The Non-Profit Accounting Guide for Beginners
Although non-profit organizations do not generate an income, accounting is a vital component of their functions. Without proper accounting, you cannot track cash flow and spending.
This could damage your ability to raise money for projects or hiring new staff.
Non-profit organizations are often charitable entities. They raise money for a particular cause or project or provide a service. While non-profit and for-profit accounting share some similarities, there are some nuances that you need to be aware of.
If you are new to non-profit accounting, read this guide to find out how you can keep your organization running smoothly.
Where Does the Money Come From?
All money coming into your organization must be accounted for, but where does it come from?
When you receive money, you should classify it by purpose and donor restriction. Keep your funds organized to avoid accounting and legal trouble. Make a record of all incoming money.
As a non-profit organization, you may receive funds from various sources. These include the following:
These are any promises to make a donation. This type of donation may be dependant on a future event, so make sure to record these carefully.
Not all donations are money. If someone donates their time to do some work for you, account for it as though it were money.
If you are planning to buy investments, such as land, for your non-profit organization, make sure to record it. There are rules regarding these investments, so make sure you understand them.
You must maintain a clear separation between the functioning of your non-profit and any business activities. You may also use investments to grow seed money for long-term goals. These goals must be defined.
Donations, Membership Fees, and Events
This is any money that comes from donation campaigns, admission fees to fundraising events, or dues. All must be recorded.
Local, state, and federal grants are available to non-profit organizations. Grants can also come from private entities.
Remember to record these transactions.
The Basics of Non-Profit Accounting
Unlike a for-profit business, non-profit organizations are not set up with the goal of making money. They largely handle donations and membership fees.
Because money is being received and spent, non-profits must legally account for their dollars.
Just like a for-profit business, you must be able to properly manage your cash flow. Your cash flow is any money that you use to stay in business.
Non-profits use funds to create accountability for their dollars. When your accountant runs a report, they will use a statement of financial position.
This defines all assets, liabilities, and net assets.
Your organization's assets are anything it owns.
Using funds allows organizations to see how donor money is being spent. This is what accountants will use to run reports.
A single organization may have multiple funds. There will be a fund for the administration, overhead expenses, and other departments.
Each individual fund will be marked with a unique code. This allows the accounting and finance departments to easily run reports on a particular fund.
When you run a report, you will be able to track how much unrestricted and restricted funds your organization has available.
Unrestricted vs Restricted Funds
The various other funds may have specific purposes, which will restrict their use. For example, if someone makes a large donation, they may ask for it to be used with a specific goal in mind.
These restricted funds will be marked as such within your accounting program.
Unrestricted funds will not be limited by the donor. These will also be marked as such.
Funds can also be temporarily restricted. These funds can be restricted by either time or purpose. A donor may say that you cannot spend the money within a given period of time.
Once either requirement is met, the restriction is lifted.
Making this distinction will help you better track your available funds. You will also keep yourself from misappropriating funds.
As a non-profit organization, you have an obligation to uphold some duty. Make sure that you communicate your goals to donors.
If your donors understand how their donations are being appropriated, they are more likely to become repeat donors.
Clearly define your motive. When you define yourself as a non-profit, you will need to prove that your goal is to provide a charitable service.
Choose a Good Accountant and Accounting Program
Although your goal is not to make money, you still need to think like a business. You need a staff of responsible professionals who will help you keep your affairs in order.
You still need to keep track of any assets and overhead expenses. Your accountant should be well-versed in non-profit accounting.
If you are running a non-profit, you want to help society in some way. Make sure that you can continue to operate and provide whatever service you provide.
In the beginning, it can be difficult to find people who will back your cause. Be patient.
As you grow, you can better automate some of these processes and invest in systems that will help you streamline reporting.
What if You Make a Profit?
Some larger organizations may own for-profit businesses. This is common in healthcare.
Such operations can put your tax-exempt status at risk.
In this case, make sure the for-profit business is kept in a separate corporate entity. It is important that the functional purpose of each entity remains clear.
Make the Most of Your Tax-Exemption
As a non-profit, you are exempt from income taxes. Additionally, the paperwork involved tends to be a lot easier to manage. If you manage your money wisely, you will have more money to spend on your projects and services.
With good non-profit accounting, you can better help improve the welfare of a group of people or society at large.
Scrubbed is a full-service accounting service that can help you keep your non-profit on track. Check out our services and get a free consultation.