After “How do nonprofits make money?” one of the most frequently asked questions about nonprofit organizations is “What is nonprofit accounting?”
It’s not surprising why many ask this. After all, both for-profit corporations and nonprofit groups handle money. So why should nonprofit accounting practices differ from those used by for-profit organizations?
If you’re planning to start a nonprofit or just plain interested in how accounting for nonprofit businesses works, read on. Here, we’ll talk about accounting basics for a nonprofit plus some tax tips to keep in mind if you do end up running a nonprofit.
How Is Nonprofit Accounting Different From for-Profit Accounting?
Many of the same accounting principles apply to both for-profit and nonprofit organizations. For instance, they both have to track and report their cash flow. However, their varying goals lead to differences in how they should report financial activities.
For example, instead of a balance sheet, a nonprofit has a statement of financial position. Remember, nonprofits don’t have shareholders or owners. Rather than showing net equity, they need to outline their assets and debts.
Another way nonprofit or 501c3 accounting differs from for-profit accounting is their statement of activities. Since nonprofits don’t have a bottom line, they don’t have an income statement. But they still need to show revenues and expenses for their programs, and this is what a statement of activities is for.
The Importance of Professional Accounting for Nonprofits
One of the worst mistakes nonprofits make is not hiring a professional accountant. Since some groups don’t have a lot of resources, they think a staff member or volunteer could handle the task.
However, the tax code for nonprofit organizations is quite complex. It becomes even more confusing when new tax laws pass.
Let’s say you have a volunteer do income reporting. There’s a possibility that a non-taxable item such as employee benefits could become taxable if there are mistakes in the report.
The good news is you have options. Aside from CPAs who offer discounts, there are also accountants offering their services for free. You can also research more about nonprofit accounting to find out how to outsource your bookkeeping needs to another company.
Some Tips to Make Accounting for Nonprofit Businesses Easier
For new nonprofits, consider using bookkeeping or accounting software. It’s important, though, to choose a platform that’s designed for nonprofits since you’ll want one that can do fund accounting.
Next, open a separate bank account. Using your personal bank account to receive money from donors will become a problem later on. From the very start, you need a bank account that’s tailored to nonprofit organizations.
Other tips to follow include learning how to reconcile bank accounts and using purchase orders. You’ll also want to research how to make budgets, record in-kind donations, and create financial statements.
Ready to Start and Run Your Nonprofit?
Now that you know what nonprofit accounting involves, are you looking forward to managing your group’s finances?
If not, don’t worry. Remember your options, and don’t forget about tapping online resources for more information.
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