Bookkeeping for Nonprofits: What You Need to Know

Running a nonprofit organization requires a deep commitment to its mission, but it also requires a solid foundation in financial management to ensure sustainability and growth. Bookkeeping, while often overlooked, is a vital aspect of nonprofit operations. Proper bookkeeping helps maintain transparency, meet regulatory requirements, and build trust with donors, funders, and stakeholders.

Here’s what you need to know about nonprofit bookkeeping to help your organization stay on track.

1. Understanding Nonprofit Bookkeeping Basics

Nonprofit bookkeeping is different from for-profit bookkeeping in key ways. While for-profits focus primarily on profits, nonprofits have to manage their funds in a way that supports their mission rather than generating income for owners or shareholders.

Nonprofits must keep track of:

• Revenue: This includes donations, grants, membership fees, and fundraising proceeds.

• Expenses: These are costs incurred for programs, operations, fundraising, and administration.

• Net Assets: The difference between assets (what the nonprofit owns) and liabilities (what it owes).

Accurate and detailed record-keeping is essential for financial accountability and legal compliance.

2. Separate Your Personal and Organizational Finances

One of the most important rules for nonprofit bookkeeping is to separate your personal finances from the nonprofit’s finances. Not doing so can lead to confusion, potential legal issues, and difficulties in reporting and tax filing.

• Open a separate bank account for the nonprofit.

• Use accounting software designed for nonprofits, which helps streamline the process of tracking income and expenses.

3. Track Restricted vs. Unrestricted Funds

Many nonprofits receive donations or grants that are "restricted" to specific purposes, such as a particular program or project, while others are "unrestricted" and can be used for general expenses. Understanding the distinction is critical for maintaining legal compliance and ensuring funds are used appropriately.

• Restricted Funds: These funds can only be used for the specific purpose designated by the donor or grantor.

• Unrestricted Funds: These can be used for general expenses and support the organization’s day-to-day operations.

Accurate tracking of both types of funds will help prevent any mismanagement and will be important for reporting to donors and other stakeholders.

4. Follow the Right Accounting Method

The two most common methods of accounting used by nonprofits are cash basis accounting and accrual basis accounting.

• Cash Basis Accounting: This method records income and expenses when they are actually received or paid. It’s simpler and more suitable for smaller nonprofits.

• Accrual Basis Accounting: This method records income and expenses when they are earned or incurred, even if cash has not yet changed hands. It provides a more accurate picture of financial health and is typically used by larger organizations or those with complex financial situations.

Most nonprofits choose accrual accounting for a more comprehensive financial outlook, though cash basis accounting may be sufficient for smaller operations.

5. Ensure Accurate Payroll

Nonprofits are subject to the same payroll requirements as for-profit businesses. This means keeping accurate records of employee salaries, wages, taxes, and benefits, as well as ensuring compliance with federal, state, and local employment laws.

Nonprofits often rely on volunteers, but if your organization has paid employees, here’s what you need to keep in mind:

• Keep track of salaries, wages, and benefits.

• Withhold taxes and file appropriate forms (such as IRS Form 941).

• Stay current with unemployment taxes and worker's compensation.

6. File Nonprofit Tax Forms

Nonprofits are generally exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code, but they still need to file annual returns with the IRS. The most common forms include:

• Form 990: This is a comprehensive form used to report your financial activity. There are three different versions based on your nonprofit’s size, so ensure you file the right one.

• Form 990-EZ or Form 990-N: Smaller nonprofits may qualify for these simplified forms.

Additionally, many states require nonprofits to file specific state tax forms. Make sure to stay on top of your tax filing deadlines to avoid penalties.

7. Prepare for an Audit

Nonprofits often undergo financial audits or reviews to ensure compliance with regulations and to maintain accountability. Even if your organization isn’t required to undergo a full audit, regular internal reviews and oversight can help catch any errors before they become bigger issues.

Make sure your financial records are well-organized, up-to-date, and transparent. Consider hiring a professional accountant or auditor to help prepare your organization for any external review.

8. Use Accounting Software Designed for Nonprofits

Using accounting software tailored for nonprofits can significantly simplify your bookkeeping. Many of these programs offer features specific to nonprofit accounting, such as tracking restricted and unrestricted funds, generating financial reports, and facilitating tax filings.

Some popular nonprofit accounting software includes:

• QuickBooks for Nonprofits

• Xero

• Wave

• Aplos

• Financial Edge NXT (for larger organizations)

The right software will help you save time, reduce errors, and ensure compliance with financial regulations.

9. Understand the Importance of Financial Transparency

Nonprofits are required to maintain financial transparency to maintain public trust. Providing regular financial reports and making them accessible to your donors, funders, and the public can help build confidence in your organization. It also demonstrates accountability.

Your nonprofit's annual report should include:

• A statement of financial position (balance sheet)

• A statement of activities (income and expense statement)

• A statement of cash flows

• A breakdown of how funds were used (programs vs. administrative costs)

10. Create a Budget and Stick to It

A well-planned budget is one of the most powerful tools a nonprofit can have. It helps guide the organization’s financial decisions, ensures that resources are used efficiently, and prevents overspending.

Work with your board and staff to develop an annual budget that aligns with your goals and priorities. Be sure to review and adjust the budget as needed to respond to changing financial circumstances.

Conclusion

Bookkeeping may not be the most glamorous part of running a nonprofit, but it is absolutely essential to your organization’s success. By staying organized, tracking your finances carefully, and ensuring compliance with legal requirements, your nonprofit can focus on what really matters—making a positive impact in your community.

Taking the time to implement strong financial management practices will help you avoid costly mistakes, build trust with your supporters, and ensure that your organization remains financially stable for years to come.

Do you have any questions about nonprofit bookkeeping or need tips on choosing software? Feel free to ask!