What is the reason for joining a Non-profit organization or doing accounting? No challenging and complex accounting calculations, tedious paperwork, or anything else. You are wrong here! The only moto to join a Non-profit organization is their mission. However, being an accountant, you cannot run away from all those confusing money planning, accounting paperwork, and long & complex calculations with your non-profit accounting. At Novus Taxes, it is like our USP to help non-profit organizations with all their accounting needs. Within this initial year, we have worked on the financial summary of many non-profit organizations. So, this article explores all the basics and best practices to be followed to understand the accounting needs of non-profit organizations. Let’s roll out by understanding each section one by one.

What is Non-profit Accounting?

Of course, you must know that for-profit organizations are meant to record their finances and show their profits for better financial statements. In contrast, non-profit organizations do it for their accountability! Making financial statements and managing accounting is to show the non-profit’s accountability to its contributors and donors. You can learn more about the basics of non-profit accounting in our last article. 

Following this section, we will cover the basics and best practices non-profit accountants must follow to get a clear picture of non-profits’ financial profiles and how well they can project financial statements to their contributors for solid reputations.

How Non-profit Accounting Differs

As we just shared, non-profits are more interested in their accountability interests than creditability. Their donors can restrict donations, and funds must be spent on the agreed terms. These conditions ensure that non-profit funds are well spent so that the contributors and donors can approve! That is where fund accounting comes into the picture. Fund accounting is accounting for non-profits that allow them to allocate their money into different “funds” in order to keep them organized. They can spend the funds based on what they’re designated for.

To let you understand, Funds can be categorized into groups:

• Restricted Funds: These funds are meant for specific projects and activities.
• Temporarily Restricted Funds: For a particular time, the funds should be used for specific projects, and later, they become unrestricted.
• Unrestricted Funds: These can be called annual funds, and the organization can spend them on their most essential needs.

One more thing you should consider while working on non-profit accounting to stay accountable is the non-distribution constraint.

We distribute net earnings to the leaders of for-profit organizations, whereas, for non-profit organizations, net earnings cannot be distributed to the leaders of non-profits. Let’s say you found $15,000 additional in your Animal Shelter funds. You cannot distribute that fund; instead, it should be reinvested in the organization’s mission.

Statement of Financial Position

The balance sheet of your non-profit, also known as the statement of financial position, best represents its financial health.

The balance sheet provides a list of your non-profit’s assets and liabilities. In essence, the statement of financial position in non-profit accounting can be summarized by a simple equation:

Net Assets = Assets – Liabilities

Understanding how these variables interact will help you better comprehend your organization’s financial health through this vital document. Positive net assets indicate improved financial health, while negative net assets suggest that you may need to reassess your priorities.

Statement of Activities

Your non-profit’s statement of activities, also known as the income statement, records the revenue and expenses over time. It helps categorize revenue sources and expenses and track changes in net assets. 

Statement of Functional Expense

Please remember the following information: Your non-profit’s statement of functional expense categorizes your expenditures into different common categories, assigning a “function” to each expense. This breakdown separates expenses into one of three operational functions: program expenses, Management and general expenses, or fundraising activity expenses.

Providing detailed information on the statement of functional expenses is important for completing your annual Form 990, which requires expenses to be separated similarly.

Form 990

Don’t forget to file the annual Form 990, which is crucial for non-profit accounting. Most organizations exempt from income tax under section 501(a) must file an annual information return (Form 990 or 990-EZ) or submit an annual electronic notice (Form 990-N), depending upon the organization’s gross receipts and total assets. It helps to demonstrate how your non-profit organization has utilized its revenue and expenses throughout the year. Essentially, it’s the IRS’s way of ensuring that your non-profit is financially honest and legitimate.

Understanding various accounting documents will make non-profit accounting much easier. It’s important not only to pull important information but also to know how to use that information to make effective accounting decisions.

Knowing the statements and reports for Non-profit accounting allows you to ensure best practices are followed to maximize the accuracy of financial reports.

Best Practices for Non-profit Accounting

Your non-profit bookkeeper is responsible for recording day-to-day financial information, while your non-profit accountant validates bookkeeping entries, performs reconciliations, prepares financial statements and reports, and reviews the financials with you before closing the monthly period. This ensures that you can make the best financial decisions in managing your non-profit. To make informed financial decisions, non-profit professionals should be familiar with some accounting best practices. In this section, we will cover some of the best practices that non-profit accountants can use to manage their finances better.

• Reference your budget frequently.

Keep an eye on your budget throughout the year, not just during the annual approval process. Compare your planned and actual income and expenses monthly to stay on course to achieve your goals. Regular budget check-ins will help you adapt to changes, such as discontinued programs, funding changes, or unexpected funding. Reviewing and adjusting your spending to align with your organization’s mission is essential.

• Don’t overthink overhead expenses.

The public’s perception of overhead expenses has a significant negative impact on the non-profit industry. Overhead costs are the expenses that non-profits incur for administrative purposes, marketing their mission for fundraising, and covering internal other expenditures necessary for the organization’s growth. In essence, overhead expenses encompass all non-program-related costs incurred by non-profit organizations.

Non-profit organizations function similarly to for-profit businesses, requiring overhead expenses for basic operations. Donors should evaluate organizations based on their impact on the community rather than just fundraising and administrative expenses.

• Establish tangible internal controls.

Internal controls not only limit fraud cases but also help catch errors. Even if your non-profit consists of only two to three employees, there should still be a ‘checks and balances’ system in place. No matter the size of non-profits, internal controls are essential for effective non-profit accounting.

Small non-profits, especially, struggle with implementing internal controls. However, there are certain approaches you can follow:

• Share financial duties: If your bookkeeper records all incoming revenue for your organization, someone else should be responsible for approving write-offs. This creates a system of checks and balances between roles at the organization.
• Instill security policies: Non-profit cybersecurity can easily become a significant risk to organizations, especially when handling sensitive transactional information. Implement specific policies for handling this data at your organization.
• Take inventory of fixed assets: Some items are quickly taken home from the office and forgotten about. It is advised to take regular inventory of computers, cell phones, and other items your organization’s staff use.

Internal controls don’t imply a lack of trust in your organization’s staff members. They help catch any mistakes and prevent inadvertent wrongdoing.”

• Conduct regular audits.

It’s important to note that a financial audit can be very positive. A non-profit audit is conducted to ensure the accuracy of the organization’s financial records and assess its financial health. When audit results are made public, they contribute to financial transparency with current and potential donors. Furthermore, audits offer insights into opportunities for improving financial stability and record-keeping. Addressing these opportunities now can help ensure the security and accuracy of financial data in the future.

Now comes to understand your expert non-profit accounting team. When outsourcing accounting for your non-profit, choose experts or firms specializing in non-profit bookkeeping and accounting. They’ll streamline processes, ensure compliance with tax regulations, and help your non-profit flourish. See the following section, where we have covered hiring an outsourced non-profit accounting team.

Hire or Outsource for Non-profit Accounting

Is there a team member in your non-profit with the skills and availability to handle your accounting needs? Many small to midsize organizations struggle to fill this role. Nearly 37% of non-profits listed limited staff as their most significant challenge in 2023. This implies that finding someone to take on these responsibilities can be challenging, especially as your organization grows. Thanks to that, there are options that non-profits can consider when looking for someone to fill the role of non-profit accounting professional.

Considerations for Managing Accounting Responsibilities in Non-Profits:

• Roll the Responsibilities Up Under an Executive: Many brand-new organizations take this approach, allowing their executive director to manage all financial responsibilities. While this can work initially, problems arise as the organization grows. Not only do accounting needs become more complex, but executives will have other pressing responsibilities and priorities.
• Hire a Full-Time Accountant: Hiring a dedicated accountant is an option many large organizations utilize. However, for small non-profits with limited resources, hiring additional staff is an expense that must be carefully considered. Often, it’s not quite the right time to hire a full-time accountant.
• Outsource Your Accounting Needs to an Expert Firm: The majority of non-profits would benefit from outsourcing their accounting needs. Expert firms offer professionals who have extensive experience with non-profit accounting and can address various needs effectively. Additionally, outsourcing tends to be more affordable than hiring a new team member for your non-profit’s accounting needs.

At Novus Taxes, we believe most non-profits will benefit from outsourcing their accounting needs to experts specializing in non-profit accounting. This affordable option provides access to deep non-profit accounting experience and expertise.

If outsourcing your accounting needs sounds like a viable option for your organization, ensure you select an agency that specifically works with non-profits. This ensures they are well-versed in fund accounting and can effectively address non-profit-specific questions.

How to Choose a Non-profit Accounting Firm

Novus Taxes specializes in non-profit accounting and taxes, and they have experts working on the same solutions for over the last seven years! When you outsource your accounting to us, you’ll have access to specialists who very well understand the intricacies of the non-profit world.

Nonprofit accounting is a specialized area of finance. A good grasp of accounting principles will enable a nonprofit organization to better understand its financial status. If your accounting and tax preparation firm still needs a back to ensure everything about nonprofit accounting and tax planning, you must look for an outsourcing CPA firm. They can assist in implementing best practices and controls, leading to more effective financial management.

We recommend connecting with our accounting experts if you’re looking for more information about non-profit finances.