Best Practices for Setting up an Accounting System for a Charity or Other Nonprofit Organization

There is no single right way or wrong way to set up an accounting system for a nonprofit organization. Every method has its pros and cons. Yet small new nonprofits may find a that simple clear list of best practice recommendations is useful to save time and money and to avoid learning ‘the hard way’. So that’s the purpose of this post, to simply list some the best practices while not delving into discussion or explanations. If you want a discussion of the options or explanation of the recommendations, then I am pleased to help with that part of the setup project.


1. Use QuickBooks Online. Charities qualify for a heavily discounted version currently $50 per year. Regardless of the merits and comparison to other accounting software, no other option compares with this value. It takes some time to be approved for the large discount, so plan ahead. Otherwise get it through a ProAdvisor accountant at their wholesale price. The discount only applies to the software, so be sure to budget for the setup od the accounting system.

2. Adapt some version of the Unified Nonprofit Chart of Accounts for Nonprofit Organizations to set up and organize your accounts. The software helps make this process easier by making suggestions based on your organization’s profile. Don’t stress over this at startup. Accounts can always be modified, renamed, or re-organized later.

3. Use three Classes of accounting transactions: Administration, Programs, and Fundraising.

4. Track specific fundraising campaigns and grants as Projects if this is required.

5. If any grants or donations have donor restrictions, use Locations to separate grant funds With Donor Restrictions or
Without Donor Restrictions. (This is likely the most non-intuitive suggestion in this blog post but works well for those who use it).

6. Use generic vendor categories. Each vendor does not necessarily need to be identified by name. For example, “gas station” or “restaurant” rather than each individual business name is usually appropriate.

7. If tracking of volunteer hours is desired, allow each volunteer to set themself up as an “employee” with time tracking access.

8. Use the mobile app to scan and store receipts to avoid paper handling and manual data entry.

9. Each user who is calculating and deducting auto mileage should install and use the mobile app for tracking deductible auto mileage.

10. Use the organization’s external accountant, preferably a ProAdvisor, as the master administrator until you are certain that the organization’s internal executive director or treasurer is comfortable and competent in that role.

11. Offer board members and project managers access to reports to the specified accounting records that they need. Offer to have customized financial performance reports sent to them on a periodic basis. This part of the accounting system setup multiplies the value of accounting to achieving your organization’s mission.


Notes:

There are other considerations not covered in this post including choosing a basis of accounting, setting up effective controls, reporting to outside organizations, integration of banking, bill paying and payroll. These issues also deserve equal attention when appropriate for your organization.

I am grateful to the many unnamed accounting influencers and professional mentors who taught me these principles and generously support the nonprofit accounting community.

Grants of professional accounting services may be available through Raising Nonprofits that may be useful in the setup of a nonprofit accounting system. See this blog post for more information.