Nonprofit accounting is one such activity that many people dislike. However, it is important for the smooth running of the organization. Because the whole process of nonprofit accounting can be overwhelming and time-consuming, you can employ the use of software or you can outsource the services to create time for other important tasks. We’ll show you some examples of free software you can use, but first, let’s understand the concept of nonprofit accounting.
What Is Nonprofit Accounting?
Nonprofit accounting is the distinct process by which nonprofits plan, document, and report their financial activities. While for-profit organizations are primarily concerned with making a profit, nonprofit organizations are more concerned with the accountability component of accounting. They adhere to a system of regulations and processes that assist them in remaining accountable to their supporters and contributors.
The remainder of this essay will address the fundamentals and best practices of accounting that all nonprofit professionals should be aware of. Understanding the fundamentals will enable you to better manage and plan your initiatives in order to maximize the value of your resources.
What Does A Non-Profit Accountant Do?
Nonprofit accountants assist organizations in ensuring financial health and stability, maintaining financial data standards, and making decisions based on the nonprofit’s budgetary capabilities.
How Is Accounting Different For Non-Profits?
As previously said, nonprofit accounting focuses on financial accountability. Donors to your nonprofit have the right to restrict the gifts they make to your organization, and grant funders want to ensure that their monies are spent on the agreed-upon initiatives. Because of these constraints, you must ensure that their contributions are spent in a way that their supporters approve of. As a result, nonprofits use a style of accounting known as fund accounting.
Fund accounting allows NGOs to divide their cash into distinct categories or “funds” to keep them organized and to ensure that funds are only spent on what they are authorized for.
Nonprofits frequently divide their funds into categories such as:
- Restricted funds: These are the monies that your organization must spend on specific projects and activities.
- Temporarily restricted funds: This money should be used for certain initiatives and activities at your nonprofit until a set date. They become unlimited funds after that time.
- Unrestricted funds: This is often referred to as your annual fund. It can be spent on whatever areas of your organization are most critical.
The non-distribution constraint is another facet of nonprofit accounting that helps organizations stay accountable for their finances. This is an important component of accounting that helps organizations define themselves. Nonprofits, unlike for-profits, are not compelled to disperse their net revenues to the organization’s leaders.
A government organization also differs in its lease arrangement accounting practices. Governmental organizations have already been through the wringer in recent years with the introduction of new accounting rules for leases. Now, the introduction of GASB 96 means these same organizations must go through a very similar change with a large portion of their software agreements. GASB 96 was introduced and is effective for fiscal years beginning after June 15th, 2022. So you could already be operating within the guidance that GASB 96 mandates. It’s worth checking your lease guidelines to make sure you’re compliant.
Top Best Accounting Software for Nonprofit Organizations
Nonprofit organizations frequently operate on a shoestring budget. Every money spent must be carefully considered and accounted for. Many NGOs rely on in-house accounting systems because they cannot afford to engage a professional accountant. If you don’t have the money to hire a professional, free accounting software can help you get started. (elcapitalino)
When looking for free accounting software for your nonprofit organization, evaluate what activities you need the program to complete and whether you need any specific reports. Each curriculum has something unique to offer, so pick the one that best meets your requirements.
Options for Free Nonprofit Accounting Software
Here are some of the best options for free nonprofit accounting software:
#1. Nonprofit Treasurer
Nonprofit Treasurer, as the name implies, was designed to fulfill the needs of small nonprofit organizations such as parent-teacher associations, homeowners groups, professional association chapters, child sports clubs, and others. This program is free and simple to use, thanks to its integrated reporting and budgeting options. It is intended to make the lives of volunteer treasurers and other board members easier in terms of financial administration and monitoring, as well as all nonprofit accounting needs.
#2. GNUCash
This free software application can be beneficial to tiny nonprofit groups. It is an open-source tool with certain Quicken features and some small business accounting capabilities. This software allows you to construct a variety of reports, although you may need to export some data to Excel to finish them. This software is compatible with Windows, Mac, and Linux operating systems.
#3. Adminsoft Accounts
This program is a complete double-entry accounting system that can even manage payroll if necessary. It will run on any Windows-based system and, in some cases, on Mac or Linux PCs.
#4. BS1
BS1 software is designed for small enterprises and allows you to create files in several currency formats, allowing you to manage international billing or purchasing. You can also make your own financial statements. If you like, you can pay a charge to have your program customized.
#5. Lazy8 Ledger
This free accounting tool is a double-entry accounting program for users who are familiar with bookkeeping techniques. Your company can also track receipts and payments automatically. This application is also compatible with Windows, Linux, and Mac computers.
#6. LedgerLite
Responsive Software’s free accounting software operates on Windows platforms. This shareware application is a double-entry ledger system that may be expanded as your company grows. One advantage for non-profit organizations is that account balances can be calculated whenever you choose, rather than only on a quarterly or yearly basis.
#7. FrontAccounting ERP
Because this is an open-source solution for small businesses, it is an excellent choice for nonprofit organizations. This tool allows you to manage bank accounts, general ledgers, and many reports. This tool may be used on Windows, Linux, and Mac and has multiple user access.
#8. ZipBooks
ZipBooks’ free version may be useful for NGOs searching for a software program to perform basic accounting responsibilities. Unlimited invoicing, digital payment processing via Paypal or Square, basic reports, and vendor and client management are among the program’s capabilities (such as members or donors). The program can be linked to a single bank account.
Why Do Nonprofit Organizations Need Accounting Software?
Nonprofit accounting differs greatly from for-profit accounting. Nonprofits rely on donations and grants for funding. Thus, they must adhere to strict financial accounting requirements. They must comply with FAS 116 (Accounting for Contributions Received and Contributions Made) and FAS 117 (Financial Statements of Not-for-Profit Organizations) reporting standards.
Nonprofits frequently operate on shoestring budgets. While having a specialized accountant or bookkeeper—or several—on staff is ideal, it isn’t always feasible for young or growing businesses. The correct accounting software can assist nonprofit organizations in meeting these criteria even if they have a small workforce, allowing them to fulfill their financial goals while minimizing their expenditures.
The program can assist with a nonprofit organization’s special accounting demands, such as meeting unique reporting requirements, monitoring grants, making financial information available to donors and stakeholders in a timely manner, and preparing balance sheet reports.
Accounting Services for Nonprofit Organizations
Do you want to spend more time designing programs and communicating with funders and less time tracking down receipts and arguing about payroll reports?
Outsourcing your bookkeeping to nonprofit accounting agencies can be a great way to lessen your load. A skilled accounting team with nonprofit experience can help free up your time while providing you with the exact data you need to face your board and supporters with confidence.
Here are six ways nonprofit accounting services can assist your organization in achieving its goals:
#1. Audit-Ready Books
You need an efficient bookkeeping system to help you maintain your nonprofit status, meet the needs of your donors, and prepare for audits. However, maintaining audit-ready records is difficult, especially with a part-time, volunteer, or understaffed accounting department.
Outsourcing your nonprofit accounting services ensures that your accounts are always in order and meet the necessary criteria. So you don’t have to rush or work late every time someone requests to see your books.
Improved accountability will help increase your contributors’ trust by demonstrating that you are handling their money appropriately.
#2. Make the Time to Concentrate on Your Mission
As a member of a charity team, your focus is diverted in a variety of ways, including fundraising, team management, staffing initiatives, and more. With all of these responsibilities, tracking donor donations should be the least of your concerns.
For example, if you’re attempting to assist with a homelessness crisis in your city, you should spend more time creating relationships with individuals in your neighborhood than staring at spreadsheets.
Outsourcing your nonprofit’s bookkeeping and accounting can help you flourish by giving you more time to pursue the work you love. If you’re not bogged down by bookkeeping activities like processing invoices, organizing receipts, or paying vendors, you’ll be able to guide your staff and volunteers more efficiently.
#3. Save a Significant Amount of Time and Energy
Nonprofit accounting can be difficult and time-consuming, especially if you have no prior nonprofit financial experience. Accounting can eat away at your passion and limit the amount of energy you have to devote to the cause if you don’t find it inspiring.
When you outsource your accounting to a seasoned nonprofit accounting firm, their employees handle everything for you, reducing your workload. It also alleviates the worry of hiring, training, and maintaining your own bookkeeping staff.
Nonprofit accounting services are also knowledgeable about the best time-saving software and shortcuts to help you simplify your tasks. They can also recommend current accounting software that consolidates all of your accounting data in one location. As a result, when it comes time to produce reports or file taxes, you have everything at your disposal.
#4. Determine How Much Money You Can Spend
You want to be able to put your contributors’ and grant funding to good use to help your initiatives prosper.
However, for many nonprofit organizations, determining how much of your donations should go toward programs versus fundraising or operations can be challenging. Because of program-restricted monies and grants, it’s much more difficult to track which money you CAN spend.
This is when a nonprofit accounting service can be worth its weight in gold. Because most general CPA firms lack the necessary sector knowledge, they lack established methods for tracking program-restricted or grant-restricted monies. A nonprofit accounting service, on the other hand, will be familiar with the specific challenges that organizations like yours confront on a daily basis.
#5. Obtain Reliable (and Readable) Reports
Never underestimate the importance of consistent and recognizable nonprofit financial reports. It may appear simple, yet…
Most small and medium-sized organizations (as well as many large ones) struggle to provide accurate financial reports in time to satisfy their board members, funders, and auditors. And, frequently, the reports they do receive differ from month to month in terms of presentation, the information contained, and categorization.
A professional nonprofit accounting firm will standardize your records and consistently classify your income and expenses. So you’ll get reliable reports every month that you can actually read.
This enables you to instill trust in both your monitoring team and your donors. It also allows you to make better judgments faster. So that you can progress with your objective!
#6. Save a lot of money
You may not believe it, but nonprofit accounting services can help your organization save a significant amount of money.
Employees are expensive, and accounting salaries have risen by up to 30% in the last year alone. Furthermore, staff accountants are prone to be caught in old habits that waste your organization’s time and money.
Bookkeeping and accounting services can be far more efficient than your in-house team, thanks to optimized processes and cutting-edge technology!
Do Non-Profits Use Cash Or Accrual Accounting?
Established nonprofits often prepare and issue financial statements using the accrual method, as opposed to the cash method.
Do Nonprofits Use GAAP?
Nonprofits are not required to follow GAAP principles in their 501c3 accounting endeavors, but it is a good practice to do so
Is Non-Profit Accounting Hard?
Just like any other venture, nonprofit accounting has its own challenges.
What are the main financial statements that nonprofits need to prepare?
Nonprofits typically need to prepare financial statements such as the balance sheet, income statement, statement of cash flows, and statement of functional expenses. Additionally, nonprofits may be required to prepare a Form 990 or 990-EZ to report their financial information to the IRS.
How can nonprofit organizations ensure compliance with accounting and reporting regulations?
Nonprofits can ensure compliance by staying informed of the laws and regulations that apply to them, such as the IRS Form 990. They can also engage professional accountants or auditors to review their financial statements and ensure compliance.
How can nonprofit organizations manage their finances effectively?
Nonprofits can manage their finances effectively by creating a budget, regularly reviewing financial statements, and implementing internal controls to prevent fraud or errors. They should also ensure that their financial records are accurate, timely, and transparent.
How can nonprofit organizations use their financial information to make strategic decisions?
Nonprofits can use their financial information to make strategic decisions by analyzing their income and expenses, identifying trends and patterns, and evaluating their progress toward achieving their mission. They can also use financial information to identify areas for improvement and to make decisions about fundraising and program development.
What is the difference between unrestricted and restricted funds in nonprofit accounting?
Gifts that are unrestricted can be used for any purpose, but donations that are limited can only be used for the reason that the donor has stated. Restricted funds must be tracked separately by nonprofits, who must also guarantee that they are utilized solely for that purpose.
How does the fundraising process affect nonprofit accounting?
Accounting for nonprofits may be significantly impacted by fundraising. Donations, pledges, and other contributions must be tracked by nonprofits to make sure they are accurately represented in their financial accounts. They must also make sure that they adhere to all applicable laws and rules, including disclosure obligations, that pertain to fundraising.
What are some common financial challenges that nonprofits face?
Limited money, funding unpredictability, competition for donations, and regulatory compliance are a few major financial issues that NGOs deal with. Nonprofit organizations could also struggle with cash flow management, forecasting, and budgeting.
To summarize
Nonprofit accounting is a distinct area of finance. Understanding the fundamentals of accounting will help your nonprofit better understand its own financial status.
If your accounting tasks still fall under the purview of your executives, consider outsourcing your accounting to a business. They will assist in ensuring that all best practices and internal controls are implemented, resulting in smarter finances.
Frequently Asked Questions
What is the difference between non-profit and for-profit?
Nonprofits have a social goal, whereas for-profits attempt to provide valuable products and services to consumers while also generating revenue.
Can nonprofits sell products?
Nonprofits can undoubtedly earn from selling products if those operations are directly tied to the organization’s objective.
Do nonprofits pay taxes?
No, nonprofits do not have to pay taxes on donations received.
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