Nonprofit Expense Categories: Guide + Examples
As a nonprofit leader, you've likely seen organizations struggling with delayed grants, flagged audits, or loss of funders because of unclear expense...
As a nonprofit professional, your strengths are likely fundraising, managing volunteers, and working with beneficiaries. While these capabilities are critical to sustaining your charity’s mission, proper accounting keeps things running smoothly.
Accounting for charities ensures transparency and accountability, which can mean continued support from benefactors.
In today's guide, we’ll explore the meaning of nonprofit accounting, its importance, how it differs from for-profit accounting, and how to set up a reliable accounting system.
Your accounting system should have two key types of tools working in tandem: accounting software and dedicated nonprofit budgeting, forecasting, and reporting software.
Martus fits the bill nicely as a tailored nonprofit financial management software that enables you to manage budgets, project financial situations, and produce detailed board- and donor-ready reports.
Martus integrates with popular accounting software, like Sage Intacct, to complete the accounting system, enabling you to accurately manage and report on your finances.
Book a free discovery call today to discover how Martus can streamline your budgeting and accounting processes.
Nonprofit accounting is the unique process that charities use to plan, record, and report their finances.
While it's a specialized form of accounting, the practice is based on nonprofit bookkeeping, which entails:
Accounting is more complicated than bookkeeping and requires accounting for tasks such as:
Nonprofit accounting focuses on fund accounting, which involves tracking revenues and expenses across different programs or activities.
Not-for-profit fund accounting separates monetary resources into different dedicated funds based on their intended use and donor restrictions.
For example, if a certain donation is specifically meant to fund a school feeding program, you use the money and account for it specifically under that school feeding fund.
If there are no donor restrictions, you can add the money to the organization’s annual fund and spend it on projects, overhead, or other appropriate expenses.
Proper accounting is important to nonprofits for several reasons:
As a specialized form of accounting, nonprofit accounting differs from for-profit accounting in ways such as:
When accounting for charities, you'll need to create separate funds or accounts for various programs.
You establish various nonprofit budget categories with expenses and revenues using the chart of accounts, usually called the nonprofit chart of funds.
Because of the added complexity of accounting for donations and grants that may cover multiple categories, you need an accounting system tailored to the unique nonprofit needs of keeping accounting records and generating specialized reports.
When choosing an accounting system for nonprofit organizations, you must ask yourself two key questions:
This is where Martus comes in, and here's how it helps:
Trusted and used by over 850 organizations worldwide, Martus is the best nonprofit financial management software for aligning your financial strategy with your mission while maintaining accountability and transparency.
Schedule a free discovery call to learn more about how Martus can revolutionize nonprofit accounting and how your organization plans for the future.
If your charity qualifies as a federal tax-exempt entity, you must file with the Internal Revenue Service (IRS) yearly to confirm that you comply with the 501(c)(3) rule.
Let's check out how you can comply with the rule to maintain your exemption from federal income tax.
Form 990 is a filing requirement for federal tax-exempt organizations. You should file with the IRS if you receive over $200,000 in revenue or own over $500,000 in assets.
To comply with Form 990 requirements, you must do the following:
Here's how to ensure you are ready for an audit if needed under 501(c)(3):
Your grantors or state might require grant accounting for not-for-profit organizations to ensure you comply with grant-specific requirements to continue receiving the necessary funding.
Your accountant can help you ensure tax-compliant fund accounting for your not-for-profit accounts, including grants.
Whether you handle your accounting in-house or outsource it, you should be aware of the typical nonprofit accounting mistakes below.
Book your free consultation today and discover how Martus can help you avoid common nonprofit accounting pitfalls.
Here are answers to questions we get often from nonprofit professionals regarding accounting software for their organizations.
One key difference between nonprofit accounting and traditional accounting is that the former focuses on accountability, transparency, and mission alignment rather than maximizing profits.
Nonprofits rely on fund accounting to categorize and track funds based on intended application and donor restrictions.
The objective is to show donors, grantors, and the public that the organization is accountable and sticks to its mission objectives.
You can use free accounting software for nonprofits if you run a small charity. Such software offers essential features like basic accounting, expense tracking, and reporting.
As your organization grows, you need to shift to a paid system to enjoy advanced capabilities like Martus's budgeting, forecasting, reporting, and multiple integrations with top accounting software for charities.
When looking for an accountant for your nonprofit, you should consider these attributes:
Outsourcing your accounting saves money and time compared to using an in-house team.
You may not have the required experience and expertise to complete accounting for your charity accurately, but using the right resources can help you ensure compliance with public and benefactor expectations.
A reliable accounting system will require accounting software and nonprofit-focused financial management software.
You may already have the right accounting software, meaning you are now looking for the best nonprofit financial management tool.
Martus is a reliable cloud-based tool for nonprofits to manage their finances through advanced budgeting, forecasting, and reporting.
Through Martus’s many integrations with accounting software, you can enjoy seamless financial management that promotes transparency, accountability, and alignment with your mission’s objectives.
Gain financial clarity and make smarter decisions with Martus from today.
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