Nonprofit Bookkeeping: Funds, Grants and Reports

Restricted and unrestricted money

Gifts come with strings or without them. An unrestricted gift can be used for any mission-related purpose. A restricted gift must be used as the donor specified, such as for a scholarship program or a building fund. Your books need to show the difference. Many organizations set up classes or funds for each restriction, then report net assets with and without donor restrictions.

When you spend restricted money for its purpose, you release it from restriction. That release is a bookkeeping event worth recording, since otherwise your report will show a growing restricted balance that is already gone.

Grants and pledges

A grant agreement may be a contribution or an exchange for services, and the accounting is different for each. Read the agreement for conditions, such as matching requirements or spending milestones. Record multi-year pledges carefully, since you may recognize some of the amount now and some later. Your CPA or auditor can help you decide, and it helps to ask before the first payment arrives.

Functional expenses

Nonprofit financial statements usually split expenses into program services, management and general, and fundraising. To do that, each expense should be coded to a function, and shared costs such as rent and salaries need a sensible allocation based on time or space. Keep a short memo explaining the method so the same approach is used each year.

In-kind gifts and volunteers

Donated goods and services can be recorded as both income and expense at fair value under certain conditions. Donated time from volunteers usually is not recorded unless it requires specialized skills you would otherwise buy. Keep a donor acknowledgment letter for each gift. For larger noncash gifts, the donor, not you, is responsible for valuing the item.

Reports, filings and controls

Run a budget-to-actual report each month for the board, with restricted funds shown separately. Most exempt organizations file an annual information return with the IRS, and state charity registration or reporting may apply, so check the current requirements with each agency. Controls matter even in a small group: two people involved in handling cash, bank reconciliations reviewed by someone who does not write checks, and board approval for unusual payments.

If you reach a size where audited or reviewed statements are required by a funder or a state, plan for it in advance. Clean books throughout the year turn an audit from a crisis into a routine.

Questions a board treasurer should ask

A treasurer does not need to be an accountant, but should ask a few steady questions. Are restricted gifts being spent only on their purpose? Do cash balances cover the next few months of payroll? Which grants are paid late, and what is receivable? Are the bank reconciliations finished and reviewed? A one-page dashboard with cash, receivables, and the budget variance makes these questions easy to answer at every meeting.

Common questions

This guide is general information, not tax, legal or accounting advice. Rules, fees and due dates change; check with the IRS, the NJ Division of Taxation or a licensed professional for your situation.