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Today, perhaps more than previously thought, nonprofit organizations have garnered immense support from the civic community, as the internet and social media allow them to share their causes more frequently and to a wider audience.

According The Nonprofit Timesa leading publication and medium for nonprofits, 2021 contributions totaled more than $484.85 billion, with 67% coming from individuals alone, a significant increase from the 33% it represented at the turn of the century in 2000.

As society and younger generations seek more of a voice around the causes and communities that nonprofits serve, more 1.5 million US nonprofits — which employ about 10% of the U.S. workforce and contribute about 5.4% to the nation’s GDP — will only increase their impact and empower them to advance their mission.

Although nonprofit organizations make a difference in our civil society, whether through the programs they orchestrate or the support they provide, regulatory factors regarding taxation and accounting still require that nonprofit organizations nonprofits adhere to strict protocols set by the federal government and the Internal Revenue Services (IRS).

Fortunately for all 27 types of nonprofits, there are specific rules that guide them on their tax-deductible contributions and nonprofit accounting.

To make sense of this whirlwind of information, this simple guide aims to bring clarity to accountants and non-accountants who have found themselves working for a nonprofit organization. Here is a simple overview of the basics for beginners.

Non-profit tax-exempt status

Since nonprofit organizations conduct efforts on a charitable basis, with most donations and proceeds going toward fulfilling the organizations mission, the majority of these groups and organizations will generally be exempt from paying federal taxes.

Organizations are only exempted if they meet the requirements set out by Publication 557 tax-exempt status published by the Treasury Department and the IRS.

In the absence of direct ownership, shareholders, or investors, nonprofits are required to meet certain conditions to maintain their nonprofit status – and that’s where for-profit accounting nonprofit becomes a crucial part of their operations.

A Brief Summary of Nonprofit Accounting

Often referred to as fund accounting, nonprofit accounting records all financial and monetary accounts held by the organization.

Since all nonprofits are different, the fund accounting system works to track income and expenses to ensure organizations can achieve their goals and meet regulatory requirements.

Nonprofit accounting may include some of the following:

  • Establish a budget
  • Analyze financial records and statements
  • Record transactions such as in-kind donations
  • Management of various bank accounts
  • Performing bank reconciliations
  • Fund accounting and bookkeeping

Simply put, nonprofits will need to appoint a treasurer or accountant who will help balance the books and keep track of fundraising accounts.

Establish a budget

Just like for-profit businesses and corporations, a budget helps determine how profits will be used to achieve certain goals and how money will be allocated accordingly.

For nonprofits, a budget may look a bit different, as they generate revenue from donations and other forms of charitable causes. This means that a budget will usually have expected income and expenses.

Expected income and expenses will indicate where the money will come from, whether through corporate contributions, in-kind donations, volunteer work, or other programs. At the same time, expenses will help track where nonprofits are spending money, including payroll, programs, and events.

Analyze financial records and statements

The second part of fund accounting is making sure to analyze the records and financial statements that the nonprofit commits to during the financial period. As with regular businesses, financial records and statements help keep track of all the revenue generated by the organization, where it was spent, and how it got there.

For accounting and tax reasons, nonprofit organizations need to use digital tools that will help them manage and control their financial statements more transparently. Ultimately, these statements serve as a way to keep track of all accounts and expenses a nonprofit generates over time.

Recording of transactions

As mentioned, financial statements can play an important role in the overall process of managing the fundraising account and since many nonprofits will often receive in-kind donations and voluntary assistance, these will also need to be recorded. .

In-kind donations are those that are used by a person or company as a gesture of goodwill. For example, if a photographer says they will help with new portraits and photographs for the organization’s website, the association will need to record the in-kind donation in its statements.

The nonprofit will have a separate account in its accounting records for all in-kind donations and record a receipt based on the fair market value of the donation. So, if the photographer charges $550.00 for 100 photos, the nonprofit will record the $550.00 as an in-kind donation.

Management of various bank accounts

Small nonprofits may have one or two bank accounts at first, but over time, as the organization grows, different bank accounts will be needed for different activities.

Some nonprofit organizations may have a regular checking account, but will have a separate savings account for emergencies. Some financial institutions offer custom checking accounts for nonprofits that act like regular business accounts, but have been customized for nonprofits.

It is not a good idea to have a single bank account from which all transactions are made, as it makes accounting practices increasingly difficult and complex.

Performing bank reconciliations

Individuals and businesses tend to do bank reconciliations when it comes to filing annual taxes. A bank reconciliation is simply checking whether the transactions made on a specific bank account match those recorded on the financial statements.

Bank reconciliation helps keep track of purchases and expenses that may be exempt from tax, or are categorized and accounted for differently.

Fund accounting and bookkeeping

Finally, fund accounting and bookkeeping is where most nonprofit organizations will begin to organize their financial and monetary statements or transactions in one place.

Instead of having different ledgers that help keep track of the various transactions made by the nonprofit, some organizations tend to use automated software and computerized programs to help keep all of their financial procedures in one place. secure place.

Additionally, nonprofits are advised to use some form of bookkeeping and accounting services appropriate to their needs and tax-exempt status. Not only does this help them ensure greater financial credibility, but it allows them to align their financial procedures with their missions and regulatory elements.

To finish

We know that nonprofits play a huge role in our community at large and in civil society, acting as a voice for disadvantaged communities around the world. If it is true that these organizations can make a difference, whatever their mission, they must align their accounting and financial situation with the regulatory elements enacted by the federal authorities.

Nonprofit accounting can seem like a daunting challenge at first, but once a person gets used to the ins and outs, it becomes almost instinctive for people to better keep track of their financial situation.