Running a non-profit organization is mission-driven by a lot of passion for creating impact. Although these organizations believe in charity, managing their finances is one of the most crucial processes. Here’s where bookkeeping for non-profit organizations comes into the picture. In this blog, you will read about the bookkeeping process and everything that helps non-profit organizations maintain their records.
An Overview of Bookkeeping for Non-profit Organizations:
The bookkeeping for non-profit organizations is very different from the bookkeeping and business accounting of businesses. The other businesses in their bookkeeping track the profits and losses the businesses have incurred. With non-profit organizations, the main focus is on the financial accountability of the organization, the right management of the funds they receive, and reporting that is completely driven by their mission and not profits. Every donation that is made and every dollar that they receive needs to be allocated and put to use correctly and with utmost transparency.
Tracking these funds becomes easy when non-profit organizations use fund accounting. Fund accounting is a system that is designed to track the funds that are received, funds that are spent, and also the funds that are restricted. These funds comply with the rules, and regulations and are also accountable to the donors, the providers of grants, and the government agencies.
Key components of non-profit bookkeeping:
- Fund accounting: It is the process of categorizing the finances of non-profit organizations into restricted funds, temporarily restricted funds, and unrestricted funds.
- Grant and donation tracking: This process involves recording the contributions made with proper documentation to maintain transparency in the accounts.
- Allocation of the expenses: This is a process of being vigilant and ensuring that the funds are utilized in accordance with the rules that are per the donors and other regulations.
- Compliance with tax exemption: This includes the process of filling out the necessary forms like IRS Form 990 in the United States and more to maintain the non-profit status.
- Reporting the finances: The process of preparing the financial statements that will showcase the financial health and impact of the non-profitable organization.
With this, you would have understood that accurate bookkeeping is very essential to secure more grants and more donors while maintaining the status of tax exemption. Without a financial system and robust bookkeeping services, non-profit organizations lose out on their credibility.
Importance of Financial Transparency for the Non-Profit Organisations
Financial transparency is the utmost important factor for any non-profitable organization. The organization’s functioning as non-profitable ones need to be ethical and very responsible when it comes to managing their finances. This helps in maintaining the trust of the donors and so much more. Let’s read why this is important in the blog.
1. Builds the trust of donors
Every donor or contributor wants to sponsor funds and grants so the funds are put to good use and drive a meaningful impact. When non-profit organizations ensure financial transparency, the donors get a clear picture of how their donations are being put to good use. This builds trust in them and they continue to contribute more to the organizations.
2. Meeting all compliances:
When there is a non-profit organization, it is operated with very strict regulations from the government bodies. Documents like IRS Form 990 and more in the US need to be filled and this can be only done when the financial records are transparent. When there is non-compliance in adhering to these rules, there can be penalties, loss of the tax-exempt status of the organization and also damage to the reputation.
3.Grants and partnerships:
There are corporate sponsors and grant providers who access the financial documents of non-profit organizations before they sponsor or offer the grants. When the financial documents are well-documented and are transparent with clear financial statements, clear allocation of the funds and the reports are effective, the sponsors may give the grants and also partner with the organizations.
4. Avoiding Fraud:
Where there are transparent bookkeeping practices, it prevents situations of financial mismanagement and fraud. Every dollar that comes in and every dollar that goes out are clearly noted in the bookkeeping process for non-profit organizations. In this way, non-profit organizations can make sure that their finances are safely guarded and are directed towards the non-profitable goals they have for the future.
5. Support in the decision-making:
The leaders and decision-makers of all the non-profit organizations completely rely on accurate financial data to plan the expansion and allocate financial resources. Transparent and accurate reports with bookkeeping for non-profit organizations can help the decision-makers and the stakeholders make strategic decisions that benefit the organization.
Difference Between Bookkeeping for Profit and for Non-Profit Organizations
The bookkeeping process for both profit and non-profit organizations requires meticulous bookkeeping. However, these processes are different. Read more about them over here.
1. The purpose and focus:
The major focus of for-profit organizations is increasing profitability, market revenue, and share value. Bookkeeping mainly focuses on maintaining the profit and loss statements, cash flow statements, and balance sheet updates. The bookkeeping for non-profit organizations focuses on highlighting the allocation of funds to fulfill the purpose of the organization and not for profits
2. System of Accounting
The profit organizations normally use Accrual accounting to match the cash flows to the time during which the transactions were made. For nonprofit organizations, the funds are segmented based on the restrictions the donors have. This form of accounting is called Fund accounting.
3. Statements and reports:
The financial statements that are mandatory for for-profit organizations from the bookkeeping in the US include balance sheets, profit and loss statements, cash flow statements, and all the statements that indicate the revenue and growth of the business. The non-profit organizations see the statements that show resource management, the reports of fund raises, and the statement of activities
4. Recording the revenue sources
The revenue source for profitable businesses can be their return on investments, sale of their services, and other incomes. For the non-profit organization, the revenue is generated by the donations made and the funds raised. The revenue generated is recorded in bookkeeping for non-profits and profit organizations
Principles of Nonprofit Bookkeeping
There is a proper structure involved in the process of bookkeeping for non-profit organizations. The bookkeepers and organizations need to adhere to the process and principles to maintain accountability. Here is how it is done.
1. The bookkeeping system is set:
Before the nonprofit organization starts recording the transactions, a bookkeeping system needs to be established. It involves the following steps:
- Choosing an accounting software is the first step. Nonprofit organizations use software like QuickBooks and other such tools to efficiently track donations and expenses.
- The accounts are categorized into revenue, expense, assets, liabilities, and net worth. This step of bookkeeping helps the organization understand the funds that are restricted, unrestricted, and funds that are temporarily restricted.
- To prevent fraud and discrepancies, an internal policy is created so everyone in the nonprofit organization adheres to it.
2. The financial transactions are recorded:
All the revenue that is generated and all the expenses that are made need to be recorded. The income that comes in from donations, grants, and other funds that are raised in the form of cash, checks, online money transfers, and more is recorded. There needs to be an account for the membership fee and other activities that bring money into the organization. When it comes to expenditure, the costs incurred while running the administration, raising funds, and other such expenses are recorded. To ensure accuracy, the double entry type of bookkeeping is the process that is followed.
3. Fund accounting:
The funds and resources need to be allocated based on the restrictions that the donors have. This comes in different categories:
- The restricted funds are donations that are specified and restricted to the purpose that the donor defines.
- Unrestricted funds can be used for general use.
- Temporary restricted funds are contributions that come with specific conditions. These funds are tracked separately and are accurately accounted for in the bookkeeping process for non-profit organizations.
4. Financial statements:
When the statements are prepared during the bookkeeping for nonprofit organizations, they focus more on accountability. The statements that are recorded accurately include:
- The statement shows the nonprofit organization’s financial position by giving details on the assets and liabilities.
- The statement of the activities that are carried out by the organization to show the funds are used for the desired purpose.
- Statement of the expenditure that has happened during resource management, services, and other activities.
- Tracker that has the cash inflow and the cash-out flow.
5. Reconciliations:
The bookkeeping process involves regular checks and reconciliations that are performed to ensure the records are accurate. Some of the steps include:
- Comparing the reports from the bookkeeping with the bank reports.
- Making sure the grants and funds are spent according to the directions of the donor.
- Matching the accounts with the donor receipts.
6. Tax reports and documents:
Nonprofit organizations need to ensure they are exempted from taxes by maintaining records. A couple of tax redemption forms and reports need to be filed.
- The IRS 990 specific to the US needs to be filed to ensure the finances and activities are transparent before the law.
- The authorities of the States would need additional financial disclosures and this can be provided by accurate bookkeeping.
- Reports need to be submitted to the donors and grantors to ensure they are aware that the funds are being used correctly.
7. Planning budgets:
Financial planning is very essential to run the nonprofit organization smoothly.
- Annual budgets are created based on the revenues, goals, and expenses that are projected.
- Budgets are monitored from time to time to ensure the expenses are not out of budget.
- The bookkeeping process involves taking a look at the gaps in funding and diversifying the revenue stream.
8. Audits and reviews
Nonprofit organizations need to build their credibility. They need to keep reviewing their accounts and be ready for external audits that are organized by the donors and grantors. With bookkeeping, these records are accurately maintained and are ready for review at all times.
9. Reports:
Accurate reports must be provided to the donors, grant providers, and board members to ensure trust in the nonprofit organization. The data from the bookkeeping records will help in the same summarization
Tax Compliances for Non-Profit Organizations
It is very important for nonprofit organizations to adhere to the tax rules and regulations. All it takes is one wrong entry or a tiny blunder to lead them toward severe penalties and losing the tax exemption. Here are some forms and government documents you need to be aware of.
Everything about IRS Form 990:
If a nonprofit organization wants to file for tax exemption, it needs to get tax exemption status that is granted by the United States. The same form has many purposes.
- Ensures regulatory compliance for non profit organizations that have gross receipts of above $50,000. If this is failed for three years in a row, the organization loses out on the tax exemption benefit.
- The form is a document that helps the public and fund donors trust the organization. This form gives a detailed report on how the nonprofit organization is working and gives some clarity on its financial health.
- The form holds detailed reports on how many funds came in and how they were utilized. This builds trust among the donors, and the company can get more funds.
There are different types of 990 forms. Read about their relevance over here.
- Form 990, or the long form: This form is for nonprofit organizations with gross receipts of above $200,000 or with assets above $50,000. Since their value is huge, there is a need for extensive reports on the operations and finances of the organization.
- Form 990-EZ or the short form: This form is mainly for nonprofit organizations with gross receipts that are less than $200,000 or with assets that are below $50,000.
- Form 990-N or the e-Postcard: This is an online filing form from the IRS for small nonprofit organizations that have receipts that are less than $50,000.
There are some common errors that nonprofit organizations make while filling up the form.
- There could be miscalculations of the restricted and unrestricted funds.
- If there is any entry of unrelated businesses
- If there is a lack of disclosure or if there is partial information on fund inflow and usage.
avoid these blunders, nonprofit organizations hire and outsource certified bookkeepers in the US.
How Do Nonprofit Organizations Maintain Tax Exempt Status?
The nonprofit organizations need to always keep their accounts accurate and abide with the tax laws set by the governing bodies.
- Nonprofit organizations need to make sure that the revenue they are making with the donations and funds needs to be used for the goals of the organization and not for any personal or private use.
- The funds that the donors give should not be used for lobbying during any political campaign.
- The records need to be maintained with utmost transparency. The grants and donations need to be tracked, and the restricted funds need to be put to use for the purpose they were given.
- All the reports must be accurate and need to be filled out in Form 999 every year before the audit is done.
When to Hire a Professional Bookkeeper?
The nonprofit organizations hire a bookkeeper as they grow, as the process of bookkeeping can become complex and needs an expert to handle it. Here is when you know your nonprofit organization needs a bookkeeper:
1. When there are diverse revenue sources:
Nonprofit organizations have funds flowing in from many sources. Some can be government grants, membership fees, donations, revenue made during programs, and so much more. A professional bookkeeper for nonprofit organizations documents these funds correctly so the restricted funds are used for the purpose they are given and the other account details remain accurate.
2. The revenue exceeding $100,000 annually:
: When there are higher revenues of income, the bookkeeping process becomes complex and may need the intervention of an experienced bookkeeper. They can help in tracking the funds accurately and suggest effective financial planning that can help nonprofit organizations
3. Financial reports:
There are a lot of stakeholders when the nonprofit organization needs to raise funds. The reports need to be transparent and accurate to maintain the credibility of the company and build trust with the stakeholders. These documents also need to be formatted in adherence with the government rules and industry policies. A bookkeeper for nonprofit organizations can do this well.
4. Fund accounting:
- Not all funds that come in can be used according to the wishes of the organization. Some funds that are insured to carry out a certain purpose of the organization become restricted funds, and this needs to be used to fulfill the purpose it was given. A detailed report on how this and the other kinds of funds are utilized can be accurately maintained by the bookkeeper.
Benefits of Outsourcing a Bookkeeper for Nonprofit Organizations
Outsourcing a bookkeeper in the US is one of the most cost-effective ways to get your bookkeeping done by experienced and certified professionals.
Get expert insights on tax-exemption:
Being exempted from tax is one of the goals that nonprofit organizations have. An experienced and certified bookkeeper can help in the preparation of the 990 form and ensure it adheres to the rules of the governing bodies.
Knowledge about bookkeeping tools
To keep your financial statements accurate and do the work quickly, certified and experienced bookkeepers in the US have a thorough understanding of the bookkeeping tools that are available in the market. This saves their effort and your time. In the end, both parties get the accurate information that is needed.
Crucial advice:
If you are outsourcing an experienced bookkeeper, they can guide you and help you with the best tips to effectively manage your finances. Make sure the reports are positively supporting the growth of the organization and stay in compliance with the taxes.
Choose your Bookkeeper from Entelyglobal Solution
Entelyglobal Solutions has highly qualified, certified, and experienced bookkeepers who help nonprofit organizations accurately maintain their financial records through the process of bookkeeping. We do not just document, but provide the right insights that have helped many organizations grow and become a credible source of nonprofit service. Speak to our experts and start your bookkeeping journey with us.