Accounting for non-profit organizations can be complex. There are stringent tax requirements to take into account and variable funding sources to keep track of.
We know you didn’t start a non-profit organization only to spend most of your work day working on financial records and spreadsheets. However, best accounting practices that ensure compliance and transparency are crucial for your organization’s survival.
So in this guide, we’ll share with you a bit of know-how so you can stay on top of your non-profit organization’s accounting.
Essential Accounting Tips for Non-Profit Organizations
Here are the things you need to do to maintain a financially sound non-profit organization:
1. Record all financial transactions diligently.
The first step in setting up a good accounting system in place is to ensure that all your financial transactions are recorded accurately and on time. This includes recording your disbursements, organizing receipts, and keeping track of your accounts receivables, accounts payables, petty cash transactions, and payroll. Consider pay stub maker for your accounting needs.
While you can record them in a physical ledger or a traditional spreadsheet, we recommend using a cloud-based accounting system for better efficiency, automation features, security, and 24/7 accessibility of financial data wherever you are. By recording transactions diligently, your organization will remain compliant and you’ll be able to make data-supported financial decisions.
2. Understand your tax responsibilities.
If you have a tax-exempt status, you won’t have to pay federal income taxes. Furthermore, it’s possible to be exempt from sales and property taxes.
In order to achieve tax-exempt status, you should apply by filling out Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. The IRS will then decide if you qualify.
However, being exempt from federal income taxes doesn’t mean you don’t have to file an annual small business tax return. Also, you’re required to report revenue and expenses to the IRS, which is why you need to keep accurate and timely records of your financial activities for the year.
3. Create non-profit accounting statements and reports.
Just like small businesses, you should also create financial statements to report your non-profit organization’s finances. Basically, the three main financial statements you need are: financial position, statement of activities, and cash flow statement.
The statement of financial position provides you an overview of your organization’s financial health. It involves your assets, liabilities, and net assets. Your assets must be equal to your net assets plus your liabilities.
It’s important to note that net assets must be classified as “with donor restrictions” or “without donor restrictions”. If donations were made for specific purposes, they must be labeled as “with donor restrictions”.
Meanwhile, the statement of activities is similar to the income statement. This means its primary purpose is to report on the revenue and expenses of your non-profit organization. Similar to the statement of financial position, revenues must also be classified as “with donor restrictions” or “without donor restrictions”.
Finally, the cash flow statement provides an overview of how much money is entering and going out of your organization. Here, your cash is categorized as operating, investing, and financing activities.
4. Prepare a budget and try to stay on track.
Prepare a budget and reference it frequently to ensure that your organization stays on track to achieve its goals. Review your budget on a monthly basis and compare your actual revenue and expenses against the figures in your budget.
Also, by deep diving into your budget regularly, you’ll be able to quickly adapt to changes, address issues right away, and tweak your strategy. Also, it’s important to review and adjust the spending budget for the rest of the year to reduce expenses or to allocate funds to certain areas if you receive unexpected funding.
5. Establish robust internal controls.
Many non-profit organizations fail because they don’t have a solid “checks and balances” system in place. No matter how small your organization is, internal controls can significantly reduce risk of fraud and spotting errors.
Some of the ways to implement internal controls are to share financial duties, establish strong security policies, and take regular inventory of fixed assets that you allow your staff to work with.
6. Hire an accountant that specializes in non-profit accounting.
Just like any other type of business, non-profit organizations also have taxes and cash flow to manage. We know how busy your days can get, so the most logical approach is to invest in a professional who knows the ins and outs of non-profit accounting.
One of the biggest mistakes that you can probably make when it comes to running a non-profit organization is assigning finance tasks to an untrained staff or volunteer. Whether unintentional or not, a lack of experience and oversight may lead to serious compliance issues, mismanagement of funds, and risk of fraudulent activity.
By partnering with an expert accountant who specializes in accounting for non-profits such as Lear & Pannepacker, you can have peace of mind in knowing that your accounts are taken care of. Aside from doing all the heavy lifting, they can also be your trusted advisor for critical decisions that can impact your organization’s finances.
It’s not enough that you are passionate about your organization’s mission. If you want to build a successful and sustainable non-profit organization, you have to ensure that the accounting side is also on the right track.
While you can work on your books on your own, spending your day working on them is not an efficient use of your precious time. So if you don’t have an experienced accountant to assist you, find one who will.
With a reliable accountant by your side, you’ll become more empowered in making informed decisions that lead to the success of your non-profit organization.