How to Organize (Manage) Accounting in a Nonprofit Organization: Beginner’s Guide

For nonprofit organizations (NPOs), transparency is a key element ensuring accountability. Proper accounting enables optimal resource management, fulfillment of obligations to donors, partners, government agencies, and the public.

However, for beginners, this process can be a real challenge. One of the biggest difficulties is the lack of knowledge regarding nonprofit legislation and the differences between accounting for commercial and nonprofit organizations. Questions often arise about tax reporting — what reports need to be submitted and how to fill them out correctly.

Basics of Accounting for NPOs

Accounting in nonprofit organizations differs significantly from commercial accounting. The primary distinction is that NPOs are not aimed at generating profit but rather achieving social, cultural, or environmental goals. Key principles that NPOs must follow include:

1. Accountability: NPOs must report to donors and other stakeholders on fund usage.
2. Transparency: All financial transactions should be clear, open, and understandable for both internal and external users. The use of funds must be well-documented to allow donors and grantors to verify their intended use.
3. Targeted use of funds: Funds must be used exclusively for statutory purposes and cannot be distributed among members or used for personal needs.
4. Independence: NPOs must operate independently of political, commercial, or other influences that could compromise their core mission.
5. Compliance with legislation: NPOs are required to strictly follow national tax codes and laws governing nonprofit activities, including regulations on financial reporting.
6. Limitations on commercial activities: NPOs may engage in commercial activities, but only as a secondary function within their mission. All revenues must be reinvested in the organization’s development. Failure to comply with these rules can result in the loss of nonprofit status.

Organizing Accounting in an NPO to Avoid Mistakes

One of the first steps is developing an accounting policy. This document should outline clear rules for recording income and expenses, maintaining documentation, and submitting reports. Having an accounting policy in place from the start helps prevent problems, ensures financial transparency, and maintains compliance with regulations.

Financial and Tax Reporting for NPOs

One of the most critical aspects of managing an NPO’s accounting is preparing reports. Key reports include:

• Financial statements: Show the financial position, cash flow, funding sources, and expenses.
• Tax report on income usage: Confirms that the organization uses its funds in accordance with its nonprofit status.
• Unified report on personal income tax (PIT) and social contributions: Required if the organization employs staff.
• Reports for grantors and partners: Typically prepared according to grant agreements and not submitted to tax authorities.

Non-profit organizations can have different organizational and legal forms depending on their activities, goals, and legal requirements. Accordingly, each form has its own reporting specifics.

Accounting guidelines for non-profit institutions include monitoring reporting deadlines, as missing them can result in fines. It is also important to continuously monitor regulatory changes that affect reporting requirements.

Documentation in NPO Accounting: How to Store and Organize

Proper documentation is the foundation of good accounting. To maintain order, NPOs should properly store:

1. Contracts: Grant agreements, partner contracts, and supplier agreements.
2. Primary documents: Work completion reports, invoices, expenditure statements.
3. Banking documents: Account statements, payment orders, and transaction confirmations.

To optimize accounting in non-profit organizations, it is advisable to create an electronic document archive, which will simplify searches and allow for quick access to necessary information. At the same time, it is important to ensure data backup. According to the law, certain types of documents must be stored for several years, and their loss may result in legal liability.

Accounting Software for NPOs

Automation of accounting is an essential tool for improving the efficiency of non-profit organizations (NPOs).

For beginners, managing accounting in NPOs becomes significantly easier with automation. It reduces errors, automatically generates reports, and simplifies budget preparation. The choice of software should be based on the organization’s needs, the scale of its activities, and the requirements of its partners.

Common Accounting Mistakes in NPOs

Common mistakes include failure to properly account for grant funds, reporting errors due to misinterpretation of legislation, and non-compliance with the requirements for non-profit status or the application of accounting principles as if for commercial organizations.

Accounting tips for beginners in non-profit organizations include involving specialists, conducting regular audits, and using modern software solutions.

Additionally, adhering to accounting rules and applying modern accounting approaches help mitigate risks and prevent errors. For beginners, it is crucial to understand that accounting guidelines for non-profit institutions must consider all the specific features of this sector, including reporting, expense control, and document management. Only by doing so can NPOs achieve financial stability and success.

UHY-Prostir has many years of experience working with non-profit organizations, providing accounting, auditing, payroll calculation and record keeping services. If you are looking for a reliable partner, contact our specialists by leaving a request on our website or call the phone numbers listed in the Contacts section.