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NPOs need to manage their money to ensure accountability and transparency. Without good bookkeeping, it’s easy to lose track of donations and expenses, which can lead to mistakes and even legal trouble.
Bookkeeping helps nonprofits stay transparent, accountable, and compliant. In this article, we’ll outline the key steps to keep your nonprofit’s finances clear and running smoothly.
Nonprofit bookkeeping is the systematic recording and organization of an organization's financial transactions. It encompasses tracking all monetary inflows (such as donations, grants, and program revenues) and outflows (including expenses, salaries, and program costs).
This meticulous record-keeping is crucial for maintaining financial integrity and fulfilling the organization's mission. Good nonprofit bookkeeping helps you manage your finances and ensures that every dollar is accounted for and that nothing is lost or forgotten.
It shows donors, members, and the government that you are honest and responsible. When everything is recorded properly, it’s easier to create reports, file taxes, and make smart financial decisions.
Bookkeeping helps nonprofits stay organized, avoid mistakes, and build trust with everyone involved. It’s an essential part of managing finances and staying accountable.
Nonprofit bookkeeping vs. accounting
nonprofits bookkeeping
Aspect
Nonprofit Bookkeeping
Nonprofit Accounting
Definition
Daily record-keeping of all financial transactions
Analysis and interpretation of financial data
Primary focus
Recording donations, purchases, and bills
Preparing financial statements and making financial decisions
Timeframe
Day-to-day operations
Overall financial periods (monthly, quarterly, annually)
Key tasks
Writing down every donation
Recording all expenses
Keeping track of bills
Analyzing financial data
Preparing financial statements
Making big financial decisions
Handling taxes
Skill level
Basic financial knowledge
Advanced financial expertise
Purpose
Keeps things organized on a daily basis
Guides nonprofit's financial decisions and ensures compliance
Payroll management is crucial for nonprofits because it ensures that everyone involved gets paid correctly and on time.
To manage payroll effectively, nonprofits need to carefully track the hours employees work and calculate their pay. This includes making sure the right amount of taxes is withheld from each paycheck.
Nonprofits should use payroll systems or software to automate calculations and reduce mistakes. Keeping detailed, regularly updated records of each paycheck helps avoid errors and ensures everyone is paid as agreed.
Proper payroll management also helps nonprofits comply with labor laws and maintain good relationships with staff. It supports smooth operations and helps the nonprofit stay financially healthy.
2. Invoicing
Invoicing is essential for nonprofits to get paid for services or products they provide. A clear invoice includes the date, the amount owed, a description of what is being billed, and how and when payment should be made.
Nonprofits must keep a copy of each invoice sent and received. This helps track payments and manage the organization’s cash flow. Using invoicing software or templates can make the process easier and more accurate.
It’s important to follow up on unpaid invoices to ensure timely payments. This practice helps nonprofits manage their budget effectively and maintain financial stability.
3. Recording and allocating expenses
Recording expenses means keeping track of all the costs a nonprofit incurs, like buying office supplies or paying for utilities. Properly documenting these costs helps maintain accurate financial records.
Allocating expenses means assigning costs to the right areas, such as different programs or departments. This helps show how money is spent and ensures that it is used as intended. For example, expenses related to a specific project should be recorded under that project’s budget.
Accurate expense tracking and allocation are important for creating clear financial reports and staying transparent with donors. It helps nonprofits plan their budgets and use funds effectively.
4. Recording business transactions
Recording business transactions means keeping detailed notes of every financial activity, such as donations received or bills paid. Each transaction should include the date, amount, and purpose.
Using accounting software like QuickBooks can help keep your records organized and easy to review. Regularly updating and checking these records helps prevent mistakes and provides a clear view of the nonprofit’s financial situation.
Having a complete record of all transactions is important for creating a nonprofit financial statement and report. It also helps during audits and ensures that the nonprofit complies with financial regulations.
Note: You can use past data and methods like the cutoff method (multiply the chance of getting each donation by the donation amount) or the discount method (adjust the total expected revenue based on your chance of reaching it).
2. Statement of financial position
Also called a balance sheet, this shows what your nonprofit organization owns and owes at a given point in time.
Assets: Things you own, like cash and equipment
Liabilities: Things you owe, like loans
Net assets: The difference between what you own and what you owe
Example: If your nonprofit organization owns $50,000 in equipment and has $20,000 in loans, your net assets would be $30,000.
3. Statement of activities
This document tracks your nonprofit organization's revenue and expenses over time. It helps you see how much money you made, how much you spent, and how your net assets changed from the start to the end of the year.
Example: If you had $100,000 in donations and spent $70,000, you would see a $30,000 increase in your net assets.
4. Statement of functional expense
This document breaks down your spending into categories like program costs, administrative costs, and fundraising costs. It helps show how each dollar is allocated, which is important for transparency.
Example: If you spent $50,000 on program costs and $20,000 on fundraising, you’ll see these amounts listed separately.
5. Statement of cash flow
This statement shows how cash moves in and out of your nonprofit organization. It tracks cash used for daily operations, investments, and financing. This helps you see if you have enough money to pay bills.
Example: If your nonprofit organization starts the year with $10,000 and ends with $5,000. You can see how cash was used or saved throughout the year.
6. Form 990
This is the tax form that nonprofit organizations must file annually to show how they manage their money. It includes details about your revenue, expenses, and how you use your funds.
Understanding these documents helps ensure your nonprofit stays financially healthy and compliant with regulations.
5 best practices for bookkeeping for nonprofit organizations
Meticulous record-keeping: Maintain detailed records of all financial transactions
Specialized software utilization: Choose a dedicated nonprofit accounting software
Regular auditing: Conduct frequent internal and external audits
Regulatory compliance: Adhere to nonprofit accounting standards and regulations
Ongoing financial training: Provide continuous financial management training for staff and board members
Implementing these practices ensures accurate financial reporting, regulatory compliance, and fosters donor trust.
Robust bookkeeping practices are the foundation of a nonprofit's financial health and operational effectiveness. Accurate and transparent financial records not only ensure regulatory compliance but also enable strategic decision-making and reinforce donor confidence.
Implementing best practices such as regular audits, specialized software, and staff training significantly improves financial management. While bookkeeping can be challenging, various tools are available to simplify the process.
Zeffy, a 100% free fundraising platform for nonprofits, complements bookkeeping efforts by automatically generating tax receipts for donations. This feature streamlines record-keeping, saves time and reduces manual errors.
By staying organized, using appropriate tools, and following best practices, your nonprofit can maintain financial health and transparency, ultimately supporting your ability to make a positive impact in your community.
Nonprofits rely on a few key financial statements to provide a clear picture of their financial health and to ensure transparency with stakeholders:
Statement of Financial Position (Balance Sheet): This document outlines the nonprofit's assets, liabilities, and net assets at a specific point in time. It’s essential for understanding the organization’s financial stability.
Statement of Activities (Income Statement): Similar to an income statement for businesses, this report shows the nonprofit’s revenues, expenses, and changes in net assets over a period. It highlights the organization’s financial performance and helps assess how effectively it’s using its resources.
Statement of Cash Flows: This statement tracks the flow of cash in and out of the nonprofit, categorized by operating, investing, and financing activities. It’s crucial for managing liquidity and ensuring the nonprofit can meet its obligations.
Statement of Functional Expenses: This statement breaks down expenses by function (e.g., program services, management, fundraising) and by nature (e.g., salaries, rent, supplies). It’s unique to nonprofits and provides insights into how funds are being used in relation to the organization’s mission.
These financial statements are fundamental for nonprofits to maintain transparency, ensure compliance with legal requirements, and provide insights for strategic decision-making.
Recording donations for a nonprofit involves a few key steps to ensure accuracy and compliance:
Create a dedicated account in your nonprofit bookkeeping software for donations to track all the money coming in.
When you receive a donation, enter it into your bookkeeping software with details including the donor’s name, the amount, and the date.
Issue an official receipt to the donor acknowledging their contribution, which they can use for tax deduction purposes.
If someone donates goods or services instead of money, record these as “in-kind donations” after estimating their value.
Yes, nonprofits have to follow GAAP, which stands for Generally Accepted Accounting Principles. These are rules that help organizations keep their financial records clear and consistent.
Following GAAP is crucial for nonprofits to maintain transparency in their financial reporting. More importantly, it's necessary to ensure compliance with regulatory requirements, maintain their tax-exempt status, and build trust with donors, grantmakers, and other stakeholders.
Labeling net assets: Nonprofits must label their net assets based on donor restrictions.
Describing cash flow: They need to explain how they manage their money to cover daily expenses.
Recording contributions: All donations, including promises for future donations, must be recorded properly.
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