Running a nonprofit is not quite the same as running a for-profit entity. In some ways, the structure is similar, but there are subtle differences regarding how you will conduct your accounting. You must adhere to the rules in place for nonprofit accounting if you don’t want to get audited.
Not-for-profit accounting software is available, and it might behoove you to get some. Let’s run through some of the accounting basics for nonprofits right now.
You Must Have Statements of Financial Position
The IRS can reach out at any time and ask to see your books. This happens both with nonprofits and for-profit entities. You never know when or why they might decide to do that, but you should always be ready.
The IRS can ask to see a statement of financial position. This is simply a balance sheet. It’s a real-time look at your assets, losses, and equity. You should always be prepared to generate one if you’re asked for it.
You Must Have Statements of Activities
A statement of activities is also something you must have ready whenever an official from the IRS reaches out. These reports show your organization’s expenses and revenue over a given period, like a month or a quarter.
This statement should establish that your nonprofit is working in good faith to accomplish your stated mission. It should show that you are a responsible steward of the donations you receive.
You Must Provide a Statement of Cash Flows When Asked
You must be ready to provide a statement of cash flows if the IRS asks for it. This document shows any cash donations or equivalents leaving and entering the company during a given period.
If the IRS suspects fraud or an irregularity, this document can clear up any appearance of impropriety. It will show changes in balance sheet accounts and also provide an analysis of your nonprofit’s day-to-day activities.
You Must Have Statements of Functional Expenses
A tax official might also ask for a statement of functional expenses for your nonprofit. This is related to a cash flow statement, but they’re not quite the same.
A statement of functional expenses will show your nonprofit’s costs for each of the organization’s functional areas. There should be areas that show fundraising, a breakdown of what programs you’re running, and how you’re managing your daily cash flow.
You Must Handle Your Petty Cash Correctly
The IRS might also check how you’re running your nonprofit at some point, and they’ll look into your petty cash situation. Usually, you will have a relatively small amount of petty cash on hand for your everyday expenses that you’ll keep on the premises in a lockbox.
You’ll have one person in charge of it and only give them authorization for certain purchases. If the IRS sees more petty cash on hand than there should be and some irregularities in how you’re handling it, they might scrutinize you further because of it.
Keep these accounting fundamentals in mind as you run your nonprofit.
