its own line within revenue, expenses, assets and liabilities.
• By handling your nonprofit’s accounting responsibly, you’ll earn the trust of donors and foundations and more easily accomplish your goals.
• It lets them focus on attracting donors, building engagement, fundraising, etc.
• We aim to help you better understand how to introduce compliant and efficient practices that support your organization’s growth.

How confident are you in your long term financial plan?

In addition, audits provide insight into the various opportunities that your organization has for financial stability and recording improvements. By addressing these opportunities for improvement now, you’ll help keep financial data secure and well-reported in the future. But, when you grasp how to read various accounting documents, it becomes much easier to understand how finances function and move at your organization. For the most part, nonprofits can apply to the IRS to become exempt from federal taxes under Section 501. “With donors focused on making the most of their contribution, it is important for nonprofits to allocate costs correctly,” said Gwaltney.

If I qualify for tax-exempt status, do I still have to pay some taxes?

• These types of organizations may not benefit the greater society, but typically operate to serve the goals of their members, such as a business league that collects dues in order to host workshops for members.
• QuickBooks is known and loved by many specifically for its polished, no-fuss desktop and user-friendly interface.
• Nonprofit accounting is distinctly different from its for-profit counterpart due to its focus on accountability rather than profitability.
• At Finance Strategists, we partner with financial experts to ensure the accuracy of our financial content.

Maintaining a clear view of your financial health is excellent, but it’s even more valuable when you can use that insight to inform your fundraising strategy. Hopefully, you’re feeling well-equipped with the logistics of nonprofit accounting. Now, we’ll pivot into ways to get the most value from best practices for implementing compliant and proactive approaches within your team. Many charity rating organizations will also look at this form to evaluate your organization’s financials.

• Since 2017, you’re also required to disclose the “nature” of the activities your nonprofit lists on this report.
• The net income on an income statement for nonprofits is what remains after subtracting total expenses from total revenues.
• This includes identifying trends, highlighting potential issues, and suggesting strategic financial decisions.
• No matter who does your books, choosing the right accounting software for your nonprofit is crucial.