How to Easily Prepare Financial Statements for a Nonprofit (2024)

Many small nonprofits that are just starting out lack funds to buy expensive accounting programs or to hire bookkeepers. They have great ideas on how to help those in need and their hearts are in the right place, but they generally don’t have any accounting experience. This can prove to be quite detrimental: nonprofits must keep good records or risk losing their nonprofit status. So, even if you are a small nonprofit, your first priority should be to keep accurate financial statements from the get-go. If the funds are just not there to hire a bookkeeper, or if you’ve been relying on volunteers without accounting experience, there is good news. There are accounting software tools in place that anybody can use. These tools will help you categorize your financial transactions and produce statements that are reliable and accurate. Producing these clear category totals will greatly help an accountant obtain true totals for year-end financial statements and tax returns.

But first, let’s start with a list of what is absolutely necessary to keep track of in your nonprofit. I’ll give you the why and the how: the details, the reports, and the suggestions for how to do this on a small budget. (Keep in mind this is for small nonprofits or nonprofits just starting out. If your gross receipts are over $50,000.00, then you will need to seek the help of your accountant to help you stay compliant.)

Preparing the Financial Details for Small Nonprofits:

• A list of all revenues (or gross receipts as the IRS calls them)—whether restricted, temporarily restricted, or non-restricted—divided into the proper categories. This will make it easy for your accountant or tax professional to sort this out on your final year-end financial statements. But don’t get caught up in the terminology here. It is more important to keep accurate records of your financial position than to be sure every report generated during the year is perfectly tweaked for nonprofit terminology. If this is the case, your year-end statement prepared by your professional may need to be tweaked for nonprofit terminology.
• A list of all expenses categorized accurately, taking into account all the checks you have written, any purchases you have made with credit or debit cards, and all cash expenditures. (TIP: keep receipts for all of these expenses in a categorized envelope or folder system.)
• Your checkbook should be reconciled each month and include any outstanding items.

Nonprofit Financial Reports

I suggest starting out using the cash method of accounting instead of the more elaborate accrual method for your nonprofit. You will have to choose one or the other before completing your first tax return, but you can change it at a later time by requesting the IRS form 3115 here. It will be much easier to operate on a cash basis, especially for the kind of employees or volunteers you will most likely have (those with no bookkeeping background).

You enter transactions into ledger spreadsheets like the ones listed below to capture all the details before a program can produce the financial statements needed for your nonprofit:

• Deposits Ledger – categorized
• Checks Ledger – categorized
• Cash & Charged Expenses Ledger – categorized
• Bank Reconciliation
• Subcategorizations for special events and fundraisers (which would show income over expenses for each event separately)

Examples of Financial Statements

To keep you (and those to whom you report) informed, it’s Important to understand which financial statements are necessary and why.

• Income Statement (or Statement of Activities) with budget comparison.

  This statement shows all your revenue (and income — Did you know your nonprofit can take in up to $1,000 of income each month before having to pay taxes.) against all your expenses.
  

  See Also

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• Balance Sheet (or Statement of Financial Position).

  The Balance Sheet shows all your assets less liabilities which equals your (equity) net assets.
  

• Cash Flow – IN: A record of all incoming money

• Cash Flow – OUT: A record of all outgoing money

• Trial Balance at the Year-End: A list of all accounts and their balances

The Why:

Understanding why to keep these records is very important and will help to keep you motivated and current. The reasons are 1) to stay compliant – nobody wants to lose their nonprofit status they tried so hard to acquire and 2) because you will be held accountable to many people. To name a few:

• donors
• board members
• accountants
• tax preparers
• auditors

It’s a Good Idea to Keep Clear, Concise, Accurate, and Auditable Records

Your records will be accurate if you have reconciled the checkbook and other accounts. Reconciling is a way to compare your records against what your bank accounts show on their records and list all the differences such as outstanding checks. You should have an audit trail of your expenses. An audit trail is a security-relevant chronological record of your transactions. In other words, it is a record of all checks in numerical order without skipping any, from the beginning of the year to the end. That means you need to record any voided check numbers also. It makes for a complete record and if audited you would have everything recorded properly – hence the term “audit trail.”

The How:

I’ll recommend a software package I designed which I use for both my personal and business financial records, but ultimately it will be your decision. Keep in mind that what you start out using should fit the volume of your transactions. You don’t want to use a program that is too large with too many features you won’t be using and too cumbersome as it will most likely be difficult to learn. If it’s difficult for you to learn, it could be difficult for each new volunteer treasurer to learn as well.

Excel Spreadsheets

If you are really good at making spreadsheets, you could use Google Sheets or (better yet) Excel to keep the records I mentioned above. Be careful not to waste too much time reinventing the wheel here.

Fund Accounting Software

There is no need to go out and purchase a cumbersome fund accounting package for a lot of money that requires a lot of training if your needs don’t warrant it at this time. But if you do, be sure you have someone lined up to be trained on the program. Also ask yourself: if that volunteer should choose to leave, will you be able to find another volunteer with the same experience rather quickly? These are just some things to think about.

It is so much better to keep track of your records in the simplest system from the get go instead of waiting to find an elaborate fund accounting program and then have to go back to the beginning of the year to recreate your records. Things have a way of falling through the cracks that way and can cause you many headaches.

Your Current Accounting Software Program

You may already have a current program you could use to get the job done. Just be sure it can print the above mentioned reports. Don’t be so concerned with the terminology of your current software. As I mentioned before, the most important reports are: the year-end nonprofit financial statements completed by your accountant to share with donors and others; and the nonprofit tax return that would be filed with the governmental agencies. Your monthly reports you prepare during the year are for your internal use only.

You May Want to Consider Using Big E-Z Books

Big E-Z Books, the accounting software I designed, can produce all the above-mentioned financial statements for your nonprofit for an annual license fee of only $79.95. It’s easy to set up and easy to enter and import your data. Once categorized and reconciled, it will produce all the above reports. What is nice about Big E-Z Books is how everything is laid out. If you need to correct an entry it’s easy to find it, correct it, and move on. Correcting an entry in a cumbersome program can take more time then you wish, especially if you have to do an online search to find an answer. Also, Big E-Z Books is so easy to learn how to use that you can train other volunteers quickly. Schedule a free 30-minute demo to see if Big E-Z Books is right for you and so we can show you how to customize it for your nonprofit.

Happy Bookkeeping!