Nonprofit Accounting Best Practices

Nonprofit accounting can be a daunting task due to its specific and detailed nature. Here we have compiled some basic information about nonprofit accounting including best practices and software choices. 

Basics of nonprofit accounting 

Since nonprofits have no ownership interests, receive donations from third parties, and have goals other than making a profit, accounting is much different and often more complex than for-profit accounting. 

What makes nonprofit accounting so much different? Business.com’s “A Nonprofit’s Guide to Accounting” sums up three key differences: 

• Since a nonprofit does not have stakeholders, it produces a statement of financial positions, which outlines assets and debts rather than a balance sheet. 
• Nonprofits do not have equity, so this item is referred to as net assets, which are labeled as restricted or unrestricted. 
• Rather than an income statement, nonprofits produce a statement of activities that tracks revenues and expenses for each program. 

Nonprofit accounting best practices 

When managing your books, protecting your nonprofit’s financial data should be a top priority. Aplos’ “Ultimate Guide to Nonprofit Accounting” and National Council of Nonprofits’ “Internal Controls for Nonprofits” both list important tips for responsible financial management. These can be policies or plans which reduce risk surrounding your nonprofit’s funds or assets. 

• It may seem obvious, but creating a budget and a multi-year plan is a great way to prepare for spending ahead of time. Both should be realistic for your organization.
• Understand the requirements of the IRS and GAAP and remain aware of any rule changes. 
• Make sure everyone in your nonprofit understands how money travels through your organization. Creating a flowchart can help your staff visualize different responsibilities and risks at different points. 
• Delegate financial duties among multiple employees.This can prevent fraud and increase accountability. 
• Manage your fundraising expectations. Use past data to set realistic goals and adjust them if anything goes wrong—or right!

Software 

When it comes to accounting software, Best Accounting Software has compiled one ranking of software for nonprofits. Their recommendations: 

• Aplos as best overall software: Aplos has features important to nonprofits such as fund accounting, membership management, and fundraising capabilities. 
• QuickBooks Online best for small nonprofits: QuickBooks is an inexpensive software that has the basics of program and fund accounting, donation management, and more.  
• Blackbaud Financial Edge most flexible for nonprofits: more suitable for large nonprofits, Blackbaud offers user-level permissions tools, customization, and flexibility in financial reporting and analysis.  

For more information on nonprofit accounting: 

Cal Nonprofits’ Nonprofit Compliance Checklist

Indiana Attorney General’s Best Practices for Nonprofits Checklist (pdf)