How to Keep Your Nonprofit’s Books Organized and Current

By Stan Hutton and Frances Phillips from Nonprofit Kit For Dummies, 3rd Edition

After you’ve created a budget, you need to set up a system for keeping consistent, organized records of your nonprofit’s financial information. You may choose to do your bookkeeping by hand or with accounting software.

You’ll encounter two standard systems for compiling and presenting information about your organization’s financial history: cash and accrual. Here are some ways they differ:

A cash system closely resembles the way most people keep their checkbooks. You enter income into the books when you receive and deposit a check or cash. You enter expenses when you pay a bill. Many find a cash system to be a comfortable approach because it’s straightforward. When your books show a positive balance, you have money in hand or in the bank.
An accrual system recognizes income when it’s promised and expenses when they’re obligated. Suppose you receive a grant award letter from a foundation promising your organization $60,000 over a two-year period. This grant is going to be paid in four checks of $15,000 each. In an accrual system, you enter the entire $60,000 as income in your books when that money is promised.

On the expense side, you enter your bills into your books when you incur them — which may be before they’re due.

Each of these approaches has possible disadvantages:

In cash books, your organization may owe money in unpaid bills, but those debts aren’t apparent because they aren’t on your books until they’re paid.
In cash books, your organization may have been awarded a large grant but may look poor because you haven’t received the check.
In cash books, it’s more difficult to tell whether you owe payroll taxes.
In accrual books, you may have been promised a large contribution but not yet received it. You may have no cash in hand, but your books look as if you have surplus income.

Keeping books by an accrual system is standard accounting practice for nonprofits and is recommended by the Financial Accounting Standards Board. To be honest, however, small organizations often can get by with a cash system.

If you decide to use software to keep your books, you can purchase types that are designed specifically for nonprofits, which have some different needs and use a few different terms than for-profit businesses. Some accounting software packages that many small nonprofits use include QuickBooks by Intuit, Peachtree by Sage, and Fund E-Z by E-Z Development Corporation.

If more than four or five users at your organization will be using the accounting software, if your budget exceeds $1 million, or if you need to track many programs, you’ll likely want to invest in more-complex accounting software.

When creating your start-up budget, don’t forget to include accounting software — the cost of purchasing the package or online service, of setting it up, and of being trained to use it. As your organization grows and you need more sophisticated software, the setup time will be greater.