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Nonprofit Accounting Tips every Agency Should Know

Posted by Tom Hallissey on Oct 10, 2019 10:00:00 AM

nonprofit accounting

Even though an organization doesn’t earn a profit, it is not exempt from financial reporting. 501(c)3s must also submit tax returns and follow IRS rules. From internal polices to tax regulations, these four nonprofit accounting tips will help any agency be better prepared to manage its finances.

What is Different about Nonprofit Accounting?

Nonprofit accounting is slightly different than other types of accounting, because these types of charitable organizations are structured differently than a typical corporation. For one, a nonprofit doesn’t pay taxes.

3 Other Ways Nonprofits Work Differently

  1. No ownership interests
  2. An operating purpose other than earning a profit
  3. Receives significant contributions from others who don’t expect to receive a return

Graphs of numbers used in nonprofit accounting

4 Useful Nonprofit Accounting Tips

1)      Set a Budget, Track Cash Flow and Compare Goals

Every organization, nonprofit or otherwise, can benefit from following basic financial management principles when developing an operating budget.

Helpful Hints to get Started

  • Determine goals
  • Develop realistic cost estimates
  • Estimate yearly income sources
  • Alter the budget to align expectations with reality

Once your nonprofit has developed a financial plan, the next step is to set up a system for tracking and analysis.

2)      Use the Right Bookkeeping Solution

Nonprofit accounting requires a solution that is specifically designed to meet its unique challenges. Your organization will benefit from using software that allows for fund accounting, which gives you the ability to track separate pools of money. Then, you will be able to use the software to sort through your funding sources, which could be subject to different rules and regulations.

An individual analyzes a nonprofit accounting document

3)      Learn to Create and Analyze Financial Statements

Like many other parts of accounting for nonprofits, the financial statements used in the process are also unique. Although nonprofit documents also will tell you how much money you have, where your money is going and how it got there, these statements have other key differences.

What’s Different in Nonprofit Financial Statements

  • The statement of activities replaces the income statement.
  • The statement of financial position replaces the balance sheet.
  • There is no nonprofit equivalent of the statement of shareholders’ equity.

4)      Understand Tax and Accounting Regulations for Nonprofits

In terms of tax and accounting regulations, there are two important guidelines nonprofits need to know: FASB accounting standards and IRS rules. Both will factor into a nonprofit’s tax compliance. Any 501(c)3 organization will benefit from learning the basics, like what is a IRS Form 990, as well as staying up to speed on all the latest updates.

While there are many similarities in different types of financial reporting, nonprofit accounting requires a little more care and attention than some of the others. If you have any questions about tax preparation for a nonprofit, contact a local accountant.

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Topics: Insider, Business Accounting

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