As a nonprofit professional, your strong suit is likely fundraising, volunteer management, and beneficiary programming. While these mission-sustaining activities are central to your organization, there are underlying processes that need to occur behind the scenes to keep your nonprofit running smoothly.

One of the most important of these processes is nonprofit accounting. Properly managing your organization’s finances and allocating your resources is crucial to keeping your nonprofit afloat and ensuring you can continue to carry out your cause.

To help you better understand the ins and outs of nonprofit accounting, we’ve developed this guide that covers the following topics:

With a better grasp of key nonprofit accounting concepts, you can be confident that you’re properly managing your finances and remain compliant with all relevant rules, regulations, and guidance, including Generally Accepted Accounting Principles (GAAP). Less stress about the nitty gritty of nonprofit finances means more time and energy to focus on what matters most: your mission.Click through to start working with YPTC for all your nonprofit accounting needs.

What is Nonprofit Accounting?

Nonprofit accounting is how charitable organizations record, track, summarize, and report their financial transactions. Since nonprofits operate to better society and source their revenue through donations and grants, their accounting practices look different from those of for-profits.

Nonprofit Accounting vs. For-Profit Accounting

Since nonprofits don’t secure revenue for internal gain, nonprofit accounting is all about staying accountable for your finances, instead of making a profit. Charitable organizations rely on donors and grant funders to obtain the funds they need. As a result, they must spend these funds according to donors’ and grant funders’ terms and restrictions.

These differences in how nonprofit and for-profit organizations operate lead to a few key distinctions in their accounting strategies and terminologies:

  • Equity vs. Net Assets: In a for-profit organization, the difference between your assets (items owned) and liabilities (items owed) is equity, which represents the ownership interest or stake that shareholders have in the company. Because nonprofit organizations do not have owners, the difference between your assets and liabilities is instead labeled “net assets.” Under current accounting guidance, nonprofits must classify net assets based on whether or not they have donor-imposed restrictions on their use. For example, a major donor may specify that their donation to their alma mater must be used to build a new library on the university’s campus.
  • Net Income vs. Change in Net Assets: While in a for-profit organization, the difference between revenues and expenses is net income, in nonprofit accounting, this difference is referred to as the “change in net assets.”
    Report Titles: Nonprofits and for-profits must prepare similar reports, but the terminology used to describe them is slightly different. For example, the balance sheet of a nonprofit is known as a Statement of Financial Position, and the income statement of a nonprofit is known as a Statement of Activities.
  • Contributions: The rules surrounding the receipt and recognition of contributions are one of the most important differences between for-profit and nonprofit accounting. Nonprofit contributions may come with strings attached, leading to potential timing differences between when your nonprofit receives cash and when you recognize this revenue in your financial reports. A common case of this scenario is matching pledges or challenge grants, wherein a donation is contingent on some other goal (usually another donation).
  • Expenses: Nonprofits must report expenses by nature (expense line) and function (program services and supporting activities). Most organizations choose to meet this requirement by preparing a separate financial statement, known as the Statement of Functional Expenses.

These accounting differences are reflected within the financial statements that nonprofit organizations prepare, which we’ll review in more detail in a later section.

Nonprofit Accounting vs. Bookkeeping

While you may use the terms “accounting” and “bookkeeping” interchangeably, they are different yet related concepts. Understanding this difference can help you distribute responsibilities amongst your team appropriately and determine which services your nonprofit may need to outsource.

A chart comparing nonprofit accounting and nonprofit bookkeeping.

As we’ve already discussed, nonprofit accounting focuses on planning, recording, and reporting on financial transactions. The following activities fall under the umbrella of nonprofit accounting:

  • Reconciling accounts
  • Compiling financial statements
  • Preparing for audits
  • Budgeting
  • Managing grants
  • Maintaining GAAP compliance

Accountants typically must have at least a four-year degree, and some may have a Certified Public Accounting (CPA) license.

On the other hand, nonprofit bookkeeping involves keeping up with your nonprofit’s day-to-day financial activities. It’s less complex than nonprofit accounting and encompasses the following activities:

  • Entering transaction data
  • Maintaining organized financial records
  • Managing accounts payable and receivable
  • Allocating resources
  • Processing payroll

Bookkeepers do not require specialized education like accountants do. Consequently, a volunteer or staff member may be able to help out with your nonprofit’s bookkeeping, but a qualified accountant or accounting firm should handle your organization’s accounting needs.

Key Nonprofit Accounting Statements and Reports

As mentioned before, the GAAP are guidelines that accountants across all sectors follow. The Financial Accounting Standards Board (FASB) has implemented these principles to create consistency within the industry and increase financial transparency.

Within these guidelines, there are several statements and reports your nonprofit will have to create and use to demonstrate your organization’s financial health. We’ll review these documents in depth.

Nonprofit Operating Budget

Your nonprofit’s budget is a foundational financial document that allows your team to plan for expenses and allocate resources. Most organizations create a yearly budget that details all of the costs their nonprofit will incur and the revenue they’ll generate over the next 12 months.

For nonprofits, the operating budget is more than just a financial plan projecting income and expenses for the year—it’s a tool you can use to monitor your organization’s activities. Use your operating budget to determine the best uses of funds to accomplish your mission. Throughout the year, you should monitor your budget monthly and compare it to your actual results so you can stay on track and make adjustments where needed.

In addition to an annual operating budget, nonprofits often prepare project or grant budgets to meet funders’ reporting needs. Thus, the ability to track income and expense items by funding source is an important function of nonprofit accounting.

Your nonprofit’s annual operating budget will end up looking something like this:

A nonprofit accounting operating budget template.

Statement of Financial Position

The Statement of Financial Position is another term for a balance sheet. It shows the financial health of your organization through its assets and liabilities.

Ultimately, your Statement of Financial Position allows you to complete the following equation:

Net Assets = Assets – Liabilities

When you subtract any outstanding financial obligations from your available resources, you can better evaluate your nonprofit’s financial health. If you have positive net assets, that means your organization is in a suitable financial position and can reinvest its surplus of resources. However, negative net assets indicate that your nonprofit should reevaluate its resource allocation to promote future growth and stability.

Refer to the example below to see what a Statement of Financial Position looks like:

A nonprofit accounting statement of financial position template.

Statement of Activities

Your nonprofit’s Statement of Activities, or income statement, breaks down your revenue and expenses over time. Typically, nonprofits will have a yearly Statement of Activities that allows them to categorize their revenue sources and expenses.

This document also allows your organization to track changes in its net assets between the beginning and the end of the year. In addition to summarizing your revenues and expenses for the period, the report helps readers understand how your nonprofit manages its resources to fulfill its mission.

Here’s an example of what your Statement of Activities might look like:

A nonprofit accounting statement of activities template.

Statement of Functional Expenses

Your nonprofit’s Statement of Functional Expenses separates your expenses into different categories based on their function. Nonprofits typically organize their expenses according to the following categories:

  • Program expenses
  • Supporting activities, such as
    • Management and general expenses
    • Fundraising expenses
    • Membership development expenses

You’ll also need to delineate the nature of each expense. For instance, you’ll separate staff compensation from rent and utilities, even though both are overhead expenses.

This document allows you to be transparent about how you’re allocating your resources to donors, funders, board members, and other stakeholders. Additionally, creating a detailed Statement of Functional Expenses will help you fill out your expenses on your Form 990, simplifying the filing process.

Check out an example of a nonprofit Statement of Functional Expenses:

A nonprofit accounting statement of functional expenses template.

Statement of Cash Flows

Your nonprofit’s Statement of Cash Flows shows how cash moves in and out of your organization. It demonstrates cash flows from your operating, investing, and financing activities to reveal how cash moves in different areas of your nonprofit.

This statement allows you to determine how much money you have available to pay your expenses. You can also better understand how your organization uses the funding it receives through this document.

Your Statement of Cash Flows should look something like this:

A nonprofit accounting statement of cash flows template.

Form 990

If your nonprofit qualifies as a tax-exempt, 501(c)(3) organization, then you must file Form 990 each year. Form 990 is the annual tax form that confirms your compliance with IRS regulations and requirements and maintains your tax-exempt status.

To evaluate your nonprofit’s finances, the IRS requires you to record your yearly revenue and expenses. This is a publicly available document that promotes financial transparency and verifies that your nonprofit operates as a 501(c)(3) should.

Not only does completing Form 990 promote transparency, but it also provides nonprofit management with the opportunity to share program accomplishments and reflect on the impact its services have on the community it serves.

Here’s an example of what this important nonprofit accounting document looks like:

An example of Form 990, an important nonprofit accounting document.

Now that you have a better understanding of these key nonprofit accounting statements and reports and their purposes, it’ll be much easier for you to assess your organization’s financial health. However, the next step is to learn how to properly implement this information and use it to inform your accounting decisions.

Click through to start working with YPTC for all your nonprofit accounting needs.

Nonprofit Accounting Best Practices: 5 Tips

Whether you’re handling your nonprofit accounting needs in-house or outsourcing these responsibilities, it’s important to abide by industry best practices. We recommend implementing the following tips to manage your finances efficiently and effectively.

Five nonprofit accounting best practices, as discussed in the text below.

1. Evaluate your budget regularly.

Since your budget is your guiding document, you’ll want to revisit it frequently. Ideally, you should check your budget once a month so you can compare your budgeted revenue and expenses against your actual revenue and expenses.

As a result, you can identify any discrepancies between your projected and actual budget and make adjustments to your resource allocation accordingly. Additionally, this practice ensures your organization adapts to any changes in revenue or expenses, whether that be a new grant that increases your funding, heightened facility rent that raises your overhead expenses, or anything in between.

2. Allocate funds for overhead expenses as needed.

While nonprofits generally try to limit their overhead costs to ensure they’re directing the majority of their funds toward their mission, these expenses are necessary for your organization to function properly.

Paying your staff, acquiring an office space, and creating a nonprofit website, for example, all fall under overhead expenses. Where would your organization be without people to run it, a place to carry out your important work, and a website that promotes your mission and services?

While the general rule of thumb is to not exceed spending 35% of your funding on overhead expenses, every organization’s expense breakdown will look different. Instead of blindly cutting overhead costs to reach a certain percentage, be strategic about limiting your overhead, and ensure you’re allocating enough funds to this area to keep your nonprofit running smoothly.

3. Establish internal controls.

With proper internal controls in place, you can limit fraud, identify errors, and protect your assets. No matter the size of your nonprofit, having appropriate checks and balances is necessary for effective financial management.

To ensure your internal controls are sufficient, follow these guidelines:

  • Separate financial responsibilities. When you separate financial duties amongst your team, you prevent individuals from having too much control over your organization’s finances. For example, the staff member who records financial transactions should be different from the one who approves these same transactions.
  • Implement clear financial policies. Create policies and procedures surrounding expense approval, cash handling, payroll processing, budget management, and financial reporting. Make sure your staff members are familiar with these policies and can easily reference them as needed.
  • Conduct physical asset checks. While you likely have several sets of eyes on your financial records and transactions, don’t forget about your physical assets. Store cash and checks in safes or locked cash boxes, and keep stock of valuable office equipment, such as computers and cell phones.

Internal controls allow you to be more confident in the accuracy of your financial records and increase accountability among members of your nonprofit accounting team.

4. Conduct audits.

Auditing your organization’s financials regularly ensures they’re accurate and reflect a healthy, prosperous financial standing for your nonprofit. Audits allow you to identify any risks that may jeopardize your nonprofit’s financial stability and opportunities to improve your financial management practices.

Additionally, you can publish the results of your audit to increase transparency with donors, grantors, and other stakeholders. When you can demonstrate responsible resource use and strong financial performance, you can build trust with your stakeholders and encourage them to continue lending their support.

5. Use dedicated accounting tools.

The right software can take your nonprofit accounting efforts to the next level. Make sure to choose a solution with nonprofit accounting settings and features that will make it easier for your team to manage your organization’s finances.

If you’re thinking about outsourcing your accounting needs, choose an expert or firm that not only specializes in nonprofit bookkeeping and accounting but that also uses tools your organization can quickly familiarize themselves with. The experts you hire should act as an extension of your team and work with your staff to effectively manage your nonprofit’s finances.

Hiring vs. Outsourcing for Nonprofit Accounting

Your nonprofit may already have someone on staff who fulfills your accounting needs. However, many nonprofits struggle to fill this role and round out their teams, with 74.6% of organizations reporting job vacancies. If you can’t find someone for the job, you may need to explore alternative options.

Take a look at the different ways your organization can cover its nonprofit accounting needs:

  • Have an executive step up. At your nonprofit’s inception, you may assign all financial responsibilities to the executive director. While this approach may work in the beginning, your accounting needs will likely grow more complex as your organization grows. Additionally, your executives will need to take on other responsibilities, leaving them little time to focus on financial management.
  • Hire a full-time accountant. Large nonprofits often hire a full-time accountant to join their team and take care of their finances. However, as we discussed before, it can be difficult for organizations to fill these roles, and smaller nonprofits may not have the means to hire additional staff.
  • Partner with a nonprofit accounting firm. The last option is to outsource your accounting needs to a dedicated firm. Nonprofit accounting firms specialize in managing the finances of charitable organizations and can be more affordable than hiring a full-time accountant.

We strongly recommend working with the experts at a nonprofit accounting firm. Outsourcing your bookkeeping and accounting needs enables you to better focus on your mission with financial management taken off your team’s plate. Plus, when you work with a nonprofit-specific firm, you can rest assured that team members know the ins and outs of how to manage the finances of organizations just like yours.

Why YPTC Is the Right Choice for Your Nonprofit Accounting Needs

At YPTC, we’re passionate about helping nonprofits with their bookkeeping and accounting needs. Working with our team of experts allows you to be confident in your organization’s financial management without taking time out of your staff’s busy schedule to implement the proper procedures.

Wondering why exactly you should work with YPTC? Check out the benefits our clients receive:The benefits of working with YPTC, an expert nonprofit accounting firm.

  • Nonprofit expertise. What sets YPTC apart is our background in nonprofit-specific financial management. For three decades, we’ve worked with executive directors and board members across a variety of organizations to fulfill their missions more effectively and efficiently. Whether you run an association, foundation, museum, school, environmental organization, or anything in between, we have experience with similar nonprofits and can help get the job done.
  • Flexible services. Our team adapts to your nonprofit’s needs to provide the perfect financial management solution. We can serve as your organization’s bookkeeper, accountant, controller, or Chief Financial Officer, depending on which services you’re looking for. From accounting and month-end close to financial reporting to data visualization, we conduct a variety of services and can customize them to your nonprofit’s specific needs.
  • Assistance from anywhere. We typically work with our clients onsite, allowing you to work with our experts face-to-face and ask them any questions you may have. However, we can also work with your organization remotely, leveraging your nonprofit’s preferred combination of video chat, phone calls, and emails. No matter the format, we provide that extra “personal touch” that makes our services stand out.

The YPTC team is ready and eager to help your nonprofit with its accounting needs so you can focus on your mission and beneficiaries. Don’t just take our word for it, though! Hear what some of our clients have to say about working with YPTC:

  • “With YPTC, it’s never ‘your’ organization, it’s what ‘we’ need. That makes a difference when you’re a mission-driven nonprofit. YPTC isn’t an outside consultant as much as they are a team member.” – Allison Hay, Houston Habitat for Humanity Executive Director
  • “For me, at the top of my ‘love list’ with YPTC is trust. That’s so important for me and our organization…Having a partner whom we can trust helps us focus on what’s most important for us – people who need help with food. We can focus on that because we trust YPTC wholeheartedly to ensure that we have accurate and appropriate reporting about how we’re managing our money. Because we have that trust we don’t have to worry.” – Kevin M. Yates, Founder and President of Meals in the Meantime
  • “As a financial professional, I’ve dealt with a variety of consultants and accountants. To be quite honest, working with YPTC has been not just positive, but quite a pleasure. Their experience and recommendations have been useful in helping to shape us from a start-up into a more sustainable state. As a treasurer, I can say that relying on their professionalism and experience is invaluable.” – Carlos Orozco, Co-Founder of the Organization of Latino Actuaries

Additional Nonprofit Accounting Resources

From developing a budget to reconciling accounts to managing grants, nonprofit accounting encompasses a variety of activities that allow charitable organizations to successfully manage their finances. When you understand key accounting concepts, you can assess the financial health of your nonprofit and make operational adjustments as needed.

Outsourcing your nonprofit accounting needs enables you to focus on what’s important: your mission. Leave it to the experts to implement accounting best practices and keep track of your organization’s finances.

If you’d like to learn more about nonprofit finances, check out the following resources:

  • All Things Accounting! Ask and Answer. This webinar with YPTC’s Vertical Specialization Director Andi Fanelli McGunnigle answers all of your accounting questions to help you evaluate your organization’s current financial management.
  • What We Do. Dive deeper into YPTC’s services so you can discover the power of outsourcing your nonprofit accounting needs to our team.
  • Back to Basics: Nonprofit Finance 101. Watch this webinar to refresh your team on nonprofit financial statement terminology, reporting requirements, and best practices.Contact us today to focus more time on your mission and less on nonprofit accounting.