Ins and Outs of Nonprofit Accounting: 4 Key Aspects to Know

1. Differentiating Nonprofit Bookkeeping and Accounting

You can make better decisions about your nonprofit’s finances by first understanding the roles and responsibilities of nonprofit bookkeepers and accountants. While these two are often lumped into the same category, they’re very different positions. Jitasa’s guide to nonprofit bookkeepers and accountants breaks down the difference in their roles:

Functions of Nonprofit Bookkeepers

• Enter basic data. Nonprofit bookkeepers record donations, spending, and other financial transactions in your nonprofit’s financial software. 
• Allocate costs. Bookkeepers review and organize expenses to determine how much of your nonprofit’s spending goes toward operating costs, fundraising, programming, or other costs.
• Write checks and make deposits. Nonprofit bookkeepers make the necessary deposits and payments, then record the various transactions in your nonprofit’s financial software. 

Functions of Nonprofit Accountants

• Review and reconcile accounts. Nonprofit accountants compare your financial records to the cash in your bank account to find and account for any discrepancies. 
• Prepare detailed reports. As part of their financial analysis, accountants prepare reports on monthly, quarterly, and yearly transactions to assess your organization’s current financial health and make future spending decisions. 
• Compare actual and predicted expenses. Nonprofit accounts help your nonprofit make more accurate predictions for future spending by analyzing your previous budgets and actual spending and revenue.

Essentially, nonprofit bookkeepers record and keep track of what financial data is important to your organization, while nonprofit accountants understand the why behind the numbers and draw conclusions to improve your nonprofit’s financial health and compliance. The analysis component is why accountants need a four-year degree and official certification. Meanwhile, your bookkeeper could be any staff member with strong financial knowledge or a well-trained volunteer.

Your nonprofit needs a bookkeeper and an accountant to create and manage your annual budget, compile financial statements and file tax forms. Make sure to clearly define their roles so that you know exactly who is responsible for what financial activities.

2. Creating Budgets for Your Organization

Your nonprofit budget is used to forecast expenses and allocate resources for your organization over a set period. You’ll need to create a budget at the beginning of a fiscal year or major project and then revisit it throughout the year to ensure you stay on track.

There are three types of budgets that nonprofits use often, and the best-known type is the nonprofit operating budget. This budget breaks down all the predicted revenue you’ll bring in during the year and all the expenses you expect to incur, outlining the everyday needs of your nonprofit. An effective budget will further break down predicted revenue by funding sources, such as:

• Individual donations
• Corporate philanthropy
• Event revenue
• Service fees
• Grants

Similarly, your predicted expenses will be categorized as follows:

• Administrative costs, like rent, personnel expenses, and loan payments.
• Fundraising costs, such as event planning and campaign marketing expenses.
• Program costs, which cover the mission-related programming at your organization. Therefore, these expenses will vary among organizations. For example, an animal shelter may include dog grooming and training expenses under program costs, while an education-based nonprofit might include the cost of the books and school supplies they use for their after-school tutoring services in that section.

The other two types of nonprofit budgets—program and capital budgets—are more specific than the operating budget. Program budgets break down the costs and funding sources that go toward particular initiatives, which can be especially helpful as your organization launches new programs and projects. Meanwhile, capital budgets project the finances needed for long-term campaigns, like capital campaigns. 

Consider your nonprofit’s current situation and your upcoming goals to determine which types of budgets will be most useful for your organization.

3. Compiling Nonprofit Financial Statements

In addition to budgeting, compiling nonprofit financial statements is another regular accounting activity your organization needs to complete. But like your budget, these reports shouldn’t just be another checkmark on your to-do list. Financial statements can help your organization in several different ways, such as:

• Showing insights into your organization’s financial health
• Providing transparency for stakeholders
• Gathering data in one place for review during audits
• Maintaining financial compliance

Your organization needs to pull three types of financial statements, each of which serve a unique purpose in nonprofit accounting:

• The statement of activities is the nonprofit equivalent of a for-profit income statement. It’s divided into three sections: revenue, expenses, and net assets (the difference between the first two sections). This statement is helpful to compare your revenue and expenses each year, which helps with long-term budgeting and helps your organization stay accountable to fund restrictions.

• The statement of financial position is also called a balance sheet. It serves as a snapshot of your organization’s financial health. Like the statement of activities, it’s also divided into three main sections: assets, liabilities, and net assets. You can use your balance sheet to determine the liquidity of your organization and your capacity to take on new risks for growth.

• The statement of cash flows provides insight into your fundraising and spending habits by showing how cash moves in and out of your organization. It divides your cash flow into the categories of operating, financing, and investing activities.

Besides the direct benefits of these financial statements, they can all be useful when the time comes to file your annual tax forms. On your annual Form 990, you’ll need to report on a number of figures in these statements.