Disclaimer: Please note this article is not financial advice. The purpose of our blog is purely educational, so please consult a professional accountant or financial advisor before making any financial decision.
As a nonprofit organization, you don't aim to earn a profit. Instead, you work with a motive to serve the general public—whether it be educational, religious, charitable, or scientific purposes. That being said, not working after profit doesn't exempt you from the challenges of bookkeeping and accounting.
You will still get some money running within the organization, which usually comes from donations, memberships, or grants. As a result, you still need to organize and meet some financial management regulations, albeit differently.
Nonprofit accounting is different from for-profit accounting. Some specific tools and practices cater to the needs of nonprofit organizations like yours. They are designed to manage the donations, payroll services, and financial statements you receive.
But with these numbers driven by service motive, is it really necessary to use accounting software for nonprofits? If so, what should you be using then? This article will discuss why you should consider using one and how you can make the most out of it.
Nonprofit Accounting Is Different, But Why You Need a Software Remains the Same
As briefly mentioned, nonprofit accounting works differently than businesses. The accounting method, tax compliance procedures, and types of financial documents differ from what authorities would require for a for-profit. However, if we talk about why you need to use software, it all goes down to the same reasons.
- Since you have various sources of income, it can be overwhelming and confusing to manage. Getting these data mixed up can cause financial troubles, particularly when following certain reporting protocols.
- Large and growing nonprofit organizations have increasing volumes of data, which can be difficult to manage manually.
- It's tricky to juggle different tracking and recording apps or methods for each source of revenue. You need to sync data and integrate apps to make the work easier.
- Some days, you or someone from your accounting staff might get sick and be unable to show up in the office. If such a day happens to be reporting day, it will be difficult for you to comply on time.
An Overview of How Nonprofit Accounting Works
Accounting for nonprofit organizations is an interesting study. As we stated, it doesn't work the same as regular accounting because its motive is to serve the community rather than earn a profit. Government authorities understand this and have made concessions in tax regulations, accounting methods, and financial statement requirements.
Here is a basic guide on how nonprofit accounting works.
The Preferred Accounting Method
Nonprofits usually choose between cash and accrual accounting. Cash-based accounting records cash upon receipt and expenses when they're actually paid. Generally, it works for small nonprofit groups only. Meanwhile, accrual-based accounting focuses on the revenue's incurrence rather than the actual payment date. As a result, it's the ideal method for larger nonprofits with multiple sources of funds.
Here's a quick example: a financial contract is set up in January, but the payment was done or received in March. If you're using cash-based accounting, you'll record the expense in March. On the other hand, you'll record it in January if your method is accrual accounting.
Nonprofits also work and generate financial reports that are different from businesses. Some of the most common reports are:
- Statement of financial position - the balance sheet for nonprofits that outlines your company's liabilities, assets, and debts.
- Net assets - variables that help you determine your organization's financial health.
- Statement of activities - shows the different income sources and expenses.
- Cash flow statement - shows cash movement in and out of the organization.
- Nonprofit budget - a document that contains the list of the predicted costs and revenue over a certain period.
- Statement of Functional Expense - list of funds you spend for different functions (e.g., administrative or fundraising).
- Form 990 - the required annual tax for tax-exempt organizations.
Nonprofits apply for a tax-exempt status using Form 1023. The authority (IRS or CRA) then decides whether your organization qualifies as charitable. Once you are officially tax-exempt, you don't have to pay federal income taxes and even property and sales taxes.
However, you need to pay for an annual tax return. You will still report your revenue and expenses to the tax authority. To pay for the annual tax return, you must file and submit a Form 990 on the designated payment schedule.
What Are Some of the Best Accounting Software for Nonprofits?
As a nonprofit, accounting software can be extremely helpful in managing funds from different sources. Hence, it's necessary to find the right tool for your specific needs. Here's a list of the top 4 accounting software for nonprofits and an overview of their perks.
- User-friendly, also made for non-accountants
- Fund accounting feature
- Mobile accounting app for quick tracking and management
- Donation tracking feature
- Multi-user and currency features
- Fund accounting software feature
- Multi-currency and location feature
- Donation tracking and management feature
- More specific to nonprofits (e.g., churches)
- Fund accounting and donation tracking feature
- Nonprofit tax forms preparation
- Campaign management feature
- Fundraising software
- Customizable tools for donor and donation management
- Affordable cost
- Simultaneous remote access
Unloop Believes AI and Human Intelligence Makes a Perfect Combination
Nonprofit accounting can be tricky. You have to keep track of different sources of income—all the while staying compliant with the regulations. Fortunately, accounting software for nonprofits in Canada, the USA, and other countries worldwide is a good way to manage these tasks with minimal error (and stress).
While the market offers many promising options, you only need to find one that caters the most to your needs. At Unloop, we believe in the perfect combination of AI and human accounting. With AI handling all the data entry and bookkeeping for nonprofits, it leaves more time for us bookkeepers and the accountants we work with. As a result, we can focus more on complex analysis and provide critical insights for your business.
Give us a call and work with us today.