10 Apr 5 Essential Accounting Practices for Nonprofits to Keep Their Finances on Track

Nonprofit organizations play a critical role in our society by working towards charitable, educational, religious, and other socially beneficial goals. As with any other organization, nonprofits must maintain accurate financial records and comply with accounting standards, grant management and evaluation, and program development.

Here are five accounting practices for nonprofit organizations:

1. Segregate Expenses and Revenues

It is essential for nonprofit organizations to segregate expenses and revenues based on their functional categories such as program expenses, fundraising expenses, and administrative expenses – and document how expenses relate to grants as well. This will allow the organization to better understand the costs of running their programs and the effectiveness of their fundraising efforts as well as show funders how dollars are utilized. Proper segregation of expenses and revenues also ensures that the organization complies with the tax laws and make an easier evaluation process.

2. Implement Effective Internal Controls

Nonprofit organizations must implement effective internal controls to prevent fraud and errors. The organization must have clear policies and procedures for financial transactions, and ensure that employees, volunteers, and vendors are aware of them. The organization should also establish segregation of duties to ensure that no one person has complete control over a transaction. In addition, having an internal review or an outside organization review funds used from grants ensures an accurate reporting to funder as well.

3. Accurate and Timely Recording of Financial Transactions

Nonprofit organizations must ensure that all financial transactions are accurately and timely recorded. This includes all income, expenses, and assets. The organization must also reconcile bank accounts, credit cards, and other financial accounts on a regular basis. This will enable the organization to produce accurate financial statements for its stakeholders. We suggest monthly reporting and evaluation.

4. Use Accrual Accounting

It’s recommended that nonprofit organizations use accrual accounting rather than cash accounting to provide a more accurate picture of the organization’s financial health. Accrual accounting recognizes revenue and expenses when they are incurred rather than when cash changes hands. This ensures that the organization’s financial statements reflect its economic activities accurately.

5. Hire Qualified Experts / Consultants

Nonprofit organizations should consider hiring a qualified accountant, program manager or specialist to oversee accounting practices. A professional can provide expert advice on accounting standards, tax laws, evaluation and financial reporting. They can also help the organization establish and maintain effective accounting policies and procedures.

Nonprofit organizations must maintain accurate financial records and comply with funders, accounting standards and board review to ensure accountability and transparency. By implementing these accounting practices, nonprofit organizations can ensure that they have a solid financial foundation to achieve their charitable, educational, or social goals.