Bookkeeping for a Non-Profit: What You Need to Know

You have a vision for helping others. Your non-profit can make a difference – if you can finish all the paperwork. 

You know you need to keep your receipts and records, but you’re slowly finding that bookkeeping is more complex than simply tracking expenses. Bookkeeping for non-profit organizations requires a specific skill set because the rules differ from for-profit bookkeeping rules. 

This article will cover the differences between non-profit and for-profit bookkeeping. We’ll also cover non-profit reporting requirements and our best practice recommendations. 

What Is Non-Profit Accounting?

Non-profit accounting is a set of principles for recording non-profit organizations’ financial activities. 

Non-profits must file annual reports to maintain tax-exempt status; non-profit accounting supports these filings. Non-profit financials are publicized to help government agencies and donors understand how the organizations operate. Donors expect your non-profit to use funds toward its stated mission.

Bookkeeping is critical to supporting the accounting function.

What Is Non-Profit Bookkeeping?

Non-profit bookkeeping is the practice of maintaining detailed, accurate records of all revenues and expenses. Accountants rely on accurate bookkeeping for financial reporting and analysis. 

Non-profit bookkeepers perform recordkeeping activities such as the following: 

Categorize revenues and expenses

Record in-kind donations

Record transactions

Verify general ledger balances

Reconcile bank accounts

Create invoices and purchase orders 

How Is Non-Profit Bookkeeping Different from For-Profit Bookkeeping?

The main difference between non-profit and for-profit bookkeeping is the application of fund accounting principles for non-profit organizations. 

Both non-profit and for-profit organizations follow generally accepted accounting principles (GAAP). Non-profit bookkeepers need to understand and apply GAAP rules and fund accounting principles.

Non-profits prepare annual financial statements, which report detailed fund activities to the public. In contrast, for-profit organizations don’t need to track or report activities by fund.

How Does Fund Accounting Work for Non-Profits?

Non-profits receive funding through donations or grants. Some organizations also generate income from business activities such as selling merchandise. Each revenue source represents a separate fund. 

Non-profits categorize and track each source of receipts and related expenses. 

For example, imagine that your non-profit organizes a fundraiser. Your non-profit bookkeeper should set up a fund for the event. The event fund will reflect all related financial transactions, including donations from attendees and the cost of renting event space. 

In addition to tracking each source of receipts as a separate fund, non-profits must categorize donations and expenses. 

Donors can choose to designate donations for specific programs. Non-profits should categorize funds into the following donation categories:

Permanently restricted: The non-profit must use the donation for a specific program and cannot use funds for unrelated expenses.

Temporarily restricted: The donation will expire, and the non-profit must use it for a specified program before its expiration. 

Unrestricted: The non-profit can use the donation for any expense, including administrative costs. 

Expense categories include the following: 

General & administrative expenses: Amounts spent on day-to-day operations, such as administrative and back-office employee wages.

Program expenses: Costs to run the non-profit’s programs that support its cause.

Fundraising expenses: Costs of soliciting donations or grants from contributors, including advertisements and mailing costs. 

As you can see, fund accounting rules add complexity to non-profit bookkeeping. Don’t let the nuances intimidate you – 1-800Accountant can help your non-profit with professional bookkeeping services. 

What Are the Major Differences Between Non-Profit Accounting and Non-Profit Bookkeeping?

The terms bookkeeping and accounting are used interchangeably, but the roles have different responsibilities.

Bookkeepers perform detailed tracking and categorization activities. Proper bookkeeping includes entering financial transactions and ensuring accurate ledger balances. Your bookkeeping activities support your compliance with fund accounting rules.

Accountants rely on accurate bookkeeping to prepare annual financial statements and tax returns. Non-profit accounting includes financial analysis for presentation to owners and the board of directors. Accountants often obtain advanced degrees and CPA (certified public accountant) licenses, requiring deep technical knowledge. 

Do you need to decide whether your non-profit should hire a bookkeeper or an accountant? The following table compares the roles to help you determine the skillset you need. 

Depending on the non-profit’s size, there may be some overlap in responsibilities, such as reconciling accounts or tracking expenses. 

Non-Profit Bookkeeper Responsibilities	Non-Profit Accountant Responsibilities
Categorize revenues and expenses Record in-kind donations Record transactions Verify general ledger balances Reconcile bank accounts Create invoices and purchase orders	Prepare financial statements Prepare and file tax returns Analyze financial trends Analyze budget-to-actual differences Monitor tax rules and deadlines Assist with planning and forecasts

By the way, 1-800Accountant can support your non-profit with professional bookkeeping and accounting services. Schedule a free call to get expert help with your compliance.

Bookkeeping for Non-Profits: Requirements and Best Practices

Your non-profit must prepare annual financial statements to report its activities. Your non-profit tax return should include data from your financials.

Compliance with non-profit reporting requirements is critical, or your organization could risk losing its tax-exempt status. 

Non-Profit Financial Statements and Reports

Statement of Financial Position

A non-profit statement of financial position should reflect all restricted, temporarily restricted, and unrestricted assets held at a given date. The statement should also report liabilities (amounts owed). 

Unlike a for-profit balance sheet, the non-profit statement of financial position doesn’t report retained earnings or equity in the organization. Since non-profits cannot distribute profits to owners, total assets less liabilities represents net assets. 

Statement of Activities

Similar to a for-profit income statement, the non-profit statement of activities reflects annual revenues and expenses.

Your statement of activities should categorize revenues into restricted, temporarily restricted, and unrestricted. Total revenue less expenses represents the change in net assets. 

Statement of Functional Expenses

The statement of functional expenses offers a detailed view of a non-profit’s spending during the year. 

Do you remember the non-profit expense categories we mentioned earlier? Your non-profit’s functional expense statement should detail all general & administrative, program, and fundraising expenses. 

Statement of Cash Flows

The non-profit statement of cash flows should list cash inflows and outflows during the year. Your non-profit should summarize the total cash received or used for operating, investing, and financing activities. 

Revenue and Expense Budget

Non-profits should forecast expected income and expenses for the year ahead.

Your non-profit should estimate all funding it expects to receive. For example, imagine your non-profit has a long-standing relationship with a local company. You might anticipate donations from the business each year; you should include the estimate in your annual budget.

When estimating your expenses, consider all employee salaries and part-time wages. Estimate the costs of annual fundraisers and charity events your non-profit organizes.

Form 990

Tax-exempt non-profit organizations should file IRS Form 990, Return of Organization Exempt From Income Tax. (Small non-profits can often file simpler forms, depending on their annual gross receipts. Review the IRS guidelines to determine which form you should file.) 

Your non-profit financials support the information on Form 990. The lengthy, complex return requires specialized knowledge, and we recommend consulting non-profit bookkeeping professionals to help you prepare and file the form. 

Best Practices for Non-Profit Accounting

Fund accounting rules leave plenty of room for error – especially if you’re new to bookkeeping. We put together our recommendations for non-profit accounting best practices. 

Set up a separate bank account for your non-profit and keep your personal finances separate.

Update and monitor your budget monthly so you can catch errant spending. 

Implement proper internal controls for all financial duties.

Organize your tax return information early and make sure to file on time.

Outsource bookkeeping services to professionals if your employees need more industry expertise.

Non-Profit Bookkeeping Solutions

Non-profits can choose from several bookkeeping solutions, including purchasing accounting software, hiring a full-time bookkeeper, or outsourcing to professionals. 

Accounting software can help non-profits with tracking and categorization activities. For example, Quickbooks offers non-profit functionalities to help with fund accounting complexities.  

When should a non-profit organization hire a full-time bookkeeper? 

National or large non-profits may prefer to hire bookkeepers and accountants. Full-time staff can consistently track spending, monitor budgets, and prepare bank reconciliations. Additionally, full-time bookkeepers become intimately familiar with the non-profit’s activities. 

When should a non-profit outsource bookkeeping services? 

Many small non-profits have a modest budget or minimal operating activities. If your non-profit can’t hire an employee with specialized experience, consider outsourcing to third-party professionals. Bookkeeping professionals can help your non-profit maintain accurate records and comply with reporting requirements.

Work with a Professional for Your Non-Profit Bookkeeping

Non-profits need to comply with many complex rules. If your non-profit lacks the bandwidth or expertise to keep up with fund accounting rules, you could risk paying fines or losing your tax-exempt status.  

The good news? You don’t have to manage your bookkeeping alone. 

1-800Accountant has many resources for non-profit organizations. Our bookkeeping and accounting professionals can offer full-service support at a reasonable rate. 
Schedule a free call with 1-800Accountant to learn more about working with America's leading virtual accounting firm for non-profit accounting services.