Guide to Nonprofit Bookkeeping & Best Answers to 11 Main FAQs

If you want to know more about Nonprofit Bookkeeping, this article is going to be very helpful.

It’s a comprehensive guide to not-for-profit bookkeeping that also answers some of the main FAQs you might have about the subject.

 

First things first…

You’ve just returned from your daily trip out to the mailbox to see what sort of goodies your postal carrier may have dropped off for you.

As you sort through the mail pieces there are the usual bills, circulars, advertisements, and then a request from a local charity that catches your eye.

You’ve always been one to give back to the community and this particular charity you have heard good things about.

You slit open the envelope and you read about needing financial support to help the hungry at Thanksgiving time.

With the mail piece in hand, you sit down at your computer, go online, and enter the charity’s website address.

It appears that they provide a much-needed service, and you decide to donate on their giving page.

As you’re filling out all of the information you think to yourself, I wonder what they do with the money?

Are they good stewards of the public money and how do they account for the money that they spend on services?

So being the business-minded person that you are your thought turns to accounting.

 

Importance of Accounting and Bookkeeping for Nonprofits

Accounting is an important component in the financial business dealings of any business or corporation.

The accounting department may be a cubicle of one or there may be separate bookkeepers and other financial clerks required.

The size of the accounting department is proportionate to the size of the budget, number of employees, and extent of the financial dealings of the business.

Some of the segregated duties of an accounting department could include accounts receivable, accounts payable, payroll, reports, etc.

For a nonprofit organization, accounting holds the same importance.

They rely on good accounting practices to be in place to properly record the donations received by their stakeholders and properly report those donations to their investors as dollars that are used to touch and change lives.

However, you would be hard-pressed to find the average accounting department of a nonprofit being extensively staffed.

As a nonprofit, they have to minimize their workforce and usually get by on providing services within the parameters of a shoelace budget.

Typically, a small nonprofit will have only one individual in the accounting department doing all of these various duties.

However, the smaller size of their financial department does not release them from following and demonstrating excellent accounting processes.

It could be argued that the exact opposite is true about their need to demonstrate accounting accountability because nonprofits are dependent upon the philanthropic giving of their supporters.

 

Personal Story

Today, supporters of charities are very involved with the organization that they select to support.

Their involvement is not only through their checkbook but rolling up their sleeves and helping others through the donation of their time and energy.

Their wallet is where their heart is.

Consequently, I learned the value of being on a nonprofit tour with several other individuals who were going through a leadership program within the city.

Many questions were asked of the executive director who was providing leadership to the charity work in our community.

Some great questions were asked. One of those great questions was about overhead.

The person asking the question had read that certain nonprofits had a large percent of the money donated was going to overhead costs.

Specifically, the salary of the executive director along with various other perks.

The director responded by saying that he had read something to that effect but was humbled to say that his organization had a five-star rating from Charity Navigator.

The director shared that their administrative expenses were roughly between 10 and 12% of the total budget.

It was obvious that mostly everybody was impressed with that response. The others may have gone to the Charity Navigator website to double-check the accuracy.

The acceptable range for administrative costs for a charity can be from 20% to 35%.

Therefore, because the donor of today is more connected, questions are raised, and rightfully so.

Questions about overhead costs, salaries, the effectiveness of the donated dollar, and accounting practices are expressed by the donor who cares from their heart and wallet.

 

More about Nonprofit Bookkeeping

The average bookkeeper in a nonprofit is a dedicated, knowledgeable, and hard-working volunteer or staff member within the nonprofit.

Their pay is usually low, and their reward is also realized through their perception of making a difference in the lives of others.

The policies and procedures that are in place are strictly adhered to with oversight by on-site management, community board members, and annual audits.

The stakes are extremely high to ensure financial accountability.

The primary reason being to honor the trust of the individual contributing to the cause.

If that trust is broken or compromised, the devastating repercussions would be the decision of individuals not to support the organization.

Nonprofit bookkeeping is no different than the demands placed on multi-million dollar businesses with a cadre of financial employees.

The concept or the goal is to provide the honest handling, accounting, and reporting of finances.

 

11 Most Common Nonprofit Bookkeeping FAQs and Best Answers

 

1. What internal controls are in place to manage donations?

The answer provided by the nonprofit bookkeeping department should include assurances that they have internal controls in place.

The response should include talk about the daily mail being opened by two individuals and those two individuals signing off on the contents of those mail pieces.

Also, reference to policies that are strictly adhered to when money is counted, and documents produced to match bank statements and deposits made.

 

2. How do you segregate the duties of your staff to ensure accountability?

The response from the non-profit bookkeeping department should include assurances that they have policies and procedures in place to ensure the proper handling of financial resources.

For example, a procedure is in place and followed in which two individuals open the mail together and sign off on the contents of the letters.

Additionally, the handling of any donations by walk-in donors should necessitate an individual being called to join another individual in receiving that money.

In all instances, a receipt for the cash donation should be offered to the customer and signed by both individuals.

Another critical aspect of financial operations should be a process in which two signatures are required in the issuing of checks.

These internal controls are check for adherence during audits and by the executive director on a more regular basis.

 

3. Do you use an accounting software program?

An efficient bookkeeper will answer that indeed they do have a sophisticated accounting software program that they are utilizing.

The software program will include the recording of income and expenses and be able to generate several needed reports to ensure that the not-for-profit business is running smoothly and efficiently.

Some of those reports include income and expense, profit and loss, bank statements, accounts receivable, accounts payable, etc.

Generally, these reports are reviewed by the executive director with oversight from the advisory board or board of directors.

Some larger nonprofits most likely are using their accounting software specifically designed for their operation.

Also See: How to Save $10,000 in a Year & How to Save $3,000 in 3 Months.

 

4. Do you operate under an annual budget?

The answer to this question should be most definitely yes and if the donor wishes to receive a copy of that budget, they are entirely within their rights to request a copy.

The uniqueness of a nonprofit budget is that their clients or customers are not charged for services.

Therefore, a nonprofit relies heavily upon the charitable contributions and charity of its donors to make sure that they have the needed financial resources to provide the services required.

 

5. What are your overhead or administrative fees?

This is an extremely important question to ask the bookkeeping department and the executive director.

This is because the average donor does not want the majority of their donated monies to be spent on overhead, salaries, administrative fees, and fundraising efforts.

The bookkeeping department through management will provide this percentage and how the percentage is derived.

Also See: How to Get Paid to Name Companies and Best Value Investing Books.

 

6. Do you publish an annual report?

The most reputable not-for-profit does indeed publish an annual report.

This annual report includes all of the services that they rendered, their mission statement, vision, budget, a letter from the executive director, the chairman of the board, etc.

Usually, this annual report is made available to the public when the not-for-profit holds their annual report meeting which is open to the public and their stakeholders.

 

 

7. Do you have a governing board?

A well-structured nonprofit has either a board of directors or an advisory board.

These boards are usually representatives from the local community and as such have a stake in the way that the charity is being run and how the funds from the community are being utilized.

These boards meet every month and various committees meet within the month to discuss pertinent information and then report back to the board as a whole.

Some of those various committees include a finance committee, property committee, service delivery committee, etc.

 

8. Are your finances audited?

A reputable not-for-profit will have an annual audit conducted on their finances and often, on the services that they provide.

Some nonprofits have significant budgets because they take grants from the government.

If a certain threshold of a received grant is reached, then the government requires that an outside audit be conducted on the finances.

However, in some instances, a not-for-profit does not reach that threshold and often will have an audit done internally or by a local auditor.

Also See: How to Make Money and Get Rich with Dividends.

 

9. What accounting policies do you follow?

The answer to this question is that you want to hear the bookkeeping department say that they follow Generally Accepted Accounting Practices (GAAP).

If an audit is done by a CPA firm, a formal report of the audit will be delivered not only to the executive officer but the board chair.

Additionally, the auditor will provide a summary letter which would outline any deviations of generally accepted accounting practices, and also in the auditing package will include the financial statements and a summary of the financial condition of the not-for-profit.

 

10. Are my gifts tax-deductible?

According to IRS policies and procedures a charity that has a designation of 501 (c) (3) is recognized by them as a charity.

Therefore, any donations given to the charity with an expectation of nothing in return can be used as a tax deduction for the individual.

A reputable not-for-profit will generate a giving report to the individual that reflects their financial support for the year.

This amount reflected can be entered into a person’s tax form as part of a possible deduction.

 

11. How do you handle gifts in kind?

If a donor has donated to the charity any items other than cash, the charity categorizes these items as gifts-in-kind.

Generally, when a gift in kind is donated to the charity the receiving not-for-profit will provide a receipt indicating that the donation was made of items.

Some of those items could include clothes, shoes, household goods, etc.

The charity does not put a value on these items. It is up to the individual to claim assign a value on those items and indicate accordingly when they file their tax return.

Of course, any significant overage of the donor’s valuation of the worth of the gift-in-kind possibly might be brought into question by the IRS.

 

Conclusion

The beauty of accounting and bookkeeping is the reality of accuracy. One plus one will always equal two regardless of where the math is performed.

In our communities, there are selfless individuals who work day after day.

They are making a difference by serving others even though they are using accounting software or a 10 key calculator.

Therefore, thanks to the donor for their checks and their check-up questions to strengthen the philanthropic work of charities.