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Accounting for Non-Profit Organizations

Optima Office – Accounting for Non-Profit Organizations

We know first-hand that accounting for non-profit organizations can be complicated, but it doesn’t have to be. Let our knowledgeable, compassionate professionals at Optima Office show you how stress-free and confident you can be when it comes to your 501(c)(3) accounting needs. Click here to get started, or read on to learn a little more about what we do and how we can help.

What is Non-Profit Accounting?

Non-profit accounting is the unique process by which nonprofits perform their financial planning, recording, and reporting activities. This is different from other accounting industries because of the unique set of rules that govern how non-profits operate. Accountants who specialize in the unique field of accounting for non-profits are responsible for staying on top of all the new laws and procedures surrounding the industry. 

The processes of financial decision-making and accounting in a nonprofit organization are subject to greater degrees of public scrutiny than those of a for-profit entity. Non-profit organizations provide accountability to contributors and donors, regulators, the government, and society in general, making it necessary to have proper accounting procedures, and they must do all of this while still operating within the constraints of a nonprofit’s mission and resources.

What Types of Services are Offered in Non-Profit Accounting?

Executing accounting for Non-Profit organizations means providing a multitude of financial services pivotal to the success of any 501(c)(3) organization:

  • Budgeting and Bookkeeping
  • Forecasting
  • Bank Financing Assistance
  • Financial Statements Preparation
  • Monthly/Quarterly Accruals
  • Payroll
  • Support for Fundraising
  • Monthly Financial Reports
  • Budgets and Financial Plans
  • Industry Specific Reports and Analysis
  • Cash Management
  • Monthly Financial Review with the Board/Advisors
  • Support for Audit Schedules/Grant Writing
  • Audit ready financials

5 Documents You Should Expect to See in Non-Profit Accounting

According to Madeleine Monson-Rosen, there are five types of documents you can count on as part of the accounting for non-profit organizations process:

    • The Statement of Financial Position (SOP) acts as a balance sheet for the organization
    • A Statement of Activities shows the ebbs and flows of revenue as it comes and goes, much like an income or bank statement would in for-profit organizations
    • A Statement of Functional Expenses breaks down expenses by function and type of expense
    • A Statement of Cash Flows records cash coming and going as it relates to operating, investing, and financing expenses
  • An Annual Report details a fuller picture of a non-profit’s fiscal health, including attendance records, donor lists, and events & activities records.

 

You can download a template of the first four reports here thanks to the good people at Springly to use as a guide and know what to expect.

Unique Challenges of Accounting for Non-Profit Organizations

As with any type of accounting, non-profit accounting has its own unique challenges and pressure points. The CPA Journal tells us in great detail about the key challenges accounting for non-profit organizations should expect to prepare for and face:

  1. Overseeing many functional areas
  2. Juggling strategy and operations
  3. Carrying the c-suite
  4. Communication
  5. Governance
  6. Information technology
  7. Managing personnel
  8. Funding
  9. Compliance, regulations, and unfunded mandates
  10. Mitigating and managing risks, including reputational risk.

Non-Profit Accounting: Best Practices and Standards

How can you ensure your non-profit organization is operating strictly on the up-and-up financially? Adhering to these accounting best practices will keep your team ahead of the game in good standing, and out of trouble fiscally as well as ethically:

  1. Protect your non-profit (and your people) from fraud by enacting controls, policies, and procedures. A code of ethics, for example, is key to ensuring a moral high ground is established and your people are held accountable to it.
  2. Keep employees ethical and honest by appointing different members within the organization to have different responsibilities from each other. The same way you wouldn’t use the same password for your email as your online banking, it is wise not to entrust too much sensitive data and record-keeping to one person or small group in order to prevent fraud
  3. Use an accounting software that is built especially for non-profits. It’s just not the same as running your own personal finances or a for-profit organization, and you must treat it that way (especially) financially. The most updated non-profit accounting software will eliminate the guesswork of whether your protocol and tax requirements are current and being observed.
  4. Operate within the constraints of a budget. Create and continuously evaluate a realistic budget that is regularly run by your board of directors so there are no surprises come tax time.
  5. Having an unrealistic budget is the same as operating without one. Don’t cut corners where you shouldn’t and don’t have to, but also balance it with the needs and expectations of your donors, board, and employees.
  6. Hold yourself accountable to the myriad of tax regulations. Non-profit organizations are far more often scrutinized for their spending at the end of the fiscal year. Generally Accepted Accounting Principles (GAAP) and IRS requirements come into play here, so be sure your team is staying current on their (constantly changing) rules.
  7. Establish financial goals, and regularly check in on them. Be sure your goals match your bandwidth – whether that’s people, software, or even physical space. Looking into the future 3, 5, or even 10 years will help your non-profit organization stay successful and in good standing.
  8. Collaborate interdepartmentally to ensure the most transparency and productivity. Non-profit accounting cannot operate in a silo, and the importance of periodically checking in with other areas of the organization is imperative. Set meetings, tackle action items together, and explain the tax standards and fiscal protocol to let everyone know why certain processes exist how they do, and why particular items are handled as they are.
  9. Verify that there are no conflicts of interest across your board of directors. Your board should be completely separate, without interference from familial or professional ties for example, to ensure the most above-board experience for your donors. Someone who is a family member or employee may not be able to give an unbiased perspective on issues when it comes to decision making.
  10. Keep your head out of the clouds in regard to fundraising. As they say – shoot for the moon, but keep the stars in your peripheral. Aim high, but live in the reality that sometimes things don’t go to plan and goals can fall short (for example, did anyone see a global pandemic coming that changed everything for over 2 years? Not likely!). Consider a milestone that everyone on your team, from employees to board, believes is achievable in the time span agreed upon, and adjust your goals accordingly through the months and years of your pursuit. This goal should not only satisfy your operational requirements, but also keep your team motivated and feeling successful about the benevolent cause you’re committed to.
Ready to get started? We want to fill in your non-profit accounting gaps, be your whole team, or provide consulting – wherever you need us, there we are. Get in touch now to begin a trusted partnership that will yield strong results for your non-profit for years to come.