{"id":27696,"date":"2025-02-04T09:00:00","date_gmt":"2025-02-04T14:00:00","guid":{"rendered":"https:\/\/www.sage.com\/en-us\/blog\/?p=27696"},"modified":"2025-04-24T10:54:23","modified_gmt":"2025-04-24T14:54:23","slug":"best-practices-in-nonprofit-accounting-a-complete-guide","status":"publish","type":"post","link":"https:\/\/www.sage.com\/en-us\/blog\/best-practices-in-nonprofit-accounting-a-complete-guide\/","title":{"rendered":"Best practices in nonprofit accounting: A complete guide"},"content":{"rendered":"<header class=\"entry-header has-dark-background-color entry-header--has-illustration entry-header--has-illustration--generic\">\n\t<div class=\"container\">\n\t\t<div class=\"entry-header__row row align-center\">\n\t\t\t<div class=\"col col-lg-7 col-xlg-6 entry-header__content\">\n\t\t\t\t\t\t\t<div class=\"component component-single-header\">\n\t\t\t\t\t\t\t\t\t\t<div class=\"entry-header__misc text--subtitle text--uppercase text--small\">\n\t\t\t\t\t\t\t<a href=\"https:\/\/www.sage.com\/en-us\/blog\/category\/money-matters\/\" class=\"entry-header__link\">Money Matters<\/a>\t\t\t\t\t\t<\/div>\n\t\t\t\t\n\t\t\t\t<div class=\"entry-title-wrapper\">\n\t\t\t\t\t<h1 class=\"entry-title\">\n\t\t\t\t\t\tBest practices in nonprofit accounting: A complete guide\t\t\t\t\t<\/h1>\n\t\t\t\t<\/div>\n\n\t\t\t\t\t\t\t\t\t<p class=\"entry-header__description\">\n\t\t\t\t\t\t\t\t\t\t\t<\/p>\n\t\t\t\t\n\t\t\t\t\n\t\t\t\t\n\t\t\t<\/div>\n\n\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t<\/div>\n\t<div class=\"single-post-details container\">\n\t\t<div class=\"col\">\n\t\t\t<span class=\"posted-on \"><time class=\"entry-date published\" datetime=\"2025-02-04T09:00:00-05:00\">February 4, 2025<\/time><\/span><span class=\"reading-time\"> min read<\/span>\n\t\t<button\n\t\t\ttype=\"button\"\n\t\t\tclass=\"social-share-button button button--icon button--secondary js-social-share-button\"\n\t\t\tdata-share-title=\"Best practices in nonprofit accounting: A complete guide\"\n\t\t\tdata-share-url=\"https:\/\/www.sage.com\/en-us\/blog\/best-practices-in-nonprofit-accounting-a-complete-guide\/\"\n\t\t\tdata-share-text=\"Please read this interesting article\"\n\t\t>\n\t\t\t<span class=\"social-share-button__share-label\">Share<\/span>\n\t\t\t<span class=\"social-share-button__copy-label\" hidden>Copy Link<\/span>\n\t\t\t<span class=\"social-share-button__copy-tooltip\" aria-hidden=\"true\" hidden>Copied<\/span>\n\t\t<\/button>\n\n\t\t\t\t<\/div>\n\t<\/div>\n<\/header>\n\n\n<div class=\"wp-block-post-author has-dark-background-color alignfull\">\n\t<div class=\"container\">\n\t\t<div class=\"col\">\n\t\t\t\t\t\t\t<div class=\"co-authors\">\n\t\t\t\t\t\n\t\t<div class=\"entry-author-wrapper\">\n\t\t\t<a class=\"entry-author\" href=\"https:\/\/www.sage.com\/en-us\/blog\/author\/elizabethryan\/\">\n\t\t\t\t<img loading=\"lazy\" decoding=\"async\" width=\"40\" height=\"40\" src=\"https:\/\/www.sage.com\/en-us\/blog\/wp-content\/uploads\/sites\/2\/2024\/08\/lizryan-350x350.png\" class=\"entry-author__image\" alt=\"Elizabeth Ryan\" \/>\t\t\t\t<span class=\"entry-author__name\">Elizabeth Ryan<\/span>\n\t\t\t<\/a>\n\n\t\t\t\t\t<\/div>\n\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t<\/div>\n<\/div>\n\n\n\n<p>The world of nonprofits is driven by passion and purpose, with every organization striving to make a difference. <\/p>\n\n\n\n<p>But alongside your dedication to causes and communities comes the essential task of managing finances effectively. <\/p>\n\n\n\n<p>That\u2019s where your role in nonprofit accounting becomes critical\u2014not just for keeping things running smoothly, but for ensuring transparency and building trust with donors and supporters.<\/p>\n\n\n\n<p>The truth is, most people join nonprofits to focus on advancing the mission, not to get tangled in bookkeeping, compliance rules, or financial reporting. <\/p>\n\n\n\n<p>But these financial elements are the backbone of any successful organization. They\u2019re what keep everything accountable, build donor confidence, and make sure resources are used wisely.<\/p>\n\n\n\n<p>The good news? <\/p>\n\n\n\n<p>With the right nonprofit accounting software these tasks become much simpler, giving you more time to focus on what really matters: making a difference.<\/p>\n\n\n\n<p>Here&#8217;s what we&#8217;ll cover:<\/p>\n\n\n<?xml encoding=\"utf-8\" ?><div class=\"wp-block-yoast-seo-table-of-contents yoast-table-of-contents\"><ul><li><a href=\"#what\" data-level=\"2\">What is nonprofit accounting?<\/a><\/li><li><a href=\"#how\" data-level=\"2\">How is nonprofit accounting different?<\/a><\/li><li><a href=\"#nonprofit\" data-level=\"2\">Nonprofit accounting standards<\/a><\/li><li><a href=\"#basics\" data-level=\"2\">Nonprofit accounting basics<\/a><\/li><li><a href=\"#best\" data-level=\"2\">Best practices in accounting for nonprofit organizations<\/a><\/li><li><a href=\"#choose\" data-level=\"2\">How to choose the best nonprofit accounting software<\/a><\/li><li><a href=\"#evaluate\" data-level=\"2\">How to evaluate software based on your organization&#8217;s size and needs<\/a><\/li><li><a href=\"#simplify\" data-level=\"2\">Simplify nonprofit financials with accounting software<\/a><\/li><li><a href=\"#faq\" data-level=\"2\">FAQs about nonprofit accountin g<\/a><\/li><\/ul><\/div>\n\n\n\n<div class=\"wp-block-buttons is-layout-flex wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button\"><a class=\"wp-block-button__link wp-element-button\" href=\"#gate-00008083-d376-4e58-9b85-32535d417557\">Download your free Nonprofit Accounting Software Buyers guide<\/a><\/div>\n<\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"what\"><strong>What is nonprofit accounting?<\/strong><\/h2>\n\n\n\n<p>Before diving into the how-to of nonprofit accounting, it\u2019s important first to understand what it\u2019s all about. <\/p>\n\n\n\n<p>Nonprofit accounting is tailored to meet the unique needs and regulatory requirements of mission-driven organizations like yours.<\/p>\n\n\n\n<p>At its core, the main goal of accounting for nonprofits is to ensure transparency and accountability to stakeholders\u2013think donors, grant-makers, and regulatory agencies. <\/p>\n\n\n\n<p>This transparency isn\u2019t just a box to check; it\u2019s essential for building trust, showcasing responsible fund use, and ultimately supporting your mission and long-term sustainability.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"how\"><strong>How is nonprofit accounting different?<\/strong><\/h2>\n\n\n\n<p>Working in a nonprofit allows you to quickly learn how to differentiate it from for-profit organizations. <\/p>\n\n\n\n<p>While both involve tracking revenues and expenses, nonprofit accounting has unique requirements\u2014like categorizing funds as restricted or unrestricted based on donor intentions.<\/p>\n\n\n\n<p>Your nonprofit also needs to produce specialized financial reports, such as statements of activities, to show how funds are used to support its mission.<\/p>\n\n\n\n<p> That&#8217;s why it\u2019s so important to choose accounting software that\u2019s designed to meet these specific needs. Finding the right fit can make managing your nonprofit\u2019s finances much simpler.<\/p>\n\n\n\n<p>Here\u2019s how nonprofit accounting stands apart:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Mission-driven transparency\u2014<\/strong>nonprofits must create detailed reports to show how revenue and funds are spent to advance their mission.<\/li>\n\n\n\n<li><strong>Regulatory compliance\u2014<\/strong>filing Form 990 and meeting state-specific reporting requirements are non-negotiable for nonprofits.<\/li>\n\n\n\n<li><strong>Fund accounting\u2014<\/strong>nonprofits organize their funds into three categories based on donor guidelines to make sure they\u2019re making a proper use.\n<ul class=\"wp-block-list\">\n<li><strong>Restricted funds\u2014<\/strong>designated for a specific project or purpose. <\/li>\n\n\n\n<li><strong>Temporarily restricted funds\u2014<\/strong>reserved for a particular use or time period; once conditions are met, they become unrestricted.<\/li>\n\n\n\n<li><strong>Unrestricted funds\u2014<\/strong>can be used freely for any purpose that supports the mission.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n\n\n\n<p>These differences make choosing the right nonprofit accounting software critical. <\/p>\n\n\n\n<p>The right tools simplify fund tracking, ensure compliance, and give you peace of mind so you can focus on your responsibilities.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"nonprofit\"><strong>Nonprofit accounting standards<\/strong><\/h2>\n\n\n\n<p>Nonprofit accounting standards give your organization a clear roadmap for recording, reporting, and sharing financial information.<\/p>\n\n\n\n<p>Following these standards helps you ensure your financial practices are transparent, consistent, and accurate. <\/p>\n\n\n\n<p>These qualities make it easier for donors, regulators, and other stakeholders to understand your nonprofit\u2019s financial health.<\/p>\n\n\n\n<p>Two key pillars of nonprofit accounting standards are <a href=\"https:\/\/www.sage.com\/en-us\/blog\/a-guide-to-generally-accepted-accounting-principles-gaap\/\" target=\"_blank\" rel=\"noreferrer noopener\">Generally Accepted Principles (GAAP)<\/a> and the Financial Accounting Standards Board (FASB).<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-gaap\"><strong>GAAP<\/strong><\/h3>\n\n\n\n<p>GAAP sets the standard for financial reporting in the U.S. <\/p>\n\n\n\n<p>It forms the foundation for nonprofit accounting with a consistent set of rules that ensure financial statements are reliable, consistent, and easy to compare. <\/p>\n\n\n\n<p>GAAP covers key areas like revenue recognition, expense matching, and fund classification.<\/p>\n\n\n\n<p>By following GAAP in your accounting practices, you build trust with donors and stakeholders, offering them clear insights into how funds are being used to support your mission.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-fasb\"><strong>FASB<\/strong><\/h3>\n\n\n\n<p>Financial Accounting Standards Board (FASB) issues specific GAAP guidelines tailored to nonprofits&#8217; unique needs. <\/p>\n\n\n\n<p>These guidelines, outlined in FASB\u2019s Accounting Standards Codification (ASC) 958, address critical areas such as net asset classification, donor restrictions, and financial disclosures.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"basics\"><strong>Nonprofit accounting basics<\/strong><\/h2>\n\n\n\n<p>Sometimes, going back to the basics is the smartest move. <\/p>\n\n\n\n<p>It\u2019s important for you and your team to have a strong understanding of the fundamentals of nonprofit accounting, whether it\u2019s tracking donations or meeting specific regulatory requirements.<\/p>\n\n\n\n<p>Here are some key components to keep in mind:<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-1-essential-nonprofit-accounting-documents\"><strong>1. Essential nonprofit accounting documents<\/strong><\/h3>\n\n\n\n<p>Reliable financial documentation is the foundation of effective nonprofit accounting. <\/p>\n\n\n\n<p>The primary financial statements your organization should maintain are:<\/p>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"h-nonprofit-budget\"><strong>Nonprofit budget<\/strong><\/h4>\n\n\n\n<p>A budget is a detailed <a href=\"https:\/\/www.sage.com\/en-us\/blog\/financial-plan-for-nonprofit-organizations\/\">financial plan for nonprofits<\/a> that outlines projected income and expenses to help your organization allocate resources effectively.<\/p>\n\n\n\n<p>It provides a clear picture of the costs your organization expects to incur and the revenue it anticipates receiving over a set period of time. <\/p>\n\n\n\n<p>To boost effective budgeting, your team should focus on the following elements:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Expected revenue<\/strong>\u2014understand the sources and amounts of income, including donations, grants, and other funding streams.<\/li>\n\n\n\n<li><strong>Expense budget<\/strong>\u2014identify and categorize expenses, such as program costs, administrative expenses, and fundraising activities.<\/li>\n<\/ul>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"h-statement-of-financial-position\"><strong>Statement of financial position<\/strong><\/h4>\n\n\n\n<p>Also known as a balance sheet, the statement of financial position provides a snapshot of your organization&#8217;s assets, liabilities, and net assets at a specific point in time. <\/p>\n\n\n\n<p>It can be summarized with the following equation:<\/p>\n\n\n\n<p><strong>Net Assets = Assets \u2013 Liabilities<\/strong><\/p>\n\n\n\n<p>Understanding these components helps your team get a clear picture of your organization\u2019s overall financial health. <\/p>\n\n\n\n<p>Positive net assets shows that you\u2019re in a strong financial position, while negative net assets are a sign that it\u2019s time to reevaluate and adjust your financial strategy to stay sustainable.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"h-statement-of-activities\"><strong>Statement of activities<\/strong><\/h4>\n\n\n\n<p>This report provides a detailed overview of your organization&#8217;s revenue and expenses over a specific period, illustrating how funds are utilized to support its mission.&nbsp;&nbsp;<\/p>\n\n\n\n<p>For example, if you manage the accounting of an education nonprofit that receives $500,000 in donations and spends $300,000 on programs such as teacher training and student scholarships, the statement of activities will clearly show how these funds were allocated to advance the organization\u2019s goals.<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table class=\"has-fixed-layout\"><tbody><tr><td><strong>Revenues<\/strong><\/td><td><strong>Unrestricted funds<\/strong><\/td><td><strong>Temporarily restricted<\/strong><\/td><td><strong>Total<\/strong><\/td><\/tr><tr><td>Individual donations<\/td><td>400,000<\/td><td>100,000<\/td><td>500,000<\/td><\/tr><tr><td>Grants<\/td><td>100,000<\/td><td>50,000<\/td><td>150,000<\/td><\/tr><tr><td>Invested income<\/td><td>50,000<\/td><td>150,000<\/td><td>200,000<\/td><\/tr><tr><td><strong>Total revenues<\/strong><\/td><td><strong>550,000<\/strong><\/td><td><strong>300,000<\/strong><\/td><td><strong>850,000<\/strong><\/td><\/tr><tr><td colspan=\"4\"><strong>Expenses<\/strong><\/td><\/tr><tr><td>Program services<\/td><td>100,000<\/td><td>200,000<\/td><td>300,000<\/td><\/tr><tr><td>General and administrative<\/td><td>50,000<\/td><td>0<\/td><td>50,000<\/td><\/tr><tr><td>Fundraising<\/td><td>30,000<\/td><td>0<\/td><td>30,000<\/td><\/tr><tr><td><strong>Total expenses<\/strong><\/td><td><strong>180,000<\/strong><\/td><td><strong>200,000<\/strong><\/td><td><strong>380,000<\/strong><\/td><\/tr><tr><td><strong>Change in net assets<\/strong><\/td><td>370,000<\/td><td>100,000<\/td><td>470,000<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"h-statement-of-functional-expenses\"><strong>Statement of functional expenses<\/strong><\/h4>\n\n\n\n<p>The <a href=\"https:\/\/www.sage.com\/en-us\/blog\/statement-of-functional-expenses\/\">statement of functional expenses<\/a> provides a detailed breakdown of your nonprofit\u2019s expenditures by function (program, administrative, and fundraising) and by nature (such as salaries, supplies, and marketing).<\/p>\n\n\n\n<p>This statement enhances financial transparency by showing stakeholders how resources are allocated to support your organization\u2019s mission.<\/p>\n\n\n\n<p>For example, the table below illustrates how your nonprofit might allocate its expenses across various functions and categories, providing a detailed view of financial priorities and operational efficiency.<\/p>\n\n\n\n<figure class=\"wp-block-table is-style-alternating\"><table class=\"has-fixed-layout\"><tbody><tr><td><strong>Expense category<\/strong><\/td><td><strong>Program expenses<\/strong><\/td><td><strong>Administrative expenses<\/strong><\/td><td><strong>Fundraising expenses<\/strong><\/td><td><strong>Total expenses<\/strong><\/td><\/tr><tr><td>Salaries and wages<\/td><td>100,000<\/td><td>50,000<\/td><td>30,000<\/td><td>180,000<\/td><\/tr><tr><td>Supplies<\/td><td>20,000<\/td><td>5,000<\/td><td>10,000<\/td><td>35,000<\/td><\/tr><tr><td>Professional services<\/td><td>15,000<\/td><td>10,000<\/td><td>5,000<\/td><td>30,000<\/td><\/tr><tr><td>Marketing<\/td><td>10,000<\/td><td>5,000<\/td><td>15,000<\/td><td>30,000<\/td><\/tr><tr><td>Rent and utilities<\/td><td>30,000<\/td><td>20,000<\/td><td>10,000<\/td><td>60,000<\/td><\/tr><tr><td><strong>Totals<\/strong><\/td><td><strong>175,000<\/strong><\/td><td><strong>90,000<\/strong><\/td><td><strong>70,000<\/strong><\/td><td><strong>335,000<\/strong><\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"h-statement-of-cash-flows\"><strong>Statement of cash flows<\/strong><\/h4>\n\n\n\n<p>The <a href=\"https:\/\/www.sage.com\/en-us\/blog\/cash-flow-statement-explained\/\">statement of cash flows<\/a> clearly shows how cash moves in and out of your organization, broken down into operating, financing, and investing activities.<\/p>\n\n\n\n<p>This report is essential for understanding your nonprofit\u2019s liquidity.<\/p>\n\n\n\n<p>With this statement, your team can pinpoint where funding is coming from and determine if there\u2019s enough cash available to cover expenses on time.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-2-compliance-requirements-in-accounting-for-nonprofits\"><strong>2. Compliance requirements in accounting for nonprofits<\/strong><\/h3>\n\n\n\n<p>Compliance is crucial to 501c3 accounting, as your nonprofit must follow specific reporting rules to maintain its tax-exempt status and demonstrate financial accountability.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"h-form-990\"><strong>Form 990<\/strong><\/h4>\n\n\n\n<p>Filling the <a href=\"https:\/\/www.sage.com\/en-us\/blog\/tips-and-tricks-for-streamlining-nonprofit-form-990-reporting\/\" target=\"_blank\" rel=\"noreferrer noopener\">990 form<\/a> is an annual requirement for tax-exempt organizations, mandated by the IRS to demonstrate financial accountability. <\/p>\n\n\n\n<p>This document highlights your organization\u2019s financial health, programs, and accomplishments, offering a clear view of the allocation of funds.<\/p>\n\n\n\n<p>Timely filling Form 990 is critical for maintaining tax-exempt status and ensuring compliance with IRS and state regulations. <\/p>\n\n\n\n<p>Delays or inaccuracies in filing result in penalties and risk compromising your nonprofit\u2019s standing.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"h-state-reporting-requirements\"><strong>State reporting requirements<\/strong><\/h4>\n\n\n\n<p>Be sure to check whether your organization must file additional financial reports at the state level. <\/p>\n\n\n\n<p>Depending on its registration and activities, these reports ensure compliance with state-specific regulations and enhance transparency around your nonprofit\u2019s financial operations.<\/p>\n\n\n\n<p><a href=\"https:\/\/www.sage.com\/en-us\/accounting-software\/financial-reporting\/\" target=\"_blank\" rel=\"noreferrer noopener\">Financial reporting solutions<\/a> tailored to the compliance landscape, offer centralized financial data and streamlined reporting processes, making it easier to meet state requirements efficiently.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"h-audit-requirements\"><strong>Audit requirements<\/strong><\/h4>\n\n\n\n<p>Many nonprofits must undergo <a href=\"https:\/\/www.sage.com\/en-us\/blog\/nonprofit-audit\/\" target=\"_blank\" rel=\"noreferrer noopener\">annual audits<\/a>, especially if they receive significant federal funding or meet certain state thresholds. <\/p>\n\n\n\n<p>As mission-driven organizations that rely on public trust and contributions, your nonprofit uses audits to verify financial records and demonstrate accountability. <\/p>\n\n\n\n<p>These documents provide an independent review of financial statements, showcasing your organization\u2019s credibility and financial stewardship.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-3-donor-management-strategies-for-nonprofits\">3. Donor management strategies for nonprofits<\/h3>\n\n\n\n<p>Managing your donors effectively is key to securing ongoing support and understanding the impact of their contributions:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Importance of nonprofit donor management<\/strong>\u2014a strong <a href=\"https:\/\/www.sage.com\/en-us\/blog\/donor-management-best-practices-for-nonprofits\/\">donor management strategy<\/a> helps you build lasting relationships with supporters and boosts donor retention.<\/li>\n\n\n\n<li><strong>Types of donors<\/strong>\u2014your nonprofit works with a range of donors\u2014individuals, corporations, and foundations\u2014each with unique expectations and reporting needs. Tailoring your approach to these groups makes a big difference.<\/li>\n\n\n\n<li><strong>Accounting strategies for tracking donations and grants<\/strong>\u2014accurately tracking donations, including restricted and unrestricted funds, makes sure you honor donor intentions, and makes financial planning much easier.<\/li>\n<\/ul>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-4-multi-entity-accounting\">4. Multi entity accounting<\/h3>\n\n\n\n<p>If you\u2019re handling the accounting for a nonprofit with multiple entities or related organizations, you know how quickly things can get complicated. <\/p>\n\n\n\n<p><a href=\"https:\/\/www.sage.com\/en-us\/accounting-software\/multi-entity\/\">Multi-entity accounting<\/a> involves managing specialized processes to consolidate financial information, ensure accurate reporting, and comply with FASB guidelines and donor requirements.<\/p>\n\n\n\n<p>By adopting best practices for multi-entity accounting, you can simplify financial management and improve your organization\u2019s overall visibility\u2014understanding how each entity contributes to your mission.<\/p>\n\n\n\n<div class=\"wp-block-buttons is-layout-flex wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button\"><a class=\"wp-block-button__link wp-element-button\" href=\"#gate-00008083-d376-4e58-9b85-32535d417557\">Download your free Nonprofit Accounting Software Buyers guide<\/a><\/div>\n<\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"best\"><strong>Best practices in accounting for nonprofit organizations<\/strong><\/h2>\n\n\n\n<p>Poor accounting practices can lead to mismanagement of funds, regulatory issues, and a loss of credibility, jeopardizing your organization\u2019s mission and long-term sustainability.<\/p>\n\n\n\n<p>Adopting best accounting practices for nonprofits is essential for maintaining financial health, transparency, and donor trust. These practices include:<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-understanding-and-managing-overhead-expenses\"><strong>Understanding and managing overhead expenses<\/strong><\/h3>\n\n\n\n<p>Properly categorizing overhead costs is essential for maintaining effectively managing expenses of your organization. <\/p>\n\n\n\n<p>Overhead costs are necessary for running a nonprofit but are not directly tied to specific programs or services. <\/p>\n\n\n\n<p>These include administrative, operational, and fundraising expenses\u2014such as staff salaries for support roles, office rent, and donor outreach efforts.<\/p>\n\n\n\n<p>While your nonprofit may often strive to minimize overhead, these expenses are key for sustaining daily operations and enabling growth. <\/p>\n\n\n\n<p>At times, increasing the overhead budget is necessary to invest in areas like technology, staffing, or fundraising initiatives that support long-term success. <\/p>\n\n\n\n<p>To justify such increases, ensure these expenses align with your mission and demonstrate a measurable impact.<\/p>\n\n\n\n<p>Misreporting or inadequately explaining overhead expenses can risk donor trust and make securing funding for future projects difficult. <\/p>\n\n\n\n<p>Transparent and accurate reporting fosters trust and helps donors and stakeholders understand how overhead investments contribute to your organization\u2019s mission.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-regular-budget-check-ins\"><strong>Regular budget check-ins<\/strong><\/h3>\n\n\n\n<p>Regularly monitoring your nonprofit\u2019s spending against budget is essential to avoid unexpected financial shortfalls and maintain organizational stability. <\/p>\n\n\n\n<p>In addition to having real-time visibility into budget spending and actuals, reviewing historical financial data enables your team to understand overall financial performance.<\/p>\n\n\n\n<p>This is where <a href=\"https:\/\/www.sage.com\/en-us\/accounting-software\/financial-planning-budgeting\/\" target=\"_blank\" rel=\"noreferrer noopener\">financial planning and budgeting tools<\/a> empower you to make strategic decisions that align with your nonprofit\u2019s needs and goals. <\/p>\n\n\n\n<p>These tools provide insights to adjust plans as circumstances change, ensuring your organization stays on track. <\/p>\n\n\n\n<p>Failing to closely track expenses leads to overspending, cash flow issues, or potential disruptions to your nonprofit operations.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-creating-a-long-term-strategic-financial-plan\"><strong>Creating a long-term strategic financial plan<\/strong><\/h3>\n\n\n\n<p>Building a long-term strategic financial plan is key to setting your nonprofit up for future growth and handling unexpected expenses with confidence. <\/p>\n\n\n\n<p>A forward-thinking financial strategy helps your organization manage resources wisely, stay financially stable, and take advantage of opportunities to expand your impact.<\/p>\n\n\n\n<p>For example, if your nonprofit is focused on environmental conservation, you might anticipate the need to expand its programs to additional regions in the next five years. <\/p>\n\n\n\n<p>Your organization can set fundraising goals and allocate resources effectively by including projected staffing, equipment, and outreach costs in its financial plan. <\/p>\n\n\n\n<p>Additionally, your plan might include a contingency fund to cover unexpected expenses, such as emergency repair or fluctuations in donation levels.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-implementing-internal-checks-and-balances\"><strong>Implementing internal checks and balances<\/strong><\/h3>\n\n\n\n<p>Establishing internal controls is critical for reducing the risk of errors and fraud. <\/p>\n\n\n\n<p>By separating financial duties and implementing specific controls, your organization safeguards assets and maintains transparency.<\/p>\n\n\n\n<p>Key internal controls to consider include:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Segregation of duties: <\/strong>share financial responsibilities among your staff to prevent fraud and errors. For example, separate the roles of authorizing, recording, and reconciling financial transactions to create a system of checks and balances.<\/li>\n\n\n\n<li><strong>Access controls: <\/strong>implement internal security policies that restrict access to financial systems and sensitive information. Clearly define protocols for handling sensitive transactional data to protect your organization from misuse.<\/li>\n\n\n\n<li><strong>Inventory of fixed assets: <\/strong>regularly monitor office assets such as computers, tablets, and other equipment your team uses. Periodic inventories ensure accountabilities for all items taken out of the office.<\/li>\n<\/ul>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-auditing-finances-regularly\"><strong>Auditing finances regularly<\/strong><\/h3>\n\n\n\n<p>Conduct regular audits to ensure compliance with regulations and build trust with donors and stakeholders. <\/p>\n\n\n\n<p>Third-party auditors can give objective assessments of the business, while internal auditing can help ensure compliance and effective process iterations. <\/p>\n\n\n\n<p>Skipping or delaying audits can lead to compliance problems and damage the organization\u2019s reputation.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"choose\"><strong>How to choose the best nonprofit accounting software<\/strong><\/h2>\n\n\n\n<p>Finding the perfect software for your nonprofit\u2019s finances is a game-changer\u2014it makes managing money easier and gives you the tools to succeed. <\/p>\n\n\n\n<p>Here\u2019s five key points to keep in mind as you explore your options:<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-1-fund-accounting-capabilities\">1. Fund accounting capabilities<\/h3>\n\n\n\n<p>Make sure the software builds in fund accounting for nonprofits, allowing you to categorize and track restricted and unrestricted funds. <\/p>\n\n\n\n<p>This feature is a great ally in ensuring compliance with donor requirements and providing clear visibility into fund allocation.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-2-customizable-reports\"><strong>2. Customizable reports<\/strong><\/h3>\n\n\n\n<p>Look for accounting software with robust financial reporting features and a user-friendly dashboard. <\/p>\n\n\n\n<p>Customizable reports make tracking and visualizing your nonprofit\u2019s financial health easier. <\/p>\n\n\n\n<p>You should be able to generate unlimited reports, tailor pre-built dashboards to meet your needs, and gain real-time insights into your finances to guide your planning and strategy.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-3-donor-management-integration\"><strong>3. Donor management integration<\/strong><\/h3>\n\n\n\n<p>Opt for a <a href=\"https:\/\/www.sage.com\/en-us\/accounting-software\/\">cloud accounting solution<\/a> that includes built-in tools for tracking donations, pledges, and grants seamlessly. Software with integrated <a href=\"https:\/\/www.sage.com\/en-us\/sage-business-cloud\/intacct\/product-capabilities\/extended-capabilities\/fundraising\/\">fundraising capabilities<\/a> is ideal to enhance donor management. <\/p>\n\n\n\n<p>This allows real-time access to donor data, customizes donor communication, and automates updates. <\/p>\n\n\n\n<p>You can analyze supporter data to tailor your message, create targeted outreach campaigns, track engagement, and build stronger relationships.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-4-automated-compliance-reminders\"><strong>4. Automated compliance reminders<\/strong><\/h3>\n\n\n\n<p>Search software that offers automated compliance reminders, including built-in alerts for crucial filing dates, such as IRS Form 990 and state-specific reports. <\/p>\n\n\n\n<p>These features help you stay on track with deadlines, reduce non-compliance risk, and promptly file all necessary documentation.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-5-user-friendly-interface\"><strong>5. User-friendly interface<\/strong><\/h3>\n\n\n\n<p>A simple, intuitive interface is vital for nonprofits, especially those with limited accounting expertise. <\/p>\n\n\n\n<p>The software should offer you an easy-to-navigate dashboard and straightforward features that allow access financial information quickly without extensive training.<\/p>\n\n\n\n<p>A user-friendly design reduces errors, saves time, and helps your team focus on strategic tasks rather than getting bogged down by complex processes.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"evaluate\"><strong>How to evaluate software based on your organization&#8217;s size and needs<\/strong><\/h2>\n\n\n\n<p>When evaluating nonprofit accounting software, it\u2019s essential to consider your organization&#8217;s size and specific requirements. Small nonprofits should focus on software that is both cost-effective and easy to use. <\/p>\n\n\n\n<p>Medium-sized nonprofits may benefit from solutions that offer more robust reporting and integrated donor management capabilities. <\/p>\n\n\n\n<p>For large nonprofits, it\u2019s essential to prioritize software with scalability and advanced compliance features to manage intricate financial and reporting requirements.<\/p>\n\n\n\n<p>Taking the time to assess your organization\u2019s unique needs before deciding helps you select the best fit, saving time and resources in the long run.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"simplify\"><strong>Simplify nonprofit financials with accounting software<\/strong><\/h2>\n\n\n\n<p>Managing your nonprofit\u2019s finances doesn\u2019t have to be overwhelming. <\/p>\n\n\n\n<p>With the right accounting software, you can simplify your financial processes, stay compliant, and create a strong financial foundation for your mission\u2019s success.<\/p>\n\n\n\n<p>Explore our <a href=\"https:\/\/www.sage.com\/en-us\/industry\/nonprofit\/\" target=\"_blank\" rel=\"noreferrer noopener\">nonprofit accounting software<\/a> to discover how we can help you manage your organization\u2019s finances more efficiently by giving you more time to focus on making a positive impact in your community.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"faq\"><strong>FAQs about nonprofit accountin<\/strong>g<\/h2>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-1-do-nonprofits-have-to-follow-gaap\"><strong>1. Do nonprofits have to follow GAAP?<\/strong><\/h3>\n\n\n\n<p>Nonprofits are generally expected to follow GAAP to maintain compliance, secure funding, and demonstrate financial transparency. <\/p>\n\n\n\n<p>While GAAP compliance isn\u2019t legally required for all nonprofits, it is strongly advised, especially for those receiving government grants, substantial donor contributions, or filing an IRS Form 990. <\/p>\n\n\n\n<p>GAAP ensures that your nonprofit\u2019s financial statements are consistent, accurate, and comparable, making it easier for donors, regulators, and stakeholders to assess your organization\u2019s financial health.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-2-what-do-nonprofit-accountants-do\"><strong>2. What do nonprofit accountants do?<\/strong><\/h3>\n\n\n\n<p>Nonprofit accountants manage nonprofit organizations&#8217; financial activities. <\/p>\n\n\n\n<p>They handle tasks such as tracking donations, managing budgets, preparing financial statements, ensuring compliance with regulations, and filing required tax forms like IRS Form 990.<\/p>\n \n<div class=\"single-cta gated-content\">\n\t<div class=\"single-cta__positioner\">\n\t\t<div class=\"single-cta__wrapper has-dark-background-color\">\n\t\t\t<div class=\"single-cta__content\">\n\t\t\t\t\t\t\t\t<h2 class=\"single-cta__title h3\">The Nonprofit Accounting Software Buyers Guide<\/h2>\n\n\t\t\t\t\t\t\t\t\t<div class=\"single-cta__description\">\n\t\t\t\t\t\t<p><!-- wp:paragraph --><\/p>\n<p>The ultimate guide to selecting the best accounting and financial management software for your nonprofit.<\/p>\n<p><!-- \/wp:paragraph --><\/p>\n\t\t\t\t\t<\/div>\n\t\t\t\t\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t<a\n\t\t\t\t\t\thref=\"#gate-00008083-d376-4e58-9b85-32535d417557\"\n\t\t\t\t\t\tclass=\"single-cta__button button button--primary\"\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t>Download now<\/a>\n\t\t\t\t\t\t\t<\/div>\n\n\t\t\t\t\t<\/div>\n\n\t\t\t\t\t<img decoding=\"async\" width=\"1440\" height=\"810\" src=\"https:\/\/www.sage.com\/en-us\/blog\/wp-content\/uploads\/sites\/2\/2022\/04\/GettyImages-965936890-1440x810.jpg\" class=\"single-cta__image\" alt=\"\" loading=\"lazy\" srcset=\"https:\/\/www.sage.com\/en-us\/blog\/wp-content\/uploads\/sites\/2\/2022\/04\/GettyImages-965936890-1440x810.jpg 1440w\" sizes=\"auto, (min-width: 48em) 33vw, 100vw\" \/>\t\t\t<\/div>\n<\/div>\n\n\n<div class=\"single-cta\">\n\t<div class=\"single-cta__positioner\">\n\t\t<div class=\"single-cta__wrapper has-dark-background-color\">\n\t\t\t<div class=\"single-cta__content\">\n\t\t\t\t\t\t\t\t<h2 class=\"single-cta__title h3\">Subscribe to our Sage Advice Newsletter<\/h2>\n\n\t\t\t\t\t\t\t\t\t<div class=\"single-cta__description\">\n\t\t\t\t\t\t<p>Get our latest business advice delivered directly to your inbox.<\/p>\n\t\t\t\t\t<\/div>\n\t\t\t\t\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t<a\n\t\t\t\t\t\thref=\"#gate-ab515c6e-7e90-4c2f-a67e-113872516e8b\"\n\t\t\t\t\t\tclass=\"single-cta__button button button--primary\"\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t>Subscribe<\/a>\n\t\t\t\t\t\t\t<\/div>\n\n\t\t\t\t\t<\/div>\n\n\t\t\t\t\t<img decoding=\"async\" width=\"1440\" height=\"810\" src=\"https:\/\/www.sage.com\/en-us\/blog\/wp-content\/uploads\/sites\/2\/2022\/04\/GettyImages-1073797282-1440x810.jpg\" class=\"single-cta__image\" alt=\"Working from home with tea in hand\" loading=\"lazy\" srcset=\"https:\/\/www.sage.com\/en-us\/blog\/wp-content\/uploads\/sites\/2\/2022\/04\/GettyImages-1073797282-1440x810.jpg 1440w\" sizes=\"auto, (min-width: 48em) 33vw, 100vw\" \/>\t\t\t<\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>If you\u2019re managing the accounting for a nonprofit, you already know how crucial it is to stay accountable to your supporters and donors. Discover the best practices for nonprofit accounting and how the right software simplifies your operations.<\/p>\n","protected":false},"author":1806,"featured_media":20199,"menu_order":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_sage_video":false,"post_featured_image_hide":false,"footnotes":""},"categories":[158,43],"tags":[2,110,168],"business_type":[40,312,41],"lilypad":[],"context":[],"industry":[58],"persona":[],"imagine_tag":[222,209,472],"coauthors":[584],"class_list":["post-27696","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-accountants","category-money-matters","tag-accountants","tag-accounting-101","tag-sage-accounting","business_type-small-business","business_type-accountants","business_type-growing-business","industry-nonprofit"],"sage_meta":{"region":"en-us","author_name":"Elizabeth Ryan","featured_image":"https:\/\/www.sage.com\/en-us\/blog\/wp-content\/uploads\/sites\/2\/2023\/09\/GettyImages-1408431081.jpg","imagine_tags":{"222":"Accountants","209":"Accounting","472":"Nonprofit"}},"distributor_meta":false,"distributor_terms":false,"distributor_media":false,"distributor_original_site_name":"Sage Advice US","distributor_original_site_url":"https:\/\/www.sage.com\/en-us\/blog","push-errors":false,"_links":{"self":[{"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/posts\/27696","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/users\/1806"}],"replies":[{"embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/comments?post=27696"}],"version-history":[{"count":0,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/posts\/27696\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/media\/20199"}],"wp:attachment":[{"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/media?parent=27696"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/categories?post=27696"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/tags?post=27696"},{"taxonomy":"business_type","embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/business_type?post=27696"},{"taxonomy":"lilypad","embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/lilypad?post=27696"},{"taxonomy":"context","embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/context?post=27696"},{"taxonomy":"industry","embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/industry?post=27696"},{"taxonomy":"persona","embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/persona?post=27696"},{"taxonomy":"imagine_tag","embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/imagine_tag?post=27696"},{"taxonomy":"author","embeddable":true,"href":"https:\/\/www.sage.com\/en-us\/blog\/api\/wp\/v2\/coauthors?post=27696"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}