Are you a not-for-profit organization using Quickbooks Online for your nonprofit accounting needs? While the software may seem convenient, it’s important to note that it does not necessarily follow fund accounting guidelines. This can pose significant compliance risks for nonprofits that must adhere to strict accounting standards.
In this blog post, we’ll take a closer look at why using the wrong accounting software can be problematic for nonprofits and provide some tips on selecting the right fund accounting software for your organization.
Table of contents
- Guidelines for Non-For-Profit Accounting
- What are the challenges of fund accounting?
- Nonprofits Must Demonstrate Compliance
- Limitations of QuickBooks for Non Profit Organizations
- Risks Using Classes in Quickbooks
- Quickbooks vs FastFund: Feature Comparison
- Bottom Line
Guidelines for Non-For-Profit Accounting
Nonprofit accounting is fundamentally distinct from for-profit accounting in several key ways. For example, nonprofit accounting must generate unique reports that serve both internal and external purposes. Above all, they must demonstrate accountability to funding sources. These features are not required for the for-profit sector.
Using a standard commercial accounting package, like QuickBooks Online for nonprofits, to manage nonprofit accounting functions can significantly jeopardize the fiscal well-being of the organization. Attempting to force-fit a non-specialized accounting solution to a nonprofit context can cause serious problems.
What are the challenges of fund accounting?
Organizations face unique challenges when it comes to accounting. Unlike for-profit businesses, nonprofits have to strictly follow accounting standards designed to guarantee that donors’ funds serve their intended purpose. Here are some of the key challenges of nonprofit fund accounting:
- Transparency: Nonprofits must be transparent in their accounting practices to maintain the trust of their donors and stakeholders. This includes accurately tracking and reporting how donor funds are spent.
- Compliance: Nonprofits must comply with laws and regulations that govern nonprofit accounting. Failure to comply can result in legal and financial consequences.
- Fund accounting: Nonprofits typically have multiple funding sources, such as grants and donations, which must be accounted for separately. This can be complicated and time-consuming.
- Reporting: Nonprofits must provide detailed financial reports to donors, stakeholders, and regulatory bodies. These reports must be accurate and comply with accounting standards.
Overall, fund accounting is a complex and highly regulated field that requires specialized knowledge and expertise. Nonprofits that fail to properly manage their accounting processes can face serious consequences.
The Importance of Fund Accounting for Not-For-Profit Organizations
Fund accounting is a critical concept for not-for-profit organizations, and proper accounting software tools are essential for ensuring accountability and stewardship of funds. In this section, we’ll explore why fund accounting is unique to not-for-profit organizations and why specialized software is necessary.
Fund Accounting vs. Small Business Accounting
Some for-profit businesses separate their accounting records by departments, branches, and product lines. The separation required for fund accounting is not the same as this. Most software packages designed for for-profit businesses do not have fund accounting capabilities.
Understanding Fund Accounting
Fund accounting segregates amounts into categories based on the restrictions funding sources set and the designations the governing board makes. For example, net assets without restrictions is revenue in one fund. Whereas, we assign the revenue to another fund as net assets with restrictions. In reporting, using fund accounting will present separate financial statements for each fund.
The Need for Proper Fund Accounting Software
Given the unique requirements of fund accounting, not-for-profit organizations need specialized software tools to manage their accounting processes effectively. Without such tools, organizations can struggle to properly track and report on their funds, which can lead to compliance risks and financial challenges. Proper fund accounting software is essential for ensuring effective stewardship of donor funds and maintaining the trust of stakeholders.
Nonprofits Must Demonstrate Compliance
Not-for-profit organizations commonly use fund accounting to ensure compliance with legal restrictions and report on their stewardship of finances entrusted by funding sources.
Even though the concept of separate funds is straightforward, applying this principle can be difficult using accounting software not designed for fund separation. Despite this, many organizations will continue to find fund accounting appropriate for internal reporting purposes and for creating financial statements for public reporting.
It’s important to understand the distinction between internal accounting and external financial reporting. Accounting standards issued by the accounting profession only address external financial reporting, not how internal books are kept. Organizations are free to use any method of record keeping they prefer, as long as the resulting financial statements seen by the public are in the correct format.
Limitations of QuickBooks for Non Profit Organizations
While Intuit recommends using Classes in Quickbooks to generate a Balance Sheet by fund, there are limitations in the software’s design that inhibit this capability. Specifically, the Balance Sheet by Class report is only accessible in QuickBooks Premier and Enterprise Solutions.
The Intuit Support Site Says:
Potential Problems in Nonprofit Accounting
- Net incomes differ between the Balance Sheet by Class and Profit & Loss by Class reports.
- The Balance Sheet by Class report makes calculations to balance a transaction’s classes. In some cases, this causes the net income for a class on the Profit & Loss by Class report to differ from the net income for that same class on the Balance Sheet by Class report.
Why is this important?
- The two primary financial statements in QuickBooks are the balance sheet and the profit & loss statement.
- Net Income appears as a line item on both reports.
- It’s the bottom line on the Profit & Loss Standard report.
- It’s a component of Equity on the Standard Balance Sheet report.
Why is my balance sheet by class out of balance?
- The balance sheet uses the standard accounting equation: Assets = Liabilities + Equity.
- The balance sheet in total (across all classes) follows the equation and always balances. However, it’s possible that the balance sheet doesn’t balance for an individual class. When this happens, the report shows “Unbalanced Classes.”
The following is an excerpt from a book titled Running Quickbooks in Nonprofits by Kathy Ivens. This book provides information about using QuickBooks Online to track financial data in nonprofit organizations.
Many nonprofits end up spending extra money to have accounting professionals create reports from its data. The purpose of this book is to help you understand how to set up Nonprofit QuickBooks accounting, create transactions properly, and reduce accounting fees.
Unfortunately, QuickBooks Premier Nonprofit edition is not a complete solution. The software does not fulfill all the requirements of nonprofit accounting. Having worked with and examined hundreds of nonprofit Quickbooks installations, I’ve seen many workarounds attempted (including add-on software) to make QuickBooks products function correctly. However, most of these workarounds are inefficient and complex, even for experienced QuickBooks users, and some do not work well at all.
Risks Using Classes in Quickbooks
Consultants usually recommend using classes in Quickbooks online for nonprofits to segregate financial activity. This is important as it helps nonprofits track funds, functional areas, and funding sources. Unfortunately, it only provides two data elements for coding, which are Account and Class, and this creates a significant limitation for reporting.
While a third data element, Jobs, is available, it is not universally accessible in the QuickBooks report structure. This means that if a nonprofit requires reporting on more than two dimensions, QuickBooks online for nonprofits is simply unable to handle it. As a result, a significant portion of financial reporting must be done outside the system, typically in spreadsheets. This can create internal control deficiencies which can negatively impact the nonprofit.
Limitations of Using Quickbooks for Nonprofits
While Quickbooks Desktop has been widely used, it falls short in catering to the specific needs of nonprofit organizations. Additionally, the software has limitations in fund accounting capabilities and may require workarounds or additional software. This not only complicates the accounting process but also fails to provide the transparency and compliance required by nonprofit organizations.
FastFund Designed for Not-for-Profit Organizations
On the other hand, FastFund is specifically designed for non-profits, and provides features such as custom chart of accounts, true fund accounting, and donor management. Furthermore, FastFund also includes features such as FASB compliant financial statements and IRS 990 form preparation, as well as payroll and cost allocation features. Above all, FastFund is better suited to meet the needs of non-profit organizations.
In addition, FastFund Online is a specialized nonprofit accounting software designed to meet the unique reporting requirements of nonprofits. It offers superior features such as a custom chart of accounts, true fund accounting, and donor management. These features simplify reporting tasks and ensure full compliance with nonprofit accounting standards.
Quickbooks vs FastFund: Feature Comparison
When comparing FastFund Accounting and Quickbooks Online for Nonprofits, it is clear that they have a number of differences. In contrast, QuickBooks is a traditional commercial accounting system that is popular for its general ledger and accounts payable features. However, it is not specifically designed for non-profits, and does not include features such as fund allocation and cost center tracking that meet the needs of non-profits.
|Features||FastFund Accounting||Quickbooks for Nonprofits|
|Chart of Accounts Segments||6||1|
|Manage Contributions and Donations||Yes||No|
|Integration with Online Donations||Yes||No|
|Direct and Indirect Allocations||Yes||No|
|Tax Support (for 1099s and 990s)||Yes||Yes|
|Balance Sheets by Fund||Yes||No|
|Income Statements by Fund||Yes||No|
|Form 990 Reports by Functional Area||Yes||No|
|Invoices and Payment Tracking||Yes||Yes|
|Budgeting by Functional Area||Yes||No|
In conclusion, it’s critical for not-for-profit organizations to have accounting software that can satisfy their unique reporting requirements. FastFund Accounting is a true nonprofit accounting software solution that simplifies reporting tasks and enables timelier completion.
Furthermore, fund accounting solutions that specialize in serving the not-for-profit sector offer more robust integrated options tailored specifically to not-for-profit organizations, including grant management, indirect cost allocations, and donor management.
FastFund Online is not just another accounting software, it’s a cloud-based solution offering integrated options for grant management, indirect cost allocations, and donor management. Built on open-source technology, it includes an integrated fundraising CRM application and payroll.
If your nonprofit organization is using Quickbooks Desktop and facing challenges with transparency, compliance, fund accounting, and reporting, it’s time to consider a superior, industry-specific alternative. FastFund Online catifies these challenges into opportunities for better financial management. Sign up for a live demo of FastFund Online today, and see the difference firsthand.
What are the main compliance risks when using QuickBooks Online for nonprofits?
The main compliance risks when using QuickBooks for nonprofits include difficulties in generating accurate fund accounting reports and balancing net incomes between different financial statements. This can potentially lead to a lack of transparency and non-compliance with accounting standards.
Why is fund accounting challenging with QuickBooks for nonprofit organizations?
Fund accounting can be challenging with QuickBooks because it’s not specifically designed for nonprofits. This can make it difficult for organizations to properly manage and track multiple funding sources, as required by fund accounting principles.
How might QuickBooks limit compliance for nonprofit organizations?
Moreover, QuickBooks may limit compliance for nonprofits due to its limitations in providing FASB-compliant financial statements and handling federal accounting requirements for grants. This could potentially lead to legal and financial consequences for the organization.
Can QuickBooks for nonprofits generate FASB-compliant financial statements?
Most importantly, QuickBooks has limitations in generating FASB-compliant financial statements. This is a significant compliance risk as nonprofits need to adhere to FASB Update 2016-14 (Topic 958) Presentation of Financial Statements of Not-For-Profit Entities.
Does QuickBooks comply with the Uniform Grant Guidance for federal accounting?
Ultimately, QuickBooks for Nonprofits may struggle to fully comply with the Uniform Grant Guidance for federal accounting. This is an important compliance requirement for organizations receiving federal grants.
How does QuickBooks compare to FastFund Accounting in terms of compliance?
Unlike QuickBooks, FastFund Accounting is specifically designed for nonprofits and offers features like true fund accounting, custom chart of accounts, FASB-compliant financial statements, and donor management. These features help ensure compliance with nonprofit accounting standards.
How does QuickBooks impact transparency in financial reporting?
Due to its limitations in fund accounting and generating accurate reports, QuickBooks may impact the transparency of a nonprofit’s financial reporting, which is essential to maintaining the trust of donors and stakeholders.
What are the implications of non-compliance in nonprofit accounting?
While, non-compliance in nonprofit accounting can lead to legal and financial repercussions, loss of trust from donors and stakeholders, and potential loss of tax-exempt status. It’s therefore crucial for nonprofits to use an accounting system that ensures full compliance with all relevant laws and regulations.
Want to read more? Check out these insightful articles:
Did you find this article useful? We welcome your thoughts and comments.