Key Considerations for Effective Non-Profit Accounting
Accounting and bookkeeping may be the last things you consider when setting up your non-profit. Still, keeping tabs on your finances is just as crucial to achieving your goals, as the work you do. From recording donations to staying on top of bank statements, these details can make or break your organization.
Setting up effective accounting practices is vital for any successful organization, especially ones that rely on donations. Knowing how and where funds are coming from – and, more importantly, how they’re being used – can make a significant difference to the growth of a non-profit. The good news is that with the right information and tools, creating reliable accounting practices doesn’t have to be overwhelming or complicated. So, let’s get started!
What’s the Difference Between For-Profit and Non-Profit Accounting?
While both for-profit and non-profit organizations require proper financial reporting and adherence to accounting standards, understanding their differences is crucial for organizations to follow the appropriate accounting practices and achieve their respective goals.
The core difference between for-profit and non-profit accounting lies in the purpose of each type of organization. For-profit accounting focuses on generating profits for the owners of a business. Meanwhile, non-profit accounting concerns the proper utilization of the resources intended to achieve a mission or purpose that benefits the public – educational, social, professional, charitable, and health, among others.
For-profit accounting includes revenue and expense recognition, balance sheet management, and cash flow analysis. Non-profit accounting includes tracking donations, grants, and other sources of revenue, as well as compliance with regulations governing tax-exempt organizations.
Accounting Best Practices for Non-Profits
That settled, non-profit organizations have unique accounting needs compared to for-profit businesses. Non-profits must follow best practices in accounting to ensure financial transparency, accuracy, and compliance with regulations and, ultimately, fulfill their mission of serving their community.
1. Establish clear policies and procedures for handling financial transactions.
Establish strong internal controls to ensure that everyone in the organization follows the same guidelines, making identifying and preventing fraud and errors easier. This includes budgeting, expense reporting, financial reporting guidelines, and a system of checks and balances, such as requiring two signatures on checks over a certain amount.
2. Maintain a separate record of your restricted and unrestricted funds.
Distinguish the types of donations you receive, such as restricted and unrestricted, and ensure they are classified and accounted for correctly.
Restricted funds are donations given on condition that they are used for a specific purpose. In contrast, unrestricted funds are donations that can be used at the organization’s discretion. It is vital to ensure that these funds are used appropriately and that they adhere to the regulations governing tax-exempt organizations.
3. Be aware of the tax implications of your financial activities.
Although non-profits are tax-exempt under Section 501(c) of the Internal Revenue Code, certain types of income may be subject to unrelated business income tax (UBIT). As such, you should be able to differentiate between related and unrelated business activities.
Related business activities refer to transactions undertaken to further your primary purpose and, thus, exempt from tax. On the other hand, unrelated business activities are those that meet the three requirements set by the Internal Revenue Service (IRS):
- It is a trade or business,
- It is regularly carried on, and
- It is not substantially related to furthering the exempt purpose of the organization.
It looks simple based on the definitions above, but there are exceptions and exclusions to the UBIT you must take note of. You should also stay up-to-date on changes to tax laws and regulations that may impact your financial activities to help prevent unexpected tax liabilities and ensure compliance with applicable laws and regulations. MBE CPAs is a trusted business and tax information firm that provides valuable industry updates. Download the MBE CPAs App on Google Play and Apple Store now for an accessible and customizable news feed and timely notifications.
4. Utilize accounting software designed for non-profits.
Making the world a better place is so big of a task that you and your team only have a little time to devote to numbers. Still, it’s not something you can ignore. The solution?
Accounting software is a valuable tool for managing your finances more efficiently and effectively. Its benefits include:
• Improved accuracy
By automating financial processes, accounting software can reduce the risk of human error and ensure that your financial data is accurate and up-to-date.
• Time savings
With accounting software, you can automate many tasks that would otherwise require manual input, freeing up time for your team to focus on other important work.
• Enhanced reporting
Many accounting software options offer robust reporting capabilities, allowing you to generate detailed financial statements and reports with just a few clicks.
• Increased transparency
Accounting software can help you make more informed decisions and communicate more effectively with stakeholders by providing greater visibility into your financial information.
QuickBooks for non-profits is a user-friendly tool that simplifies how you take, track, and manage donations. You may reach out to any of our Certified QuickBooks ProAdvisors to learn more.
5. Consider using a donor management system.
In addition to accounting software, you can benefit from a donor management system. This tool can help you track donations, manage donor relationships, and generate reports on fundraising activities.
The Bottom Line: Good accounting practices are not just about compliance.
By implementing sound accounting practices, you can optimize your finances, not only to meet compliance requirements but also to be able to make more informed decisions and have a more significant impact on the community. Maintaining accurate and current financial records will also help you identify areas of your non-profit that need improvement and investment. So, take the time to hone your organization’s financial management practices and leverage them to support your mission of making a meaningful difference in your community.
MBE CPAs is here to help you navigate the world of accounting principles and ensure you’re making the most of your resources. Get in touch with us today to see what we can do for you!