When your primary goal is to address unmet needs in the community, and every dollar counts towards meeting that goal, then you also need accounting processes and practices that will ensure transparency and accountability because they are the foundation on which you build donor relationships.
Since nonprofit organizations are unique in their approach, nonprofit accounting must also be unique to meet the demands of the regulators and the stakeholders. A system to reinvest surplus revenue is the focal point of responsible financial management and the very thing that continues the work of the organization in the community.
At Hall Accounting Company we understand this. We know that behind every spreadsheet, there’s a need being met in health, education, social services, and research. That’s why we’re here to help you manage your financial position responsibly. Financial stewardship is critical for your supporters to trust you and keep supporting you.
Our approach is simple but effective. We work with you to develop, concise financial goals and reporting structures that comply with the financial accounting standards board and generally accepted accounting principles. We will worry about the technical details while you worry about fundraising.
Since every penny paves the way for progress in a nonprofit organization, we want you to focus on what you do best and let us do the same. In the short term, we can help achieve tax-exempt status and access funding, and in the long term - full financial transparency.
If you’re not ready to make that call quite yet, then let’s examine some of the best practices a nonprofit should adopt for responsible financial management.
Nonprofit vs. For-profit accounting
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Nonprofit organizations are a unique entity that requires a special emphasis on how their funds are allocated and spent responsibly because they are not allowed to make a profit. For this reason, nonprofit accounting is different from for-profit accounting, which focuses on recording transactions to prove either a profit or a loss, made from trading.
A nonprofit organization’s main focus is to show how funds were used by donors to reach its objectives. This is called, fund accounting. Also, important is that funds cannot be distributed to executives or board members, they must be reinvested in the mission.
Nonprofit vs. For-Profit Accounting: The Core Differences
Nonprofit accounting differs from for-profit entities in several ways. It’s not just about the bottom line, it’s about proving that every dollar was used towards achieving the organization's goals and reaching community objectives.
While for-profits focus on revenue, expenses, and profitability, nonprofits concentrate on fund management, ensuring donations and grants are used in accordance with the designated purpose.
The core differences may be summarized as follows:
Nonprofit organizations | For-profit businesses | |
Ownership and types | None Humanitarian, religious, educational | Shareholders, entrepreneurs or partners Private or public corporation, sole proprietorship |
The primary objective of the operation | Provide a charitable service to society | Generate profits |
Financial statements required | Statement of Financial Position, Statement of Activities, Statement of Functional Expenses, Cash Flow Statement | Balance Sheet, Income Statement, Statement of Cash Flows, Statement of Shareholder’s Equity |
Revenue | Donations, memberships, grants, savings or investments | Sales of goods and services |
Expenses | Overhead expenses, program expenses, fundraising expenses | Operating or non-operating expenses |
IRS submissions | IRS 990 (exempt for religious organizations) | Type of business dependant |
Net worth measurement | Net assets | Shareholder equity |
Establishing Strong Fund Accounting Best Practices
Ensuring Transparency and Accountability
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Imagine your organization's funds as a series of buckets, each labeled for a specific project or donor restriction. Fund accounting helps you keep track of how much water (money) is in each bucket and ensures you're only using the water for the garden (project) it's meant to nourish.
Transparency and accountability are the twin pillars supporting the bridge of trust between nonprofits and their stakeholders. When every contribution counts, showing your cards—how funds are raised, allocated, and spent—isn't just good practice; it's an absolute necessity.
This means going beyond standard accounting practices to provide narratives that connect the dots between donations and outcomes.
Remember, transparency isn't just about being seen; it's about being understood. To be understood a clear and common language must be used. A partner like Hall Accounting Company will provide that common language for you to communicate with your stakeholders.
Let’s talk about how we can help you meet your goals
Nonprofit bookkeeping - responding to unique recording of transactions
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When we refer to a workflow for a nonprofit we talk about the steps that must be taken to record day-to-day transactions, and then organize the information in a way that allows it to be analyzed.
One of the first steps that we take when working with nonprofits is to onboard you as a client, collecting information about your current accounting practices and software and also about your tax status and financial reporting systems.
We then work systematically through the following steps to bring your bookkeeping processes up to standard.
Accurate and timely record-keeping
Every transaction must be accounted for and categorized according to a consistent accounting method (cash basis or accrual basis).
Segregation of funds
We separate funds that should be used for different projects e.g. grants that should be used for a specific project. Creating different accounts based on sources, restrictions, and intended use gives you the control you need when using donor funding.
The benefits of this practice are effective budget management, risk management, financial accountability, and an enhanced reputation with donors.
For a moment let’s consider the different categories of funding so that we have a clear picture to work from.
Unrestricted funds - these are funds that have no limitations placed on them by the donor and they can be used where the needs are the greatest in the organization. These funds are important for overhead expenses such as utilities, property rental or lease, salaries, and other costs not associated with a specific project. For example, the roof of the nonprofit’s building might get damaged and need extensive repair. Unrestricted funds can be used for this repair work.
Temporarily restricted funds - these funds should be spent on certain projects and activities at your nonprofit until a certain period lapses. After that time, they become unrestricted funds. For example, a donor donates $50,000 to an arts-enrichment project that must be used for teenagers in a certain neighborhood for 12 months. Once the program is implemented and concludes with the objectives met, any remaining funds can be reclassified as unrestricted funds.
Regular bank reconciliation
We reconcile bank accounts and financial records regularly so that we can catch any discrepancies and give you advice on how to close any gaps that would indicate a lack of transparency or non-compliance with tax or regulatory standards.
Budgeting and Financial Planning
A nonprofit’s budget is critical to its success. Without an adequate idea of your financial situation in the future, you cannot meet the needs of the community. The donors trust you to execute the ideas and goals that your mission has put forward, and we come alongside you to develop a budget and do forecasting that will provide the directions or the organization’s mission.
Financial reporting
We will prepare your financial statements and other reports to ensure you comply with accounting practices and principles. We know you need a clear picture of the organization’s financial health at any given time and we provide this. Later in this article, we will discuss the accounting statements (financial reports) in more detail.
Internal controls
Strong internal controls are the foundation of good accounting practices and business management. We will help you implement policies internally that prevent errors and fraud. Fraud in nonprofit organizations is a big challenge and we recognize that a few bad apples can taint the view of donors towards nonprofits.
Transparency review
We make all financial information available to stakeholders to demonstrate transparency and accountability.
Accounting software implementation
Many of the processes that require manual data entry will be converted to an accounting system that can automate these tasks. This not only reduces the time spent on manual data entry, but allows us to provide you with strategic financial information much faster and more efficiently. Since a nonprofit has additional funding transactions to report, we ensure the accounting system we recommend can process these transactions.
If you need a trustworthy and reliable partner who will keep the numbers in check while you do fundraising, then look for an accounting firm, like Hall Accounting Company to come alongside your community upliftment strategies.
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Now that we’ve discussed the basic bookkeeping transactions, let’s look more deeply into the financial accounting statements that are required for a nonprofit.
Nonprofit accounting statements
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Four standard accounting statements are required to track and analyze the financial health of nonprofits:
The Statement of Financial Position, similar to a ‘for-profit’ balance sheet but shows net assets instead of profit.
The Statement of Activities, similar to a ‘for-profit’ income statement but emphasizes reporting revenue and expenses rather than profit and loss.
The Cashflow Statements, reflecting items such as donor contributions, membership dues, program fees, and fundraising proceeds
The Statement of Functional Expenses, focuses on three specific expenses namely, program, general and management, and fundraising.
Taxation for nonprofits
Tax-exempt status
Equally as important as laying down the foundations for transparent bookkeeping practices, and financial reports that provide stakeholders with a clear picture, is the tax status of a nonprofit.
This status is granted to organizations that operate exclusively for religious, charitable, scientific, literary, or educational purposes, among others. To maintain tax-exempt status, an organization must ensure its activities align with its stated mission and comply with IRS regulations.
Most tax-exempt organizations are required to file an annual information return, Form 990, with the IRS. This form provides the public with financial information about the nonprofit, including sources of income, expenditures, and compensation of key employees.
Please take note that nonprofits can be taxed on income that is not related to their exempt activities, called unrelated business income tax. The IRS scrutinizes UBI closely if it is extensive and diverges too much from the objectives of the organization.
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Having considered and discussed all the important elements of responsible financial management, we believe there is a case to be made for outsourcing your accounting tasks to an accounting firm. Let’s take a look at the benefits of outsourcing for nonprofits.
Embracing Outsourcing: When and Why Nonprofits Should Look Outside
The question of when to outsource accounting functions boils down to the expertise you have inside the business as well as the complexity of the financial transactions. We have already established that a nonprofit has unique needs related to reporting transactions, reinvestment of funds into the mission, and tax compliance (even when the nonprofit status is tax-exempt).
For these reasons, outsourcing should be considered a strategic and operational necessity when:
You are starting a nonprofit and do not know how to set up accounting practices and comply with regulatory requirements.
You do not have accounting practices and principles set up to consistently report financial transactions.
You need to move away from manual accounting tasks and delayed financial data.
You have tried to manage the organization’s financial health, but are finding it increasing in complexity.
You need help with investment income to sustain the work of the organization
You do not know what is required of the organization concerning IRS submissions, and are missing out on generous tax breaks at the state level.
All these reasons indicate that it is time to outsource financial duties. Hall Accounting Company offers a level of expertise and insight that would be hard to match internally, especially in the areas of fund accounting, compliance, donor reporting and IRS submissions. It is our job to stay abreast of the latest accounting principles and practices and how to regulate your financial position so that you can focus your energy on fundraising events and supporting community initiatives.
Moreover, partnering with us can lead to significant cost savings and scalability, allowing you to serve more members of the community, more often and with greater effect.
Hall Accounting Company, a partner in your organization’s mission
Conclusion
That brings us to the end of our article on accounting for nonprofits. Every day thousands of people around the U.S. use the services offered by nonprofit organizations. You are the backbone of initiatives that improve the lives of Americans all around the country.
Effective financial management allows you to gain greater credibility and therefore attract donor attention. Taking the step to outsource your accounting is a strategic business decision and one that you need to make sooner rather than later. Once reputational damage has occurred, it is difficult to recover, especially a lack of trust linked to the financial management of donor funds.
Take the first step in the right direction today, with Hall Accounting Company.