Guide to Accounting for Nonprofits in 2025 TRUiC

Then, return to your annual budget and make updates according to your actual expenses and revenue results from these shorter initiatives. Therefore, nonprofit accountants have the vital responsibility of preparing, analyzing, and using various financial documents to explain the financial health and position of the organization. This helps determine the next best steps for maintaining an effective and fiscally sound organization.

Managing Donations in Your Nonprofit Accounting System

It shows the company’s revenue, expenses, and net income or loss, providing insights into its profitability and overall financial health. The cash-basis accounting method is easier to maintain and is often adequate for smaller nonprofits. However, if your organization plans to receive funds from more prominent donors, the accrual method might be worth looking into.

This is because there is a greater need for detailed categorization and a better view of the big picture—which will be essential for planning the use of your funds.
A member of the CPA Association of BC, she also holds a Master’s Degree in Business Administration from Simon Fraser University.
But most nonprofits don’t need a full-time accountant and generally speaking, employees are expensive.
Common challenges include tracking and reporting on restricted funds, managing grant requirements, and ensuring compliance with accounting standards and regulations specific to nonprofits.
No matter the size of your nonprofit, having appropriate checks and balances is necessary for effective financial management.
In the event of audited financial statements, transparent financial records are vital.
In this guide, we’ll explain everything you need to know about accounting for nonprofits.

Statement of Activities – Income Statement

Determine how much fundraising income you’ll need to cover overhead costs and create a strategy for cost-cutting measures to help maximize the nonprofit’s resources. Just because your nonprofit qualifies as tax-exempt under Section 501 doesn’t mean that all of your donors’ contributions qualify as charitable deductions. And it doesn’t mean that all of the activities your nonprofit spends money on aren’t taxable. Tax-exempt nonprofit employees are still subject to employment taxes, and your nonprofit could still be subject to sales, real estate and other taxes depending on which state it’s based in.

Statement of Financial Position

These standards are defined under GAAP accounting for nonprofits and have slightly different rules for charitable organizations. Strong nonprofit accounting is a foundational element of how to run a nonprofit. Whether you’re in charge of the numbers or not, keeping a pulse on your organization’s finances is always a smart idea. So how do you find an accounting solution that meets all your needs and fits into your budget?

We also offer bookkeeping services and fractional CFO guidance through the Jitasa Strategic Advisory Team (J-SAT) to develop a well-rounded financial management system for your organization.
Track your nonprofit’s finances with our customizable chart of accounts template.
That means you must comply with legal requirements, ensure financial responsibility within your organization, and maintain practices that are worthy of the public’s trust.
Following the basics of fund accounting is crucial for maintaining the trust of donors, complying with legal and regulatory requirements, and providing transparent reporting about how funds are used.
A gain is measured by the proceeds from the sale minus the amount shown on the company’s books.
So, make sure to conduct a financial audit on an annual basis to avoid poor decision-making, non-compliance fines, and a damaged reputation.
When donors specify how their money should be used, organizations must track these funds separately and ensure they’re only used for designated purposes.

The solution you decide on should also allow you to do some form of fund accounting.
Typically, smaller nonprofits that are just starting out can get by with cash-basis accounting.
Cash accounting may be a good choice for some small nonprofits with funding challenges.
Failure to comply with these requirements can result in penalties and, worse, the loss of a nonprofit status.
You must track invoices, receipts, and bank statements throughout the year to accurately report all income and expenses.
If a company’s stock is publicly traded, earnings per share must appear on the face of the income statement.

For example, instead of measuring equity, nonprofits record their net assets in a balance sheet. Donor data is useful for building relationships, but it can clog up your accounting system. Separate financial information from donor information to keep your data organized.

With a strong grasp of the best practices of nonprofit accounting, your organization’s finances will be better organized, making it easier to achieve your goals.
If a donor does not restrict the donations they provide, that money can be added to your organization’s annual fund and used for overhead, programs, or any other expenses.
Nonprofits are tax-exempt and have different state and federal requirements.
This process involves setting realistic revenue targets and expenditure limits based on historical data, economic conditions, and future projections.
This is critical for preparing financial statements that reflect the organization’s financial position and performance.
A statement of cash flows is a financial statement that provides information about a nonprofit organization’s cash receipts and payments.

Effective accounting practices are essential for nonprofit organizations to fulfill their missions, maintain financial sustainability, and comply with regulations. To learn more about optimizing your nonprofit’s accounting practices, schedule a free consultation with Anne Napolitano Consulting today. Preparing financial statements for nonprofits involves reflecting the organization’s financial health and operational efficiency. Nonprofits must adhere to FASB’s ASC 958, which requires a statement of financial position, a statement of activities, and a statement of cash flows. Each provides a distinct perspective on the organization’s fiscal status, including asset management, revenue streams, and liquidity.

Set clear and realistic fundraising goals

Temporarily restricted funds, however, come with specific conditions that must be met before the funds can be used. These conditions could be related to time, such as a grant that must be spent within a year, or purpose, such as 5 Main Benefits of Accounting Services for Nonprofit Organizations a donation earmarked for a particular program. Permanently restricted funds, often in the form of endowments, are intended to be maintained indefinitely, with only the income generated from these funds available for use. Properly managing these classifications ensures that nonprofits remain compliant with donor intentions and regulatory requirements, fostering trust and enabling long-term sustainability.

Nonprofits vs. For-Profit Corporations

For-profit organizations have it simple; they just track net income from sales. Whereas, nonprofit organizations need to monitor multiple sources, including fundraising events and grants, while maintaining their financial position. Nonprofit https://greatercollinwood.org/main-benefits-of-accounting-services-for-nonprofit-organizations/ recordkeeping can get a bit challenging, so it is worth noting that accounting software exists to help nonprofits record transactions efficiently.