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The Beginners Guide to Nonprofit Auditing Free Checklist + FAQs

Your message has been received and we’ll be reviewing your request shortly. Once you’ve made these changes, you can send the audited information and modifications to the IRS to update your 990 forms. Regular audits will keep your Board of Directors and employees accountable for their decisions.

Additional information – Charity and nonprofit audits

However, if you are not required to have an audit and simply need an independent review of your financials, a financial review may be a more cost-effective option. Here is some estimation of the order of magnitude cost of an audit based on the nonprofit organization’s financial size. This is because the auditor will have a comprehensive understanding of the nonprofit’s operations and can offer suggestions on how to improve them.

• One of our Classy experts will reach out to schedule a hands-on walk-through of the platform and demonstrate how our industry-leading solution can help your nonprofit reach its goals.
• That being said, you need to spend money to make money – even in a nonprofit.
• Lastly, auditors determine whether the nonprofit uses donor funds in accordance with their stated goals and objectives.
• An independent audit may be among the nonprofit audit requirements for those enterprises receiving federal funding.
• Verifying records also includes gathering and organizing proper documentation for all employees and contractors.

The Beginner’s Guide to Nonprofit Auditing (Free Checklist + FAQs)

Generally, the IRS issues a closing letter at the end of a compliance check, but not at the end of a compliance check questionnaire. However, certain state and federal government agencies do require audits on a more regular basis, depending on the size of your organization and your spending. This step-by-step guide helps you avoid costly mistakes, ensuring your events are well-planned, impactful, and deliver a strong return on investment while celebrating your organization’s community impact. These types of audits allow the organization to take a step back and determine if there are better ways of doing things than how they’re currently being done. Conducting frequent audits, primarily financial and operational ones, can help identify any potential risk that may impact the smooth running of the organization and its sustainability in the long term.

Where to Find Nonprofit Financial Information

Auditors must also provide a detailed report outlining all findings and recommendations so that nonprofits can take appropriate action to address any issues uncovered during the audit process. This allows organizations to remain compliant while also giving donors greater assurance that their funds are being used properly and in accordance with stated goals and objectives. This is a perfect example of the deficiency inherent in off-the-shelf accounting software in their inability to generate financial statements https://nerdbot.com/2025/06/10/the-key-benefits-of-accounting-services-for-nonprofit-organizations/ for your audit. If your auditor creates financial statements for your audit, then they will report a deficiency in operation on your audit report. Audits can cost upwards of $10,000 – $20,000 or more — and that doesn’t include the time spent by staff preparing for the audit or working with auditors.

Areas of Focus in Auditing a Small Nonprofit Organization

An audit helps improve an organization’s financial transparency, builds donor trust, and ensures compliance with regulations. If any of these requirements apply to your nonprofit, that doesn’t necessarily mean you’ll need to conduct an independent audit every year going forward. For example, some nonprofit bylaws require annual audits, but others state that they should occur every two, four, or five years. Or, if your organization doesn’t plan to apply for any grants that request audit reports this year, even though you did so in the past, you may be able to skip this year.

A Guide to Accounting for a Nonprofit Organization

By considering these factors, you can ensure your nonprofit organization has the necessary resources to reach its objectives while staying aligned with GAAP standards. A gain is measured by the proceeds from the sale minus the amount shown on the company’s books. Since the gain is outside of the main activity of a business, it is reported as a nonoperating or other revenue on the company’s income statement. It is also the term used by not-for-profit organizations instead of owner’s equity or stockholders’ equity.

Nonprofit Accounting: Essential Principles and Best Practices

Diversifying your revenue streams strengthens stability and helps sustain your mission over the long term. Donors will be more likely to give if they feel confident that you’ll use their money wisely. This includes investing in essential overhead costs like technology, personnel, and other operational needs. Conduct periodic audits to ensure transparency and confirm that expenses align with budget guidelines.

• Get free guides, articles, tools and calculators to help you navigate the financial side of your business with ease.
• The chart of accounts can be expanded and tailored to reflect the operations of the company.
• The Statement of Activities is similar to an income statement for-profit organizations use.
• Finally, you must ensure that all transactional data is recorded and reconciled promptly, systematically, and accurately.
• It provides the IRS and the public with information about the organization’s mission, programs, and finances.

Accounts Receivable

• Accounting involves close attention to detail and a deep understanding of the organization.
• There are a few required financial statements that are unique to nonprofit accounting.
• The investing activities section of the SCF reports the amounts spent to purchase long-term assets such as equipment, vehicles and long-term investments.
• While for-profit organizations track bottom-line earnings, nonprofit accounting focuses on demonstrating good stewardship of financial resources.
• They help mission-driven nonprofit organizations identify issues early and build trust with donors, unlocking additional funding opportunities.
• It is essential for nonprofits to maintain detailed records and documentation of all donations, as this information will be needed for financial reporting and tax compliance purposes.

However, donors might hesitate to give if your functional expenses become too large. This financial statement reports the revenues and expenses and the changes in the amounts of each of the classes of net assets during the period shown in its heading. This statement is issued by a nonprofit instead of the income statement issued by a for-profit business. In contrast, nonprofit accounting focuses on accountability and stewardship of resources.

What do nonprofit accountants do?

Understanding these basic principles will help your organization operate successfully for years to come. The wages are based upon amounts shown in either the W-2 or Form 1099 for Part VII, but benefit information is also reflected. The amounts received from, or recorded by, related parties are also disclosed in this part. Here’s a helpful guide for these organizations, especially when it comes to political activity and lobbying.

Though the terminology differs, nonprofits and for-profits use the same accounting principles. Strong internal controls are essential for maintaining financial integrity and protecting your nonprofit’s assets. They help prevent fraud, ensure compliance, and build trust with donors and regulators.

• With this information, you can estimate expenses in alignment with predicted income to make accurate budgeting decisions.
• Just like for profit accounting relies on customer data, donor management is a crucial element of your accounting strategy for this reason.
• Good nonprofit accounting practices help you create accurate, timely financial reports, demonstrate proper fund usage, track program outcomes against expenses, and provide clear impact measurements.
• Nonprofit accounting involves complex financial management strategies, compliance oversight, and strategic planning.
• When evaluating an organization’s financial performance, it is crucial to analyze both the budget and actual financial data.
• Here are the seven foundational money management practices you need to know.

• If you will have an audit performed, be sure to schedule it in plenty of time to meet the applicable deadlines.
• Nonprofit bookkeeping focuses on day-to-day financial record-keeping and management, while nonprofit accounting encompasses a broader scope, including financial analysis, reporting, and tax compliance.
• For instance, projects can be discontinued, and funding could fall through or increase.
• Apply for public or private grants that help cover administrative costs to ease your nonprofit’s burden.
• Cross-train staff on essential functions and maintain clear process documentation.

Clean and organized account procedures https://holycitysinner.com/top-benefits-of-accounting-services-for-nonprofit-organizati/ ensure every donation is accounted for and goes to the best place to make a significant impact. They also provide accountability to the donors, board members, and community members who make your mission possible. Strong nonprofit accounting is a foundational element of how to run a nonprofit. Whether you’re in charge of the numbers or not, keeping a pulse on your organization’s finances is always a smart idea.

Risk Management

Just like the statement of financial position, the statement of activities keeps net assets that have conditions and stipulations attached to them separate from unrestricted funds. The statement of activities (also sometimes called the operating statement) is like the nonprofit version of the income statement. Like the income statement, it tells you how “profitable” your NFP was over a given period by showing your revenue, minus your expenses and losses. The difference between the balance sheet and the statement of financial position is that, because nonprofits don’t technically have any owners, the statement of financial position doesn’t have any equity on it.

To help track and manage these restrictions, nonprofits and governments use a system called fund accounting. And then, there are a series of reports and financial statements you’ll use to communicate the financial reality of your organization to potential donors, the IRS, watchdog agencies, and other stakeholders. Nonprofit accounting typically involves preparing detailed financial statements that show how the organization is doing financially. These statements also disclose any related party transactions and other important information to accounting services for nonprofit organizations help others understand the organization’s operations.

Understanding Contra Asset Account Types and Examples

With the contra asset examples appropriate level of automation integration in your chosen tool, you can pull the relevant values into these individual accounts directly from invoices, credit agreements, and other documentation. When the two balances are offset against each other they show the net balance of both accounts. Whether reported as separate lines on the financial report or as a cumulative value, the net amount of the pair of accounts is called the “net book value” of the individual asset.

Reserve for Obsolete Inventory

By recording reductions in a separate account, companies can get better insights into their actual accounts. Contra asset accounts also provide a clear picture of the companies’ accumulation of assets. For example, after six years, the asset’s book value on the balance sheet will be $40,000. However, it will also have a negative accumulated depreciation of $60,000, offsetting that cost.

• For example, if a company has a liability account for unearned revenue, they would also have a contra liability account to offset the balance in the unearned revenue account.
• By recording reductions in a separate account, companies can get better insights into their actual accounts.
• They’re balance sheet accounts, but their activity (like depreciation expense) may flow through to the income statement as an expense.
• By showing the “used up” or uncollectible portion of an asset, they provide a clearer picture of a company’s financial position.
• The calculated bad debts expense affects the income statement by recognizing an expense related to receivables that are unlikely to be collected.
• It appears on the balance sheet and negates the gross amount of fixed assets such as buildings, machinery, office equipment, furniture, and vehicles.

Understanding Contra Accounts: Definition, Examples, and Importance

• Contra accounts are essential tools in accounting that provide a method to accurately reflect adjustments and reductions in related accounts.
• Any company that owns intangible assets such as software, patents, etc., will maintain an accumulated amortization account.
• Accounts Receivable and Allowance for Doubtful AccountsA classic example of a contra asset account is the Allowance for Doubtful Accounts.
• By nature, typical asset accounts possess a debit balance; however, contra asset accounts typically have a credit balance.

For its day-to-day operations, the business maintains a fleet of 75 identical 2016 Ford Explorer limousines, each initially retailing at $150 thousand. However, these vehicles have experienced significant wear and tear in the intervening years. And currently, Show-Fleur anticipates that it could only sell each one for roughly $50 thousand, meaning the depreciation per vehicle is $100 thousand. So an Accumulated Depletion account would serve as the contra for the parent Fixed Asset account. This process calculates the decline in value of the natural resource and offsets it against the initial appraisal of the land where the https://www.bookstime.com/bookkeeping-services/portland resource is being extracted from.

Assessing Valuation Allowances

The purpose of the Owner’s Withdrawal account is to track the amounts taken out of the business without impacting the balance of the original equity account. Home Depot reports that returns are estimated at the time of the sale based on historic returns numbers. The amount is not reported, and the net sales amount is reported on the income statement. The allowance for doubtful accounts is not specifically reported, but the 10(K) reported that the allowance is immaterial to the amount. This make sense because Home Depot wouldn’t be carrying accounts receivable with long payment terms. Most accounts receivable would just be the time between purchase and credit card settlement.

When the company pays the cost of having the flyer printed, a journal entry is done. We can see how the $10,000 allowance for doubtful accounts offsets the $100,000 A/R account from our illustrative example above (i.e. the account decreases the carrying value of A/R). Still, the dollar amounts are separately broken out in the supplementary sections most of the time for greater transparency in financial reporting. A business called Show-Fleur offers private driving tours of local botanical gardens — all from the comfort of high-end limousines.

Contra Equity Accounts

The accumulated depreciation account is designed to reduce the carrying value of the fixed asset account when depreciation is recorded at the end of each period. A contra account is an account that is used to offset the balance of a related account on a company’s financial statements. A contra asset is paired with an asset account to reduce the value of the account without changing the historical value of the asset. Examples of contra assets include Accumulated Depreciation and Allowance for Doubtful Accounts. Unlike an asset which has a normal debit balance, a contra asset has a normal credit balance because it works opposite of the main account. This is the reason they are categorized as a contra account as the normal asset accounts have positive or debit balance.

Revenue is an income statement account, but it flows through to the equity section of retained earnings Accounting Periods and Methods as well. Any products that are sold at a discount or returns are deducted from gross revenue to produce net revenue as the top line on the income statement. Allowance for doubtful accounts is netted from the accounts receivable balance. The company predicts which accounts receivable won’t be paid by customers and writes those off.

Development of Blockchain Technology in Financial Accounting

In an Accounting system using Blockchain, all financial transactions are recorded on a shared digital ledger. This ledger is accessible to all participants within the network, eliminating the need for intermediaries and minimising the risk of data inconsistencies. Each transaction is time-stamped, encrypted, and linked to the previous transaction, creating an immutable and transparent chain of financial events. With the ability to continuously monitor transactions and financial data in real time, businesses can generate up-to-date financial statements instantly. This allows companies to provide stakeholders with accurate and current information at any given time rather than relying on periodic reports. Real-time financial reporting will increase transparency and provide a detailed reflection of a company’s financial position, helping executives and investors make more informed decisions.

Key Benefits of Blockchain in Accounting

Uncontrolled outside participation, compensation of miners and the confidentiality concern were previously identified as reasons why businesses might not implement public blockchains. The view in the literature is that businesses will therefore choose to implement private blockchains (Coyne & McMickle, 2017; Yu et al., 2018). The benefit of public proof-of-work might be lost and therefore an alternative means to blockchain verification might be needed (Yu et al., 2018). A private blockchain is characterised by a permissioned ledger, while public blockchains are characterised by public decentralized ledgers that are accessible to everyone who desires to participate. In other words, blockchain in accounting participation is free as there is no condition attached to participating in the process of creating or adding blocks to the chain (Buterin, 2015).

How is Blockchain Used in Financial Transactions?

These studies provide valuable references and insights, further underscoring the importance and potential value of applying blockchain technology in enterprise financial accounting information sharing. Therefore, it writes smart contracts based on the Ethereum platform to achieve the secure sharing of financial accounting information between enterprises. This work employs a randomized experimental design approach, using a computer-generated random number program to divide 100 enterprises into experimental and control groups, each comprising 50 enterprises. Enterprises in the experimental group share financial accounting information using smart contracts on the Ethereum platform during the experiment. The financial personnel of these enterprises upload reconciled data to the corresponding smart contracts using the enterprise’s digital signatures after each month’s accounting process.

Blockchain’s Role in Financial Auditing

In summary, the exploration of blockchain technology in areas such as financial accounting, information sharing, and management systems has brought forth various opportunities and challenges for businesses. This work aims to explore how to apply blockchain technology in financial accounting to enhance the effectiveness of information sharing, improve information accuracy, and bolster security. Drawing insights from the research outcomes above can better understand the role and potential of blockchain technology in financial accounting and provide valuable references and insights for practical applications.

2. Data Collection

Automated smart contracts streamline audit procedures, triggering actions based on predefined conditions. This accelerates the audit process, allowing auditors to focus on analysis and insights. Enterprise financial accounting information sharing has become increasingly crucial in the context of modern, digital, and globalized business environments. However, traditional sharing methods present challenges to information credibility and security, encompassing issues like Accounting Periods and Methods opacity, data tampering, and data security. These traditional methods may result in information loss or tampering, leading to data inconsistencies and a lack of trust between enterprises. In contrast, blockchain-based sharing methods effectively address the inherent challenges of opacity, data tampering, and data security found in traditional approaches.

• These case studies underscore blockchain’s versatility and potential to revolutionize diverse industries.
• These efficiencies lower costs while improving service delivery, enhancing customer satisfaction.
• The findings indicate that blockchain technology could enhance a company’s operational capabilities, fostering business innovation and efficiency improvements.
• Blockchain’s transparency, coupled with its cryptographic verification mechanisms, simplifies the verification of financial records.
• Cryptography is the process of ensuring that information transferred from a sender to a receiver is secured.
• Embracing this technology will be crucial for staying competitive and relevant in the accounting field.

Blockchain Technology in Accounting and Auditing: A Comprehensive Analysis and Review of Feasible Applications

• A GL includes all the assets, liabilities, equity, expense, and income ledgers, which make up a complete set of the financial transactions records.
• Explore how blockchain technology is transforming accounting with enhanced transparency, efficiency, and real-time financial insights.
• Enterprises in the control group persist in employing traditional financial accounting information-sharing methods such as email and network platforms to share financial data files directly.
• Deloitte’s 2019 Global Blockchain Survey found that 53 percent of respondents say blockchain has become a critical priority for their organizations (up 10 points from the prior year), and 83 percent see compelling uses for blockchain.
• Ultimately, both for internal management and external reporting, accounts will have to consider whether new ways of faster reporting of accounting information are available for better decision making.
• Blockchain has revolutionised Supply Chain Management by providing unprecedented transparency.

The International Integrated Reporting Council (IIRC) (2018) has considered the information aspect regarding broader reporting. The IIRC proposes that entities should appoint a Chief Information Officer (CIO) who should be responsible for the capturing, analysing and providing of information for internal decision-making and external reporting. The IIRC believes that the CIO should work in collaboration with the Chief Financial Officer for both internal and external reporting. Accountants needs to be alerted that other disciplines will become more involved in reporting information and that an integrated reporting system needs to be developed in each entity. Paystand is on a mission to create a more open financial system, starting with B2B payments. Using blockchain and cloud technology, we pioneered Payments-as-a-Service to digitize and automate your entire cash lifecycle.

How Blockchain in Accounting Can Help Business Owners

The blockchain works on the distributed ledger that instantly records any transactions and displays them to authorized users. The immutable ledger eliminates the possibility of changes and is deleted once the finance-relevant operation is recorded. Finally, one of the key benefits blockchain brings to accounting is the absence of dependency on centralized units. Blockchain accounting offers exciting opportunities to enhance transparency, security, and efficiency in accounting practices.

Like many other industries, accounting is undergoing a significant transformation driven by technological advancements. The integration of AI and blockchain has not only streamlined traditional accounting practices but also redefined how financial data is managed, processed, and reported. Blockchain technology, in particular, is a transforming force to ensure financial data integrity and eliminate the risk of tempering using its decentralized ledger system. With Deloitte COINIA, hundreds of thousands of addresses can be loaded in bulk for a variety of crypto assets, and Deloitte can see 100 percent of the transactions and reconcile them to clients’ books and records. Deloitte COINIA also assists with off-chain verification of private key ownership by using an innovative, custom-developed workflow to confirm the integrity of a signed message. The tool is compatible with multiple public blockchains and digital assets, including Bitcoin, Bitcoin Cash, Ethereum, Ethereum Classic, Litecoin, Ripple, Dash, and all ERC20 tokens, with more being added on demand.

This form of blockchains has also been referred to as ‘consortium blockchains’ (Buterin, 2015b; Allison, 2015; Brown, 2015). Thus, AI in Accounting a blockchain can be referred to as a chain or record of transactions, which is continually updated by participants (known as miners), who engage themselves by providing solutions to complex computational problems. Through their activities, the miners normally produce additional blocks to the blockchain for which they are rewarded with newly minted coins as block rewards. The increase in the mining power in the blockchain system will lead to more complex problems needing to be solved before a new block can be mined (Böhme et al., 2015). There has been advancement in mining techniques with the introduction of mining chips, such as Bitshares, in several internet devices to mine new coins.