Finance

How to Start a Nonprofit Accounting System

By September 12, 2019 No Comments

By: Steve Zimmerman

It is sad, but true, that most people don’t start nonprofits because of their love of nonprofit accounting.  (Please, that was just a joke.) But, alas, with success and funding comes the necessary task of keeping track of your organization’s finances.  Fortunately, it doesn’t need to be (too) difficult but, then again, I’m a trained accountant.

Founding and running a small nonprofit is exactly the same as running a small for profit business.  You have to file articles of incorporation, forms with the Internal Revenue Service and documents with the State Attorney General’s office (in most states).  You wouldn’t run a small business without taking into consideration accounting. So, why would you try to run a nonprofit without an accounting system?

That being said, properly keeping track of your financial records and accounting doesn’t have to be overwhelming.  You don’t even necessarily need an accountant or bookkeeper. Here are some easy steps to help you start a nonprofit accounting system:

  1. Open a checking account
  2. Create a chart of accounts
  3. Keep track of your income and expenses
  4. Produce a summary report

1. Open a Checking Account

This may seem obvious to some, but that is good – because then you are well on your way to setting up your accounting department. Once you have your articles of incorporation, opening up a checking account should be easy.  Our main goal here is to separate the organization’s funds from your personal funds, which is why we put this important step first.  Use this account to deposit any donations or grant funds as well as to pay any expenses the organization may incur.  If you’ve paid for things personally, you can reimburse yourself from this account, but make sure you keep copies of the receipts and have a board member (other than yourself) sign off on the expenses and reimbursement.

If you don’t have a lot of expenses and income to begin with, you can keep track of your finances using your check register.  In accounting lexicon this is called using a “cash basis” accounting system.

While using your check register to keep track of finances may be fine, with success you’ll want to become a little more sophisticated.  The next step in this process is to set up your chart of accounts.

2. Create a Chart of Accounts

As you begin to set up your accounting system, the next step you’ll want to take will be to create a chart of accounts. The chart of accounts is essentially the table of contents to your accounting system.  In setting it up you need to decide your activity centers, income and expenses.

Activity centers are what your organization does.  Some examples are advocacy, outreach, administration and fundraising.

Income lines might include individual donations, foundations, special events or contracts.

Expenses would include payroll, rent, printing and legal fees.

3. Keep Track of Your Income & Expenses

There are two ways that I recommend for keeping track of your income and expenses:

Use a Spreadsheet

Using Excel or some other computer spreadsheet, simply record every deposit in the appropriate category set out in the chart of accounts as well as every expense in the appropriate category.

Use Accounting Software

This truly is the easiest way to automate your accounting, cut down on the time it takes and not make a lot of mistakes.  Many small nonprofits find that QuickBooks works extremely well for their needs.  It is easy to follow and enter information and it is not terribly expensive.  TechSoup makes Quickbooks available to nonprofit organizations for a low annual fee.  Also, having the accounting system online will allow easy access to your books for a board treasurer or bookkeeper.

4. Produce a Summary Report

This is the final step in putting together an introductory accounting system.  Add up your total income and subtract your expenses to determine if you have a surplus (also commonly called an excess or net income) or a deficit.  This is another example of the benefits of using software like QuickBooks, as it will produce a report for you.

Is that really it?

I’ve truly simplified how to start a nonprofit accounting system as much as I can.  The point is that with some time spent upfront it shouldn’t take much to maintain your finances on an ongoing basis.

There are some good books and courses out there that can help you out as well.  One great book is Bookkeeping Basis: What every nonprofit bookkeeper needs to know by Debra Ruegg and Lisa Venkatrathnam.

You should also check out your local nonprofit support center where they have trainings on this subject or a local accounting firm.

Alas, there are bookkeepers in almost every community that can help set up your systems and keep your books on a part-time basis.  The best way to find a bookkeeper is to ask around at other nonprofits and find out what they do.

Lastly, many new organizations will explore the option of outsourcing their accounting department.  It is always a good idea to have some expert advice, but remember that even if you outsource the accounting function, as the leader of your new organization you can never outsource the financial leadership. For newer organizations outsourcing can be expensive and the simple steps outlined above should suffice until more funds are available.

The most important aspect of the accounting system is that you are keeping track of your finances and actually using your reports. As you grow, expand and fulfill your mission, donors will want to know that you are using your money effectively and the easiest way to show them you are is through financial reports.  So, take some time now to start a nonprofit accounting system.