Are you a not-for-profit organization using Quickbooks for your accounting needs? While the software may seem convenient, it’s important to note that Quickbooks for Nonprofits does not necessarily follow nonprofit 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 nonprofit fund accounting software for your organization.
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 Nonprofit, 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 nonprofit fund accounting?
Nonprofit organizations face unique challenges when it comes to accounting. Unlike for-profit businesses, nonprofits must adhere to strict accounting standards that are designed to ensure that donors’ funds are used for 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, nonprofit 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. Business Accounting
Some for-profit businesses separate their accounting records by departments, branches, and product lines. This is not the same separation required for fund accounting in nonprofits. Most software packages designed for for-profit businesses do not have fund accounting capabilities.
Understanding Fund Accounting
In fund accounting, amounts are segregated into categories based on restrictions set by funding sources and designations made by the governing board. For example, net assets without restrictions is revenue in one fund. Whereas, net assets with restrictions is revenue assigned another fund. In reporting, a nonprofit 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, nonprofits 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.
Free eBook Download: How to Generate Compliant Nonprofit Reports
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, it can be difficult to apply this principle using accounting software that is not designed for fund separation. Despite this, fund accounting will continue to be appropriate for many organizations for internal reporting purposes and financial statements that will be used for reporting to the public.
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.
Nonprofit Accounting Course: Learn essential skills to strengthen accountability and avoid costly mistakes. Get in-depth training on fund accounting, budgets, financials and more.
Limitations of QuickBooks for Non Profit Organizations
While Intuit recommends using Classes in Nonprofit 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 Quickbooks 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 Nonprofit to track financial data in nonprofit organizations.
Many nonprofits end up spending extra money to have accounting professionals create reports from their QuickBooks data. The purpose of this book is to help you understand how to set up QuickBooks for nonprofit 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 QuickBooks nonprofit 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.
Pitfalls of Using Classes in Quickbooks
Consultants usually recommend using classes in Quickbooks Nonprofit to segregate financial activity. This is important as it helps nonprofits track funds, functional areas, and funding sources. Unfortunately, QuickBooks 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 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.
FastFund Features 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. With these features, FastFund is better suited to meet the needs of non-profit organizations.
Quickbooks vs FastFund: Feature Comparison
When comparing FastFund Accounting and Quickbooks, it is clear that they have a number of differences. 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|
Schedule a FastFund Online Demo: Learn more about our unique software approach to nonprofit accounting, payroll and fundraising.
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. Choosing software designed for not-for-profit accounting needs can help organizations more effectively manage their finances and fulfill their accounting obligations.
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Did you find this article useful? We welcome your thoughts and comments.
Steven Burke says
We are a small gov’t municipality that is required to maintain books by Fund and report to our Board monthly in accrual. We do report to the State in Cash annually so we do not have to follow GAAP/GASB rules. Can your system do this. We have 50 employees and only have two funds.
Joseph Scarano says
Yes, FastFund Online can report on each of your funds on the accrual basis. We have quite a few small municipalities (cities, towns, government agencies) using our system. If you are interested, go back to Araize.com and click on Get a Demo and I can show you how easy it is to give you the reports you need.
Ross Smith says
We do report to the State in Cash annually so we do not have to follow GAAP/GASB rules.
Joseph Scarano says
Even though you are on the cash basis, you still need to comply with GAAP and GASB rules.
Does your non-profit program comply with the new FASB regulations that went into effect with financial statements with a 12/31/18 fiscal year?
Joseph Scarano says
Thank you for your interest in Araize and our FastFund Online system. Yes, our accounting system is compliant with new FASB Update 2016-14 (Topic 958) Presentation of Financial Statements of Not-For-Profit Entities. In FastFund Accounting, you can set up as many funds (net asset classes) as needed for internal reporting purposes, but all funds can be consolidated for external financial statement presentations into the two net asset classifications:
Net Assets Without Donor Restrictions
Net Assets With Donor Restrictions
If you are interested in a demo, go back to Araize.com and click on Get a Demo.
shah faisal khan says
that is an excellent article about business and accounting education.
I have learned many new things from this article. I have also research accounting software and solution to the common problems we faced during the operation of this software.
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How does Fund EZ compare
Joseph Scarano says
Fund EZ is built on older Windows technology and is not a true multi-tenant Software as a Service. FastFund Online is built on open-source technology that allows you to take advantage of APIs to link to other third party applications. With FastFund, there is no software to install or maintain. You can run on any computer with an internet connection, even tablet devices. Plus, FastFund Online has a fully integrated fund raising CRM application and payroll. Our support team is dedicated to helping our customers with successful implementation of FastFund. FastFund will help your organization be more transparent, provide proper stewardship of donor funds to help you fulfill your mission.
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Julie Assel says
How well does this software manage the federal accounting requirements for grants in the Uniform Grant Guidance?
Joseph Scarano says
FastFund Online is designed by CPAs with extensive experience conducting OMB Circular A-133 audits. FastFund is being used by hundreds of nonprofits that undergo annual audits and are found in compliance with the audit requirements.