6 of the Best Accounting Practices for Nonprofit Organizations

non profit

Nonprofit organizations play a crucial role in society. However, their financial operations can be complex, with multiple sources of funding, grants, donations, and expenses. Nonprofits must ensure their accounting practices are sound and transparent to maintain public trust and comply with legal and regulatory requirements. 

This article will outline several accounting practices nonprofits can implement to achieve fiscal responsibility and transparency.

1. Establish a Chart of Accounts

A chart of accounts contains all the accounts that categorize and organize financial transactions. It is a fundamental tool that allows nonprofits to accurately track and report their financial activities. A chart of accounts should include revenue, expenses, assets, liabilities, and equity categories. 

Nonprofits can customize their chart of accounts to reflect their specific needs and activities. By establishing a chart of accounts, nonprofits can quickly generate financial statements, track their budget, and comply with reporting requirements.

2. Separate Bank Accounts

Maintaining separate bank accounts for different funding sources, such as donations, grants, and earned income, ensures that funds are allocated correctly and avoids the commingling of funds, which can raise legal and ethical issues. 

A separate bank account for the nonprofit’s operating expenses may also be necessary to help them track their cash flow and prevents overspending.

3. Track Restricted Funds

A specific purpose, such as a grant or donation, is covered by restricted funds. Nonprofits must track and manage these funds separately from unrestricted funds to ensure compliance with donor requirements and legal regulations. 

These funds should be recorded in the accounting system and identified in financial statements, so donors can see how their funds are used. Nonprofits should also have a clear policy on using restricted funds and ensure they are spent for the intended purpose.

4. Implement Internal Controls

These are policies and procedures that ensure the accuracy and credibility of financial information and prevent fraud and errors. Implementing internal controls can safeguard the nonprofit’s assets, maintain financial records, and comply with regulations. 

Internal controls may include processes such as the segregation of duties, approval processes, and regular audits. Through their implementation, nonprofits can mitigate financial risks and demonstrate their commitment to transparency and accountability.

5. Maintain Accurate Records

When it comes to tracking financial activities, preparing financial statements, and complying with reporting requirements, maintaining accurate financial records is a must for any nonprofit. They must maintain complete and accurate records of all financial transactions, including receipts, invoices, and bank statements. This includes reconciling bank accounts regularly and keeping backup copies of financial data. 

By maintaining accurate records, nonprofits can avoid errors, detect fraud, and demonstrate compliance with legal and regulatory requirements.

6. Prepare Financial Statements

Financial statements are reports that summarize a nonprofit’s financial activities and performance. It is imperative for nonprofits to prepare financial statements regularly, such as monthly or quarterly, to track their budget, cash flow, and fundraising activities. 

A financial statement may include an income statement, balance sheet, and statement of cash flows. These statements provide donors, grantors, and other stakeholders with valuable information about the nonprofit’s financial health and sustainability.

In Summary

Nonprofits play a vital role in society, and their financial operations must be transparent and accountable. Establishing a chart of accounts, separating bank accounts, tracking restricted funds, implementing internal controls, maintaining accurate records, and preparing financial statements can ensure that the financial activities of nonprofits are accurate, reliable, and compliant with legal and regulatory requirements. Doing these can also help build public trust, attract donors, and achieve their mission.

At Ash CPA, we understand the unique challenges and opportunities that nonprofits face. We have some of the best CPAs who can assist nonprofits with financial management, compliance, and reporting. Call us at (617) 462-6651 to book your free consultation!