Nonprofits and charities face some accounting challenges, from accounting for donations to accounting for employee time and expenses. However, with proper accounting procedures and systems in place, these challenges can be overcome. This article will discuss some of the most common accounting challenges faced by nonprofits and charities.
In nonprofit and charity accounting, a few challenges often arise.
Improperly Accounting for Donations
One of the most common is improperly accounting for donations. This can happen in two ways:
Not Recording Donations As Revenue
If you’re not recording donations as revenue, you’re not accounting for them properly. Donations should be recorded as revenue when received, and any associated expenses should also be recorded. This will ensure that your accounting is accurate and complete.
Recording Donations As Revenue But Not Accounting For Expenses
Another common mistake is to record donations as revenue but not accounting for the associated expenses. This can happen if you receive a donation but don’t have any immediate expenses associated with it.
However, over time, there may be expenses related to the donation – for example, if you use it to buy supplies or pay for an event. Your accounting will be inaccurate if you don’t account for these expenses. Either way, it can lead to inaccurate financial statements and improper oversight of the organization’s finances.
Accounting for Grants
Another challenge is accounting for grants. Grants often have specific requirements as to how they must be used, and if these requirements aren’t followed, the grantor can rescind the grant or take other punitive actions.
There are a few factors to consider when accounting for grants:
- You need to make sure you’re aware of all the grant requirements. This includes how the money can be used, the reporting requirements, and any other conditions that must be met.
- You must ensure adequate accounting controls to track how the grant money is used. This includes setting up separate bank accounts for grant funds, requiring pre-approval for expenditures, and maintaining detailed records.
- You must ensure that you comply with all the reporting requirements. This includes preparing financial statements and other reports as required by the grantor.
Failure to comply with any of the requirements of a grant can lead to severe consequences, so it’s essential to be aware of all the requirements and to have proper accounting controls in place.
Grantors also often require detailed reports on how the grant money was spent, so it’s essential to have a sound accounting system in place to track all of this information.
Accounting for Employee Time and Expenses
Finally, accounting for employee time and expenses can be tricky for nonprofits and charities. Employees may work on multiple projects with varying expenses, so tracking this information is essential.
There are a few key things to consider when tracking employee time and expenses:
- You need to have a system to track all employee time and expenses. This can be done through accounting software or a manual system.
- You must ensure that all employees know and use the system correctly. This includes training employees on how to use the system and ensuring that they input accurate information.
- You need to make sure that you’re reviewing employee time and expense reports regularly. This will help you catch any errors or discrepancies.
And since many employees of nonprofits and charities are volunteers, it’s crucial to track the time they spend on various tasks to be compensated appropriately.
All of these challenges can be overcome with proper accounting procedures and systems.
Accounting for nonprofits and charities can be challenging, but having proper accounting procedures and systems is crucial. Working with a qualified accountant or accounting firm can give nonprofits and charities accounting tips to ensure that their finances are accurately tracked and reported.