Wajiha Danish | August 1 2023
If you’re involved in running a nonprofit organization, you understand the importance of maintaining accurate financial records. Effective bookkeeping is crucial for legal compliance and transparent reporting, informed decision-making, and fostering trust among donors and stakeholders. In this detailed guide, we will walk you through the fundamental principles of nonprofit bookkeeping, from setting up a chart of accounts to tracking donations, managing expenses, and preparing financial statements.
Whether you’re a nonprofit founder, board member, volunteer, or simply interested in understanding the financial operations of nonprofits, this guide will provide you with the essential knowledge and tools to navigate the world of nonprofit bookkeeping with confidence.
Let’s get started!
Bookkeeping for nonprofits refers to recording, organizing, and maintaining financial transactions and records for nonprofit organizations. Like any other organization, nonprofits need to accurately track their income, expenses, assets, and liabilities to ensure financial transparency, meet legal requirements, and make informed decisions.
Here are some key aspects of bookkeeping for nonprofits:
Nonprofits must maintain detailed records of financial transactions, including donations, grants, expenses, payroll, and other revenue sources. These records provide a clear audit trail and help generate accurate financial statements.
Nonprofits use a chart of accounts, a categorized list of all the accounts used to classify financial transactions. It includes cash, accounts receivable, accounts payable, donations, program expenses, administrative expenses, etc. Each account is assigned a unique code for easy identification.
Nonprofits typically use a double-entry bookkeeping system, where every transaction affects at least two accounts. This system ensures that debits and credits are balanced and accurately represent the organization’s financial position.
Nonprofits prepare financial statements, including financial position (balance sheet), statement of activities (income statement), and statement of cash flows. These statements provide a snapshot of the organization’s financial health and performance.
Many nonprofits use fund accounting to track and report financial activities separately for different funds or programs. This allows better monitoring of funds allocated and spent for specific purposes.
Nonprofits must comply with legal and regulatory requirements, such as filing annual tax returns and financial reports with government authorities and meeting reporting obligations for grants and funding sources. Accurate bookkeeping facilitates these processes.
Nonprofits rely on donations and grants from individuals, corporations, and other sources. Effective bookkeeping helps track and acknowledge donations, maintain donor records, and generate reports to demonstrate accountability and transparency to donors.
Bookkeeping data is crucial for budgeting and financial planning. It helps nonprofits analyze past financial performance, project future income, and expenses, and make informed decisions regarding program activities, fundraising efforts, and resource allocation.
Nonprofit organizations are subject to specific accounting practices and regulations to ensure transparency and accountability in their financial management. Here are some best practices for nonprofit accounting:
Nonprofits should adhere to Generally Accepted Accounting Principles (GAAP) or the Financial Reporting Standards (FRS) specific to their country. These standards provide guidelines for financial reporting, including the presentation of financial statements and the recognition of revenue and expenses.
Separating financial duties among multiple individuals is crucial to prevent fraud or errors. Key roles in the accounting process, such as recording transactions, approving payments, and reconciling accounts, should be assigned to different staff members.
Nonprofits should maintain complete and accurate financial records, including receipts, invoices, bank statements, and other supporting documents. These records should be organized systematically and easily accessible for audit and reporting purposes.
Nonprofits often have multiple funds designated for different purposes, such as restricted, endowment, or program-specific funds. Implementing a fund accounting system helps track income and expenses for each fund separately, ensuring compliance with donor restrictions and facilitating accurate financial reporting.
Nonprofits must properly account for different revenue sources, including donations, grants, program service fees, and investment income. Revenue should be recognized by the revenue recognition principles outlined in GAAP or FRS.
Expenses should be allocated correctly to the appropriate programs, administration, and fundraising categories. Nonprofits should establish clear policies for expense allocation, ensuring that costs are allocated based on a reasonable and consistent methodology.
Implementing robust financial controls and conducting internal audits helps identify and mitigate potential risks, errors, or fraud. Internal controls may include segregation of duties, regular bank reconciliations, and review processes for financial transactions.
Nonprofits should provide transparency to stakeholders by publishing their financial statements, annual reports, and audited financial statements on their websites or other accessible platforms. Open communication regarding financial information builds trust among donors, beneficiaries, and the public.
Developing an annual budget and long-term financial plans is essential for nonprofit organizations. Budgets should align with the organization’s strategic goals and provide the following:
– A framework for monitoring financial performance.
– Comparing actual results with projections.
– Making informed decisions.
Engaging an independent certified public accountant (CPA) to conduct an external audit is crucial for nonprofits. External audits objectively evaluate financial statements, enhance credibility, and ensure compliance with accounting standards and regulatory requirements.
The nonprofit’s board of directors is critical in overseeing financial management and accountability. Board members should possess financial literacy, understand the organization’s financial statements, and actively participate in financial discussions and decision-making.
Through professional development programs, conferences, and workshops, nonprofit accounting professionals should stay updated with the latest accounting regulations, standards, and best practices. This helps ensure that accounting practices align with industry standards and evolving regulations.
Accurate bookkeeping for nonprofits is essential to demonstrate financial accountability, make informed decisions, maintain transparency with stakeholders, and fulfill legal requirements. Nonprofits often seek the assistance of professional bookkeepers or accounting software to ensure their financial records are accurate and up to date.
Implementing some best practices enhances financial transparency, accountability, and organizational effectiveness in the nonprofit sector. However, consulting with accounting professionals and legal experts specializing in nonprofit accounting is always recommended to ensure compliance with specific laws and regulations in your jurisdiction. For more information related to the blog, or any financial requirements, contact Monily.
Wajiha is a Brampton-based CPA, CGA, and Controller with 17+ years of experience in the financial services industry. She holds a Bachelor of Science Degree in Applied Accounting from Oxford Brookes University and is a Chartered Certified Accountant. Wajiha spearheads Monily as its Director and is a leader who excels in helping teams achieve excellence. She talks about business financial health, innovative accounting, and all things finances.