Nonprofit accounting is the process through which nonprofit organizations plan their financial transactions, record, and report them over time. When it comes to nonprofit accounting, accountability to the donor is everything that matters. That is to say, nonprofits do not have the same accounting procedure and requirements as those of for-profit organizations. In fact, nonprofit accountants must follow specific rules determined by the Internal Revenue Service (IRS) and their states.
The unique way nonprofits have agreed on doing accounting is fund accounting. Fund accounting helps nonprofit organizations split their money into different groups of funds to organize them and ensure they are spent where the donor desires. Donors have the right to restrict their gifts. If a donor says their donation must be used on a specific program, the accountant will immediately move that money to the correct fund to ensure it is not used unlawfully.
This article discusses the steps to performing nonprofit accounting and the 10 best nonprofit accounting software to choose from.
The 8 Steps to Doing Accounting for a Nonprofit
Nonprofit accountants are highly trained. They will help walk your nonprofit organization through the process they follow. But here are a few things nonprofits should do to remain on the right financial track and ensure IRS compliance.
1. Start bookkeeping
Nonprofits can start bookkeeping manually with Excel or with additional software. Regardless of how your nonprofit records transactions, your bookkeeping must include:
- A record of revenue from cash donations, in-kind gifts, etc.
- A record of expenses
- Petty cash
- Accounts receivable
- Accounts payable
2. Decide between cash vs. accrual
The two forms of nonprofit accounting are cash and accrual.
The cash method is easier and may make more sense to non-accountants. It reports revenue and expenses when they received the money. But there is also a better chance of error with the cash method, and it does not account for in-kind donations.
The accrual method is a more common accounting process because it focuses on when they earned the revenue instead of when they received the money. The accrual method is standard practice in GAAP.
Your state may also require your nonprofit organization to follow the accrual method, so do your due diligence when researching state requirements.
3. Open a separate bank account
If you’re starting a nonprofit, you must start a separate bank account for the organization. You must never use your personal account to hold or spend money for your nonprofit. Many banks offer customized nonprofit accounts.
4. Reconcile accounts
Nonprofits must reconcile their accounts at the end of each month to provide their board with updated financial information. Below are some tips to make it easier.
- List deposits and withdrawals.
- Enter bank balance in one column and expected balance in another.
- Compare deposits.
- Verify these match your bank statements.
- Find outstanding balances and determine why.
- Do the same for withdrawals.
5. Start using purchase orders
Purchase orders are records between a purchaser and vendor that confirm a transaction. Nonprofits that use purchase orders will record exactly where and how they spent the money.
6. Learn how to record in-kind donations
In-kind items and services are difficult to record, but the IRS has created rules to follow that make the process easier.
When recording in-kind products or services, you must research the fair market value for each gift and record that amount when including these gifts in your reports. If a gift is valued at over $5,000, you should get the gift formally appraised.
7. Start making budgets
Finally, your organization can start making budgets before holding any fundraising events or campaigns.
When creating budgets for fundraisers or programs, you’ll need to determine your nonprofit’s financial goals and include realistic expense amounts for these goals. You’ll also need to include your expected income sources.
8. Choose an accounting software
Finally, a nonprofit accounting software is what you’ll need to keep note and track of all the steps you’ve taken before. Nonprofits need not worry as most software or online platforms these days want to provide special discounts to registered nonprofit organizations. Likewise, the top nonprofit accounting software in the market have specific features to help you with MIP fund accounting, donation tracking, grant, cash, or revenue management, and more.
In our next section, we give you a list of some of the best accounting software for nonprofits that have stood out to us for their features, integrations, nonprofit pricing, and more.
10 Best Nonprofit Accounting Software
These 10 accounting software for nonprofits are some of the best in the market, chosen and successfully used by nonprofits across the world. Read on for their features, pricing, what stands out, and more. These nonprofit accounting software options should help you choose the right one for your organization.
1. QuickBooks for Nonprofit
QuickBooks is the most popular fund accounting software for nonprofits. It can make your fund accounting simple and manageable. They provide discounted pricing for nonprofits. Organizations can use this software for invoicing, bookkeeping, tracking donations, and all other accounting needs. You can also connect your bank account and very easily track cash flows.
QuickBooks will also help you remain compliant with the IRS through reporting. You can set up automatic reports and use them any time you want.
As your nonprofit continues to grow, you can upgrade to QuickBooks Enterprise Nonprofit to achieve more – store and access donor information, vendors, and items. QuickBooks Enterprise does make your financial work a lot easier than you would think. It provides you with customizable reports, priority customer service, easy transfer of data to IRS forms, and more.
You can also use QuickBooks Enterprise accounting software to track your grant information effectively.
QuickBooks and Donorbox integration
Donorbox makes donation tracking on QuickBooks an absolute breeze! You can have your donations and donor data synced on both systems in 2 simple ways – 1. using Stripe with Commerce Sync and 2. using Zapier.
To connect Donorbox to your QuickBooks account using Stripe with Commerce Sync, you must have your Donorbox account linked to Stripe. You can easily activate the connection between Commerce Sync and Stripe and then, from Commerce Sync you can log in to your QuickBooks account and authorize the sync of data. After that, all your Donorbox donations data will be automatically logged in to QuickBooks Online, as shown below. Here’s the detailed step-by-step guide on connecting Donorbox and QuickBooks using Stripe with Commerce Sync.
To connect Donorbox to your QuickBooks account using Zapier, you need to activate the Zapier integration on the Donorbox dashboard. You’ll get an API key and then, you can log in to Zapier and choose Donorbox as your trigger app and QuickBooks Online as your action app. This way, you can sync your donors and donations data between Donorbox and QuickBooks. Read the thorough step-by-step guide to get a better insight and get started now.
After the sync of donor and donations data between both systems, this is how it will look like on your QuickBooks account –
2. Aplos Nonprofit Accounting Software
Aplos advertises itself as an accounting software made specifically for nonprofits. Their fund accounting software makes accounting easy for nonprofits.
Aplos provides the following features:
- Balance sheets by fund
- Income statements by fund
- Form 990 Reports
- Form 990-N & 990EZ Filing
- Creates and sends invoices and tracks payments
- Includes recurring transactions and donations
- Online Event Ticket Sales
- Pledge Tracking
- Email and Letter Builder
There is a 15-day free trial, and their starting package is $39.50/month.
3. Sage Intacct
Sage Intacct is a nonprofit accounting software based entirely in the cloud. This means nonprofits can access their financial information from anywhere. In addition to basic accounting features like a general ledger and cash management, Sage Intacct also offers an automated fund, grant, revenue, and billing process. They also include easy-to-use reporting and dashboards to make auditing more accessible and cheaper.
The cost for this fund accounting software depends on the size of your accounting team and needs. You can contact the Sage Intacct team for the pricing by filling out a form on the website.
Your fund accounting can be made easy with Accufund and its several useful features. Accufund provides solid financial management along with:
- Grant management
- Human resources management
- Budget development
- Loan tracking
- Automations workflow
Accufund is another cloud-based nonprofit accounting software that also includes third-party integration capabilities. With affordable prices and accessibility from anywhere, nonprofits have first-rate accounting, human resources, and fundraising features.
Accufund sells its products through US resellers. These resellers provide customized packages, training for nonprofit staff, and work to implement the accounting software with your current system.
Xero is one of the most affordable nonprofit accounting software on this list. Nonprofits using this accounting software can track and pay bills, connect the system automatically to their bank, and view all activities on Xero’s dashboard.
Xero also allows nonprofits to share all reports with board members, volunteers, and donors, pay staff online with Gusto, and access financial details from anywhere with their accounting app.
Xero’s packages start at $12 a month. Registered nonprofits can sign up for a 30-day free trial and receive 25% off all Xero packages. Organizations can cancel with only one month’s notice if the accounting software is not a good fit.
6. Blackbaud Financial Edge NXT
On the other end of the financial sector is Blackbaud Financial Edge NXT. This nonprofit accounting software has a reputation for excellence in the nonprofit world with its database software, Raiser’s Edge. Their accounting software has services for all types of nonprofits. Blackbaud Financial Edge NXT’s features include:
- Payment services
- Financial management
- Grant and award management
- Program and mission delivery
- Fundraising and relationship management
The price for this fund accounting software depends on your organization’s needs. Nonprofits can contact Blackbaud for pricing and a customized demo.
Araize accounting software was created for nonprofits, and its features offer everything a nonprofit needs. With packages starting at $42 a month and no setup fee, most organizations can afford this software.
Araize features include:
- FASB compliant financial statements
- IRS form 990
- Automated recurring entries
- Automated reversing entries
- Data import
- Bank reconciliation
- Duplicate search and merge
- Automatic fund balancing
- Project revenue and expense tracking
- Audit trail
Nonprofits can cancel Araize at any anytime if this accounting software does not work for their organization.
If you’re looking for an accounting software specifically for nonprofits and MIP fund accounting, Nonprofit+ is the one for you! Nonprofit+ is accounting software for nonprofit organizations to help them with fund accounting, restricted fund management, grant, and donor management. They also provide features like cash management and reporting.
The pricing is also designed for nonprofits and you can request a quote on their website.
9. Money Minder
Volunteer-run organizations don’t always need the same bells and whistles as other nonprofits. Money Minder has created a fund accounting software targeted toward these smaller organizations and doesn’t offer too much or too little.
Money Minder features help nonprofits:
- Create a budget
- Track expected and actual activity costs
- Keep an accurate record of receivables
- Integrate with a bank account, PayPal, or Square
- Create easy to read reports
- Reconcile bank accounts
- Maintain contact information
- Stores forms
- Access financial accounts from anywhere
- Accept online payments
Another feature that stands out with this nonprofit accounting software is the ability to track volunteer time by individuals or events.
Money Minder offers free packages that help you create a budget, and manage memberships and calendars. Their Pro package includes all features and costs $179 a year.
10. Cougar Mountain Software
Cougar Mountain Software has dedicated nonprofit accounting software to help nonprofits with fund accounting. Nonprofits can purchase this software as an on-site or cloud-based system. Transparency and security are a primary focus of this software, and its features include:
- General Ledger Module
- Bank Reconciliation Module
- Accounts Payable Module
- FASB and GAAP compliant reports
- Controller Module
- Tamper-proof Audit Trail
This nonprofit accounting software also offers grant and donation management and additional fundraising tools. Nonprofits can sign up for a 60-day free trial and get 2 hours of training and support before paying a dime. After the free trial, pricing depends on your nonprofit’s needs. Training is required to get the most out of the Denali software, and the company offers up to 24 hours of online and on-site training.
Nonprofit accounting does not have to be overwhelming. This blog will help you get started with insights on accounting statements, rules, steps, nonprofit accounting software names, and more. You must also check out the IRS website for more detail on nonprofit accounting and seek external consultants‘ help if the need be.
Check out Donorbox, the simple-to-use, affordable, and powerful solution for online fundraising. 50,000+ nonprofits worldwide have used our tool to boost donations and effectively manage their donors. Our features include Crowdfunding, Peer-to-Peer fundraising, Text-to-Give, Memberships, Events, Recurring Donations, and more.
Do you think expert coaching will help boost your fundraising efforts? Let us help you with that! Donorbox Premium comes with fundraising coaching, a dedicated account manager to help you along the way, high-performance tools, and priority support.
To read more tips and resources on nonprofit management and fundraising, visit the Donorbox Nonprofit Blog. Subscribe to our newsletter to receive a list of our best resources in your inbox every month.
Frequently Asked Questions on Nonprofit Accounting (FAQs)
1. How is nonprofit accounting different from for-profit accounting?
For-profit accountants focus on earning a profit for their shareholders. Nonprofit accountants, on the other hand, are limited to planning, recording, and reporting a nonprofit’s finances. The primary reason for this is something called non-distribution constraint. The IRS has strict rules that say nonprofits cannot send excess revenue to their leaders.
2. Are nonprofit accounting and bookkeeping the same?
Nonprofit bookkeepers are responsible for recording the daily financial information of your organization. Generally, bookkeepers include recording donations, processing payroll, allocating expenses, writing checks, making deposits, etc.
Nonprofit accountants are there to review the bookkeeper’s work and ensure that the organization understands and follows the rules put in place by the IRS. A nonprofit accountant will often have to perform these actions: Review accounts, understand the purpose behind decisions, prepare reports, prepare for an audit, file Form 990, reconcile accounts, and ensure GAAP standards are met.
3. What are the nonprofit accounting rules?
The Financial Accounting Standards Board (FASB) has created a series of Generally Accepted Accounting Principles (GAAP). These rules include –
- Principles of regularity – This principle reiterates that all accountants have agreed to these rules and regulations.
- Principle of consistency – The principle of consistency supports the agreed-upon standards by ensuring accountants use them across the entire financial report process.
- Principles of sincerity – The principle of sincerity is a pledge accountants have made to accuracy and impartiality.
- Principle of permanence of methods – The principle of permanence of methods ensures all financial reports are consistent and based on past reports.
- Principle of non-compensation – The principle of non-compensation states that all aspects of the nonprofit are fully reported and transparent.
- Principles of prudence – This principle adds to transparency by stating that all financial information should be fact-based.
- Principle of continuity – When determining the value of a nonprofit, this principle states that the nonprofit’s operations will continue.
- Principles of periodicity – The principle of periodicity states that nonprofits must report the revenue during the annual or fiscal year in which it was received.
- Principle of materiality – This principle restates that accountants must disclose all financial data and fully reveal the organization’s monetary situation.
- Principle of utmost good faith – The final principle works under the assumption that all parties are acting honestly.
4. What are the nonprofit accounting statements?
Nonprofits must file Form 990 with the IRS each year to remain tax-exempt. The IRS requires nonprofits to include 4 financial statements with this form. FASB 117 gives nonprofit accountants standards to follow when filing these documents.
The following financial statements must be provided and updated each year to remain in compliance with the IRS.
- Statement of financial position – The statement of financial position is also known as a nonprofit balance sheet. This financial statement shows the financial health of a nonprofit by listing its assets, liabilities, and net assets.
- Statement of activities – A nonprofit’s statement of activities breaks down the organization’s revenue and expenses over time. The reason nonprofits use this is to review any changes in their organization’s net assets from the beginning of the year to the end. Organizations can also use this statement to categorize different revenue sources and expenses.
- The statement of cash flow – The statement of cash flow shows how cash moves in and out of the organization. This document helps nonprofit leadership and accountants see how much is available to spend on expenses and breaks it down into activities like operating activities, investing activities, and financing activities.
- Statement of functional expense – The statement of functional expense provides further details on how funds were spent. Nonprofits must include the natural and functional classifications of their expenses.