Understanding Nonprofit Bookkeeping: 3 Things to Know

 

The following article wass generously provided to us by Jon Osterburg, a leader at Jitasa.

 

As a nonprofit professional, you likely focus most of your time and effort on running programs, fundraising, or managing employees who perform those tasks. However, none of these activities would be possible without effective financial management. After all, if you want to further your mission, build relationships with donors, and keep employees engaged, you need to have enough resources first!

 

While nonprofit financial management has several facets, one of the most foundational responsibilities under that umbrella is bookkeeping. Jitasa’s nonprofit bookkeeping guide defines this term as, “The process of systematically recording, organizing, and tracking a nonprofit’s financial activities. It allows your organization to monitor its spending, fundraising, assets, receivables, payables, and other transactions essential to its operations.”

 

In this guide, we’ll walk through three essentials of bookkeeping that are useful for all nonprofit professionals to understand. Let’s get started!

 

1. The Difference Between Bookkeeping & Accounting

 

Bookkeeping is frequently confused with another core aspect of nonprofit financial management—accounting. While your organization’s bookkeeper and accountant should work closely together, and their duties both involve working with financial data, these two disciplines are distinct and different. Essentially, bookkeeping lays the foundation for the accounting processes that follow it.

 

Here is a quick breakdown of the differences between nonprofit bookkeeping and accounting:

 

A Venn diagram of the differences between nonprofit bookkeeping and accounting

 

  • Bookkeeping covers your organization’s everyday financial needs, mostly focusing on data entry and recordkeeping (more on these responsibilities below). While bookkeepers should get some on-the-job training to help them perform well in their roles, they don’t need specialized education or certifications.

 

  • Accounting encompasses a variety of financial analysis and reporting tasks, such as reconciling bank statements, preparing for audits, and filing tax forms. Because this aspect of financial management is more complex, accountants need at least a bachelor’s degree in accounting or a related field and have to pass a series of exams to become a Certified Public Accountant (CPA).

 

You’ve likely realized by now that your nonprofit should have both a bookkeeper and an accountant on its team. If you don’t have the resources to hire two full-time professionals, outsourcing one or both roles to a nonprofit-specific firm is a great option!

 

2. Core Nonprofit Bookkeeping Duties

 

Generally speaking, whenever funds change hands or new financial data is created at your nonprofit, that’s your bookkeeper’s domain. While the exact tasks bookkeepers perform vary somewhat from organization to organization, their main duties at your nonprofit will likely include:

 

  • Entering basic data on your nonprofit’s revenue and expenses into its accounting system.
  • Writing checks or verifying automated transfers for everyday payments and securing leadership approval for larger expenditures when needed.
  • Making bank deposits and recording them along with your organization’s other transactions.
  • Managing invoices that your nonprofit receives from contractors or sends out to individuals you’ve provided services to.
  • Allocating costs day to day to ensure alignment with your organization’s budget.
  • Processing payroll—although, according to Astron Solutions, some nonprofits let this duty fall to their human resources professionals instead of their bookkeeper.

 

By putting a dedicated team member in charge of these responsibilities, your organization can more effectively comply with nonprofit regulations, make data-driven decisions, and be transparent about its financial situation with its community.

 

3. Information Recorded in Bookkeeping

 

Financial data entry is likely the nonprofit bookkeeping responsibility that will be most important to you if you’re in charge of running programs or fundraising. Let’s dive deeper into some of the information your bookkeeper will track—and remember, if you have any questions about this data, they’re the best person to ask.

 

Revenue

 

Tracking nonprofit revenue is slightly more complicated than it is for for-profit organizations because most nonprofits bring in revenue from various sources. However, diversification helps your organization engage more supporters and increase its financial stability, so the extra work involved in managing this more complex funding model is worth the results.

 

Most nonprofit revenue sources fall into one of five categories, which is how your bookkeeper will organize your records. These include:

 

  • Individual donations: Small, mid-sized, major, and planned monetary gifts; in-kind donations of goods, services, and assets (real estate, stocks, cryptocurrency, etc.)
  • Corporate philanthropy: Matching gifts, volunteer grants, sponsorships, internal employee fundraising campaigns
  • Earned income: Membership dues, merchandise sales, fees for services provided
  • Investments: Interest earned on endowments, treasury bills, bonds, certificates of deposit (CDs), money market mutual funds
  • Grants: Federal and state government grants; public, private, and family foundation grants

 

Your bookkeeper will ensure all of these revenue sources are recorded accurately, including those that may fall into more than one category—for example, some nonprofits group corporate grants with other grant funding, while others consider them a type of corporate philanthropy. This way, your organization can create informed budgets, cover all essential costs, prepare for emergencies, and save for the future.

 

Expenses

 

Your bookkeeper could categorize your nonprofit’s expense data in one of two ways. Natural expense categorization organizes cost information based on the nature of payments made, while functional expense categorization organizes expenditures according to how they contribute to your organization’s mission. In most cases, they’ll use functional expense categorization to align with nonprofit reporting requirements.

 

The three categories of functional expenses are:

 

  • Program costs, which are directly related to furthering your nonprofit’s mission and therefore vary widely from organization to organization.
  • Administrative costs, which keep your nonprofit running day to day and include employee compensation, utility bills, insurance, and office equipment purchases.
  • Fundraising costs, which are the upfront expenses of revenue-generating activities, such as marketing, event planning, and fundraising software fees. Your administrative and fundraising expenses combined make up your nonprofit’s overhead.

 

One of the reports your accountant will generate based on the information your bookkeeper records is an annual statement of functional expenses, which provides deeper insight into how each of your nonprofit’s expenditures furthers its mission. Program costs fund your mission directly, but overhead still contributes indirectly—to provide services to your community, you first need to raise the money to do so and make sure you can keep your organization’s lights on!

 

By gaining a better understanding of nonprofit bookkeeping, you can more effectively consider your organization’s finances as you go about your daily tasks, leading to more sustainable practices in fundraising, management, and service delivery. Use the guidance above as your foundation, and don’t hesitate to ask your bookkeeper if you have additional questions along the way.

 

About the author: Jon Osterburgjon osterburg

 

Jon Osterburg has spent the last nine years helping more than 100 nonprofits around the world with their finances as a leader at Jitasa, an accounting firm that offers bookkeeping and accounting services to not for profit organizations.