Taxes

Nonprofit Accounting Template

The accounting responsibilities of a nonprofit organization are different from those of for-profit businesses. Bookkeeping can be complicated for a nonprofit organization, and even more so if you can’t afford to hire a professional accountant to manage your finances. This guide reviews the basics of nonprofit accounting so you can do the best you can with the resources available.

Know your financial terms

Before you jump into accounting, it’s helpful to know some basic accounting terms you’ll come across. Please note that these terms may have a slightly different meaning when applied to non-profit versus for-profit businesses. Once you’re familiar with these basic terms, you’ll be able to better understand your nonprofit’s accounting needs and begin to prioritize your activities.

  • Assets: Things your nonprofit owns, like cash, patents, or office equipment
  • passive: Things your nonprofit owes, like loans or accounts payable
  • types of income– All money coming into your nonprofit, such as donations, grants, membership dues, investments, tickets, program fees, or service fees
  • net assets: Assets minus liabilities. Net assets can be classified in one of two ways: those with donor restrictions and those without donor restrictions.

These donor restrictions can be divided into three categories:

  1. Unrestricted: Use these funds for any purpose, including day-to-day operations. For example, donations to its annual fund are unrestricted, meaning donors let the organization decide how they are spent.
  2. temporarily restricted: These funds can only be spent on a specific program or at a certain time. Examples include money donated during a crisis or emergency where donors want the money to be spent on that event.
  3. permanently restrictedNote: The nonprofit may never spend these funds, but may earn interest by investing them. For example, an organization cannot use the corpus of endowment funds, although it can use the interest earned on those funds.

Prepare your organization’s financial statements

As a non-profit organization, transparency in operations is essential. One way to strengthen this transparency is to properly prepare your financial statements. According to Generally Accepted Accounting Principles (US GAAP), nonprofit organizations are required to make the following statements for reporting:

Statement of financial position

Similar to the balance sheet of a for-profit corporation, a Statement of Financial Position breaks down assets, liabilities, and net assets. It’s an overall snapshot of the health of your nonprofit.

Declaration of Activities

The primary goal of a nonprofit organization is to provide services or programs that meet specific needs. A Statement of Activities reports income and expenses with and without donor restrictions.

Statement of Functional and Natural Expenses

Reporting expenses by nature and function in a spreadsheet format helps track activities and accomplishments.

For example, expenses would be broken down by function, such as programs, fundraising, or administration. They would also be broken down by the nature or type of expenses, such as salaries, supplies, or marketing.

Statement of cash flows

Similar to the cash flow statement of a for-profit corporation, this document reports how much cash and cash equivalents come in and out of the organization during a specified period. Your cash flow can be positive or negative, depending on whether inflows are greater than outflows (positive) or inflows are less than outflows (negative). Cash flows fluctuate and do not reflect long-term gains or losses.

This statement is divided into three sections: invest, finance and operate.

  1. The investment section of the statement reports amounts spent on long-term assets, such as investments or equipment.
  2. The financing section reports the amounts received from loans or reimbursements.
  3. The operating section of the report describes what is not included in the investing or financing sections.

Notes to the financial statements

It is important to include any additional information on restrictions, liquidity and other notes in this section. Common disclosures for nonprofit organizations include a summary of accounting policies, investment information, asset status and depreciation, status of outstanding loans or leases, and status of long-term promises. donor term.

Of course, to compile these statements, your nonprofit organization will need to track income, expenses, and activity. Accurate tracking requires attention to detail, as well as choosing accounting software appropriate for the size and complexity of the organization.

Track the inflow of funds and the outflow of expenses

To produce accurate financial statements, it is essential to keep track of all funds coming in and going out of your organization, it is best to use an organized system (described below). Also, because the tax code can change, you’ll need to know what you’re tracking and why. It’s important to keep income and expenses separate, but you should also talk to a tax expert to make sure you’re recording everything you need to safeguard your tax-exempt status.

There are two different tracking methods nonprofits can use: cash accounting or the accrual

cash accounting

With cash accounting, you record revenue when physical cash is received, not when a transaction takes place. Expenses are recorded when paid in cash. Using this system in a non-profit organization, for example, means that you will record payment when you receive payment from a member or donor.

The cash basis can only be used if you have no more than $25 million in gross receipts over the previous 3 tax years, making it a popular system for smaller nonprofits.

accrual

With accrual basis accounting, you record income or expenses when transactions are made. For example, you would record the transaction when you send an invoice for dues or a pledged donation. Not when you receive the physical payment.

However, nonprofit accounting is not just limited to donations and expenses. Don’t forget about the other activities you need to track as well, like investments and savings. A variety of nonprofit accounting software is available to make tracking easy, and many of them are easy to implement and affordable.

File a Form 990

According to the IRS, there are more than 30 types of nonprofit organizations that are exempt from federal taxes and many state taxes. The most common type of nonprofit organization is a 501(c)(3), which is a public charity or a private foundation.

Although nonprofit organizations are exempt from federal taxes, they still must file an annual information document known as Form 990. Form 990 is a public document that allows the IRS and the public to examine the organization’s mission, finances, and operations. of a non-profit organization during the previous year. Depending on the assets or gross income of your nonprofit, you will file Form 990, 990-PF, 990-EZ, or 990-N. Some churches and faith-based organizations may be exempt from this requirement if they have not formally applied for 501(c)(3) status.

Remember that being exempt from federal income taxes does not mean you can skip filing a business tax return. You may also have to pay property tax or sales tax. In some states, navigating tax codes and responsibilities can be tricky, but joining your state’s nonprofit association can help you find information about state and local regulations.

Make room for professional bookkeeping in your budget

While this guide is intended to provide you with an introduction to nonprofit accounting, it is in no way a substitute for professional experience. Many nonprofits assign bookkeeping duties to an untrained staff member or volunteer—a big mistake. Inexperienced bookkeeping can often lead to unintentional fraud and costly mistakes. Therefore, a professional with experience and training in nonprofit accounting is essential for your organization.

A CPA can also guide board members and staff through accounts, ensuring everyone is informed and up to date. Informed staff and board members can lead to a more stable and organized nonprofit. Additionally, you may be able to find a volunteer who also serves as a willing and experienced CPA or accounting professional.

This article is for informational purposes only. It is not intended to be legal advice. Check other sources, such as the IRS, and consult with legal counsel or an accountant.

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