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...
Accounting isn't the most glamorous activity for nonprofits, but it's key to running your organization smoothly.
Whether for routine financial management or compliance, accounting is one of the backbones keeping your organization’s finances in control.
The trouble is that understanding and scrutinizing a nonprofit’s finances can be overwhelming. But it doesn't have to be.
In this guide, we'll explore the best accounting practices for nonprofits to help cater to all your accounting needs and maintain good financial health in the long run.
Let's start with a quick overview of the accounting practices we'll cover:
Applying these best accounting practices for nonprofits can be taxing, especially when it comes to choosing the best accounting software and dependable financial management software for your organization.
Martus is the best bet as tailored financial management software for nonprofits looking to optimize accountability, transparency, collaboration, and efficiency in financial planning.
Martus connects with existing accounting tools to amplify accounting functionalities and streamline financial management through cloud-based budgeting, reporting, and even forecasting.
Request a detailed demo to see Martus in action and discover how it can transform your financial management.
While nonprofit and for-profit accounting are similar in many ways, they differ in the following four critical areas because of the unique nature of nonprofits.
Nonprofits must stick to good accounting practices to enjoy benefits such as:
Setting up a sound nonprofit accounting system requires combining bookkeeping, accounting software, and dedicated nonprofit financial management software.
Find a professional bookkeeper with experience in nonprofit systems to help you with basic data entry, making bank deposits, processing payroll, writing checks, and managing invoices.
You'll also need to find the right nonprofit accounting software to help with budgeting, tax filing, preparing financial statements, maintaining GAAP compliance, and managing donations and grants.
We recommend Sage Intacct, our main API-based integration, as the best accounting tool for multi-entity nonprofits looking for detailed cash flow management, financial reporting, and project costing.
You'll need the right software for nonprofit financial management. Martus is a holistic cloud-based financial management tool that helps nonprofits with:
Martus also supports financial forecasting, a valuable addition to the capabilities of the accounting software it integrates with.
Financial forecasting also complements the budgeting and reporting capabilities you get with Martus.
Book a discovery call today to find out more about Martus and how it can streamline your nonprofit accounting processes.
To choose the right accounting tools and technology, here are some major aspects to consider:
Let's now discuss the best practices in detail:
You must stay abreast of the current guiding principles and accounting standards for nonprofit organizations.
The Financial Accounting Standards Board (FASB) sets and updates the best nonprofit accounting principles, including GAAP.
For a nonprofit, ensure you keep up with FASB’s guidelines, such as:
Internal controls are necessary to prevent fraud, promote responsible collaboration, and reduce errors. Design thorough internal policies and controls that you update regularly.
Some common internal measures include:
You'll want to conduct internal audits to ensure that all accounting meets the organization’s standards and GAAP.
The audit results are helpful in decision-making, external audits, securing government funding, and establishing trust and credibility with donors.
Stay current with the IRS’s accounting, tax, and reporting requirements for nonprofits to maintain compliance and your organization's tax-exempt status.
For example, you must file Form 990 correctly, keep accurate charitable contributions documents or records, and be ready for audits if needed.
Rather than using inexperienced volunteers or staff who lack accountancy training, work with an experienced nonprofit bookkeeper.
Good bookkeeping is the basis of good accounting, and you'll need a bookkeeper who understands aspects such as:
It's a great idea to have someone responsible for accounting, such as the chief financial officer. You can also have a whole accounting team, depending on the size and complexity of your charity.
Certified Public Accountants are ideal, but you must focus on the person's understanding of GAAP and the ability to produce accurate financial reports routinely.
You can outsource the service if you don't have the proper budget to hire an in-house accountant or team.
Your accountant or accounting team can produce better results with the right nonprofit accounting software.
Choose software specifically designed to address the unique challenges nonprofits face, such as restricted vs unrestricted fund accounting and strict regulatory compliance requirements.
Your accounting system won't be complete without nonprofit-focused financial management software. Look for a cloud-based tool that supports budgeting, reporting, collaboration, and better financial visibility.
You can use Martus to streamline your accounting process through real-time budgeting and reporting, data-driven insights, and integrations with accounting tools to centralize control.
Book a consultation today to learn more about streamlining nonprofit financial management with Martus.
Even as you work with professional bookkeepers and accountants, you must avoid these common nonprofit accounting mistakes:
Here are answers to questions we often get concerning nonprofit best accounting practices.
Nonprofit accounting is a special type of accounting that includes components such as fund accounting, budget management, legal and regulatory compliance, donor management, and financial reporting.
A nonprofit should ideally review its financial reports monthly to proactively monitor financial trends, identify potential issues, and compare budgets with actuals.
Most nonprofits review their financial reports based on how often the board meets, which is usually monthly or quarterly. Some may meet more often, depending on the size, needs, bylaws, and maturity of the organization.
It's highly recommended that every nonprofit, especially large organizations, follow GAAP to ensure accuracy and consistency in financial management.
Using GAAP maintains compliance with donor and IRS requirements and builds the credibility, trust, and transparency necessary for continued donor support.
An accountant for nonprofit organizations professionally helps with financial management.
Their tasks include ensuring compliance, applying accounting principles and standards, maintaining an up-to-date net assets schedule, and preparing financial statements.
They may also advise the board on making appropriate financial decisions.
Best accounting practices for nonprofits ensure you stay compliant with governmental and donor requirements, maintain tax-exempt status, and continue receiving support from your benefactors.
For these benefits to happen, you must have a robust accounting system that includes bookkeeping, accounting professionals and software, and nonprofit-oriented financial management software.
You need the right financial management tool if you already have bookkeeping and accounting software.
Martus is your best option, given its extensive budgeting and reporting functionality and focus on collaboration, transparency, accountability, and mission alignment.
Besides, you can also enjoy forecasting capabilities, which augment all your accounting processes and results.
Book a demo to see Martus in action today.
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