Many aspects of nonprofit and for-profit business accounting and financial management are similar. However, some significant differences exist due to the nonprofit’s duty to direct its resources toward its mission. Not-for-profit accounting requires functional expense tracking, i.e., identifying which expenses relate to program, fundraising, and administrative functions.
This section presents financial management best practices relevant to ACE and its affiliates.
The Financial Accounting Standards Board (FASB) has established accounting practices for nonprofits to follow.
For an affiliate to maintain strong financial management, it needs to develop and follow well-conceived, meaningful fiscal policies, and procedures with separation of duties and strong internal controls. They should define the roles and responsibilities of individuals handling an affiliate’s financial affairs and ultimately ensure that its financial data is an accurate, reliable basis for decision making. It is highly recommended that each affiliate involve an accounting professional to give advice on fiscal matters for the affiliate.
Affiliates must maintain their books and financial records. The Treasurer or another designated bookkeeper can use existing software packages such as QuickBooks or devise a recordkeeping system on Excel. Of course, an affiliate has the option to outsource its financial recordkeeping to a business that provides this service.
Income and expenses should be recorded according to the category, or account, of the transaction. A chart of accounts guides what account number to use when posting an entry. An affiliate needs to design its chart of accounts and account numbers. This chart usually has five areas, including assets, liabilities, net assets (or fund balances), revenues, and expenses.
On their tax returns, nonprofits must report account activity according to two classifications – functional (or programs) and natural (or supporting). Program transactions are directly related to providing services to populations an affiliate serves, e.g., students. Supporting transactions are those common to all programs, e.g., general management costs, etc.
Click below for more information regarding budgeting.
All donation or contributions should be tracked in a reliable system. Refer to Chapter 13 on Fundraising for more insight on managing contributions and donations.
All tax-exempt organizations are required to file an annual IRS information return (Form 990, 990-EZ, 990-N, etc.). In addition, most states also require filings and renewals. Failure to file the necessary forms can lead to tax exempt status being revoked.
A financial audit is different from an IRS audit. A financial audit is an examination of your accounting records and financial statements by an independent auditor—normally, a certified professional accountant (CPA). The auditor is an independent professional hired and paid by your nonprofit.
