Not-for-profit accounting, and fund accounting in general, is all about the segmentation of equity into funds. While systems like QuickBooks will allow you to use a field such as Class to segment your entries, what they do not do is close equity into those various segments at the end of a period. Retaining equity by fund, at its core, is what distinguishes nonprofit accounting systems from their for-profit counterparts.
If all you had to worry about was the three net asset classes, even a for-profit system would be relatively easy to use because you’d only need to make a few manual journal entries to be sure your equity accounts held the correct balances. But very few organizations only need to subdivide transactions, and most importantly equity, into just the three net asset classes. If you’re like most nonprofits – even smaller ones – you have a need to manage things like grants, projects, programs, departments, cost centers, etc. The list goes on and on. Imagine tracking the equity balance of hundreds of programs funded by scores of grants within a dozen or so cost centers in a system like QuickBooks. It’s simply impossible, or at the very least would require so much time and effort you wouldn’t actually be able to stay on top of daily data entry.
When you look for a nonprofit accounting system, make sure you look for one that can close equity across any of these characteristics while not requiring them to be created as segments in the chart of accounts. The reason is simple. If you need up-to-the-minute balances for your organization’s projects, every time you add one you will add significant volume to the chart of accounts. If you have twenty projects, you will need twenty equity accounts to track the balance of those projects. Think of closing equity like baking pizzas. If the system allows for table-based tracking, then you’re simply baking one equity pizza and slicing it into the 20 projects. That’s always going to be faster and easier than baking 20 pizzas.
You do not have to use a fund accounting system to meet IRS requirements, but be aware that someone will have to calculate the correct equity balances and make the manual journal entries. And that someone is usually the auditors and/or CPA, and therefore it usually costs you more money to do it. And once you move past needing to track only the FAS 116/117 net asset classes then a true fund accounting system is almost a necessity.
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