Nonprofits make similar mistakes over and over again when it comes to their accounting and bookkeeping.
Nonprofits receive the ability to apply for tax-exempt status because of the crucial work they do in their communities and beyond. As such, the nature of this work also sets their finances apart from regular for-profit businesses. Nonprofits are susceptible, because of the complicated rules concerning financial reporting, to making mistakes that can potentially get them in trouble.
Excellent organization skills, impeccable attention to detail, and in-depth knowledge of nonprofit accounting and bookkeeping are necessary to keep a nonprofit above-board with the IRS and all stakeholders. This article discusses the common mistakes that nonprofit accounting staff and bookkeepers often make, and why having a seasoned accountant or bookkeeper who knows the ins and outs of nonprofit financial rules is invaluable for any nonprofit.
Revenue classification and “failing to report”
Nonprofits face stricter rules for reporting on distinct income streams and classifying that money for different uses. When money comes in, in any capacity, nonprofits need to make sure they record and organize it into the correct categories. Those categories may include conditional, unconditional, unrestricted, and restricted, based upon who provided the money and how they expect your organization to spend it.
Nonprofits often make mistakes in this categorization when collecting various kinds of donations or making money on something that is not expressly related to their purpose–unrelated business income (UBI). When listing assets or contributions and donations of any kind, nonprofits need to be describing them accurately.
Expenses must also be designated in separate categories as described by the Financial Accounting Standards Board (FASB), whose rules are subject to change as they make updates or new recommendations. Program services, management, and general fundraising – It can be confusing where to designate expenses within these various categories, especially considering recent changes. The time an expense is recorded can also affect the accounting, as expenses and payments differ in timing and might result in incorrect reporting of income and liabilities.
In general, recording and allocating expenses can get tricky for nonprofits. It’s important to have a clear and well-documented method of recording and allocating so that your organization can not only defend why things recorded a certain way, but also quickly find any misstep or error, should one occur.
The IRS pays attention and delivers penalties to companies who have not correctly withheld taxes from employees. Nonprofits often hire many individuals as contractors who, in reality, may be employees and should be on the payroll. The tax implications of this are important. An accountant or bookkeeper should keep track of this as they file taxes and make sure the organization has designated employees, contractors, and volunteers, correctly.
Data input & other software errors
Software that aids in nonprofit accounting or bookkeeping can be an incredible tool, however, it can also lead to less attention paid to the organization’s finances. If the use of software takes away from set processes or a formal accounting policy in general, it has not aided your nonprofit in the least. And, if the data records correctly, consistently, and reviewed by multiple people, something as simple as an added or missing zero can lead to a huge issue.
Recording & spending company cash
As with every other nonprofit accounting mistake, using small amounts of company cash here and there, unless meticulously recorded and controlled, can become a black hole. By allowing only certain people within your organization to have access to company money and spending, and to always require receipts for every expenditure, you will easily be able to identify a problem when it arises. And, whether it’s buying lunch for a donor or paying for volunteer’s gas while canvassing, not recording these expenses or allowing them to accumulate without accountability can turn a modest problem into a huge accounting problem quickly.
Filing forms incorrectly or late
Part of being a nonprofit is dealing with the IRS and all its reporting forms. Nonprofits often fail to file the correct forms, fill them out incorrectly, or fail to complete them in a timely fashion. Making sure to report correctly and on time is one of the biggest benefits of having a professional accountant handle your nonprofits’ finances. An expert will not only complete them accurately but will also take the task off your hands.
Spending the time, money, and effort
Nonprofits often neglect to spend the time, money, or effort necessary to have solid accounting or bookkeeping. The common mistakes that nonprofits make when it comes to accounting or bookkeeping are avoidable and are often due to not spending the resources to have sound accounting or bookkeeping. Often, one person who is not a financial expert will be put in charge of doing accounting or bookkeeping tasks. Not only will this responsibility eat into their ability to do their primary job, but they may overlook important reporting rules or make vital accounting errors.
Whatever it looks like for your organization, whether that’s outsourcing accounting or bookkeeping tasks or hiring an experienced staff member full time to do the finances, it’s worth it in the long term.
Temple Management: your nonprofit accounting solution
We help nonprofits with their accounting and bookkeeping so that they can focus on what’s important while knowing their finances are in order. By hiring us, not only will your accounting and bookkeeping needs be taken care of in a timely and accurate manner, but you will be able to use your financial information to make moves for growth in the future.
We are experienced and well-versed in what nonprofits need to succeed. Call us at (770) 892-2087 for a consultation about your nonprofit accounting or bookkeeping needs. We would love to assist you!