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Mar 01 2022

Quickbooks for Nonprofits: Why It Does Not Follow Nonprofit Accounting Guidelines

Not-for-Profit Organizations must follow strict accounting guidelines. Trying to shoe-horn the functionality of an off-the-self commercial accounting package, such as QuickBooks for Nonprofits, can be risky. There is no one-size fits all when it comes to nonprofit accounting software.

Does Quickbooks for Nonprofits Follow Nonprofit Accounting Guidelines? - araize.com

Nonprofit Accounting Guidelines

There are vast differences between nonprofit accounting and for-profit accounting. Unlike for-profit businesses, it must have management objectives and generate unique reports both for internal and external use. Most importantly, it must demonstrate accountability to funding sources.

Trying to shoe-horn the functionality of an off-the-self commercial accounting package, such as QuickBooks for Nonprofits or Peachtree, into the requirements could jeopardize the fiscal well-being of your nonprofit organization.

What is Fund Accounting?

Fund Accounting is unique to not-for-profit organizations. As a consequence, fund accounting more than any other single concept of not-for-profit accounting, is the reason why not-for-profit organizations need proper fund accounting software tools for proper accountability and stewardship of funds.

The separation of accounting records by departments, branches and product lines is sometimes done in for-profit business accounting, but this is not the same as the separation that nonprofits need for fund accounting. All software packages designed to be used in for-profit businesses do not have fund accounting capabilities.

In fund accounting, amounts are segregated into categories according to restrictions placed by funding sources and designations placed by the organization’s governing board on their use. All unrestricted revenue are in one fund, all temporarily restricted revenue in another, all permanently restricted in a third, and so forth. Typically in reporting, an organization using fund accounting will present separate financial statements for each fund.

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Nonprofits Must Demonstrate Compliance

Why Quickbooks Does Not Work For Nonprofit Accounting - araize.com

Fund accounting is widely used by not-for-profit organizations because it provides the ability in ensure compliance with legal restrictions and to report on the organization’s stewardship of amounts entrusted by funding sources.

While this concept of separate funds in itself is not particularly difficult, it does create problems when trying to apply these principals with accounting software that is not designed to separate activity by funds.

The concept of fund accounting will continue to be appropriate for many organizations for keeping their books and for internal reporting to management, funding sources and the board. In addition the fund accounting financial records will be the basis for preparation of the financial statements used for reporting to the public.

This distinction between internal accounting and external financial reporting is important to understand. Accounting standards issued by the accounting profession deal only with external financial reporting, not how the internal books are kept. Organizations are free to use any method of record keeping they wish, as long as the final result – the financial statements seen by the public – are in the proper form.

Nonprofit Accounting Course - araize.com


Nonprofit Accounting Course: Learn essential skills to strengthen accountability and avoid costly mistakes. Get in-depth training on fund accounting, budgets, financials and more.


QuickBooks for Nonprofits

Intuit recommends using Classes in QuickBooks for Nonprofits to generate a Balance Sheet by fund, but there are inherent flaws in the design of QuickBooks that limit its capabilities in this area. However, the Balance Sheet by Class report is only available in QuickBooks Premier and Enterprise Solutions.

Here is information taken directly from the Intuit Support Site:

Important: The Balance Sheet by Class report is an advanced report that differs from other QuickBooks reports. Specifically, QuickBooks calculates the class allocations for the report each time you run the report. Because of this, you may experience some unexpected results. Understanding and fixing these results requires a strong background in accounting and a good working knowledge of QuickBooks. Only use this report if you need a balance sheet broken down by class.

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 for Nonprofits to track financial data in nonprofit organizations.

Because QuickBooks is so easy to use, and so inexpensive, many nonprofit organizations have adopted it for financial record keeping. However, right out-of-the-box QuickBooks for Nonprofits isn’t really designed for the special bookkeeping functions required for nonprofit accounting.

As a result, most nonprofit organizations have to spend extra money to have accounting professionals create reports from their QuickBooks data. The goal of this book is to help you understand how to set up QuickBooks for nonprofit accounting, make it easier to create transactions properly, and reduce the amount of money to spend on accounting fees.

Even QuickBooks Premier Nonprofit edition isn’t a solution because the software wasn’t written to accommodate all the needs of nonprofit accounting.

I’ve worked with, or examined hundreds of QuickBooks nonprofit installations, and I’ve seen a wide variety of work arounds (including add-on software) aimed at making QuickBooks work properly. Most of them don’t work well, are too complex to be efficient (even for experienced QuickBooks users), and some don’t really work at all.

Using Classes in Quickbooks

Most consultants recommend using classes in Quickbooks to get the segregation of financial activity a nonprofit needs for funds, functional areas, programs, funding sources, etc. In QuickBooks, you get two data elements for coding and this severely limits reporting. You have Account and Class. Jobs is a third data element, but is not universally available in the QuickBooks report structure. If a nonprofit requires reporting on more than two dimensions, QuickBooks simply can t handle it and a majority of financial reporting must be done outside the system in spreadsheets, which can create internal control deficiencies.


Schedule a FastFund Online Demo: Learn more about our unique software approach to nonprofit accounting, payroll and fundraising.


Bottom Line

Since not-for-profit organizations have distinctly different reporting requirements from commercial companies, your accounting software must be able to handle those differences. With a true nonprofit accounting software solution like FastFund Accounting from Araize, reporting tasks are simplified and can be accomplished in a timelier manner.

Fund accounting solutions that specialize in serving the not-for-profit sector will also have more robust integrated options for not-for-profit specific tasks, such as grant management, indirect cost allocations, and donor management.

Want to read more? Check out these insightful articles:

  • What Is Fund Accounting: Guide to Proper Stewardship of Funds
  • Nonprofit Accounting Software: Guide to Demonstrating Accountability
  • Chart of Accounts for Nonprofits: Guide to Proper Setup
  • Why QuickBooks Won’t Work for Fundraising Donor Management
  • Nonprofit Financial Statements: How To Generate Compliant Reports
  • Nonprofit Net Assets and Balance Sheet Explained
  • 3 Key Advantages of Fund Accounting for Nonprofits
  • For-Profit vs Nonprofit Accounting: What is the Difference?

Did you find this article useful? We welcome your thoughts and comments.

Written by Joseph Scarano · Categorized: Nonprofit Fund Accounting · Tagged: Accounting Software for Nonprofits, Fund Accounting, Nonprofit Accountability, Nonprofit Accounting, Nonprofit Accounting Software, Nonprofit Fund Accounting Software

About the Author

Joseph Scarano is the CEO of Araize, Inc., developers of cloud-based FastFund Online Nonprofit accounting, fundraising and payroll software solutions to help your nonprofit become more transparent, accountable and sustainable.

Reader Interactions

Comments

  1. Steven Burke says

    October 3, 2018 at 9:57 pm

    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.

    Reply
    • Joseph Scarano says

      October 4, 2018 at 8:19 am

      Steven,

      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.

      Reply
  2. Ross Smith says

    December 7, 2018 at 3:10 am

    We do report to the State in Cash annually so we do not have to follow GAAP/GASB rules.

    Reply
    • Joseph Scarano says

      December 7, 2018 at 11:57 am

      Ross,

      Even though you are on the cash basis, you still need to comply with GAAP and GASB rules.

      Reply
  3. Nancy says

    June 8, 2019 at 7:21 pm

    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?

    Reply
    • Joseph Scarano says

      June 9, 2019 at 10:24 am

      Nancy,

      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.

      Reply
  4. shah faisal khan says

    October 1, 2019 at 12:34 pm

    hi,
    greetings everybody:
    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.
    everybody must read it.
    thanks

    Reply
  5. Sharon says

    May 31, 2020 at 12:40 am

    How does Fund EZ compare

    Reply
    • Joseph Scarano says

      June 1, 2020 at 8:34 am

      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.

      Reply
  6. Gena Sanford says

    January 5, 2021 at 12:36 am

    Must say, this is a well researched and informative blog. I loved reading it. Inspired by you and many others like you, I have also tried on writing something on the same niche, I would be grateful if you could take out time and share your views on it here: Affordable Monthly Bookkeeping Fees.
    Thanks a ton!

    Reply
  7. Julie Assel says

    April 21, 2022 at 1:40 am

    How well does this software manage the federal accounting requirements for grants in the Uniform Grant Guidance?

    Reply
    • Joseph Scarano says

      April 21, 2022 at 1:05 pm

      Julie,

      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.

      Reply

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