<aside> What’s this about? Accounting is the process of recording, summarizing, and reporting financial transactions. An accounting system is a software tool for handling these processes.

What do I need to do? Determine a suitable accounting system given your organization’s needs and budget, and configure the system to match your organization’s financial categories and procedures.

Contents

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Further reading

• David Howard: Accounting for Nonprofits
• Investopedia: Accounting Explained

Databases

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The basics of accounting

Accounting is the process of recording, summarizing, and reporting financial transactions to oversight agencies, regulators, and the IRS.

Regardless of the size of an organization, accounting is a necessary function. A bookkeeper can handle basic accounting needs, but a Certified Public Accountant (CPA) is useful for advanced accounting tasks.

Professional financial accountants follow a set of standards known as the Generally Accepted Accounting Principles (GAAP) when preparing financial statements.

There are several types of accounting, like managerial accounting or tax accounting — but we’ll be focusing on financial accounting here. Financial accounting is the processes used to generate interim and annual financial statements, like a balance sheet, income statement, and cash flow statement.

Accounting standards

In most cases, accountants use Generally Accepted Accounting Principles (GAAP) when preparing financial statements in the US.

GAAP is a set of standards and principles designed to improve the comparability and consistency of financial reporting across industries.

Its standards are based on double-entry accounting, a method in which every accounting transaction is entered as both a debit and credit in two separate general ledger accounts that will roll up into the balance sheet and income statement.

• Key principles
• The accounting cycle

Structuring your accounts

A robust and efficient financial infrastructure, with accurate and well-structured accounts, enables insightful cost effectiveness analyses.

For example, you may want to analyze:

• spend by individual department, unit, and fund;
• individual accounts or account groups vs. historical results or expectations; and
• multiple scenarios relating to staff, funding, or expansion – forecasted from historical data.

Considerations when setting up a chart of accounts:

• Group similar accounts together: For example, staff benefits can be broken out by benefit type, but all kept in a similar section of the chart of accounts.
• Leave room for future expansion: You'll likely have more accounts and types of accounts in the future. Think about where that expansion may come and leave room in a section for that future expansion.
• Specifically name accounts: Make the name clear enough that without context someone could know what the account relates to. For example, if you give and receive grants, make sure that they are named to reflect that.
• Don't be too shy about restructuring: If you find in the future that your chart of accounts is not working for you, you can restructure, recode, or rename the accounts to match your new needs. (There is some tension between this suggestion and the accounting principle of consistency, and it’s important to flag that this will make comparisons across time periods infeasible/harder. You should also make sure that other systems' mapping settings are re-set up after making these changes.)

Setting up an accounting system

An accounting system is a software tool that helps you record, summarize, and report financial transactions.

An accounting system is essential for supporting your accounting processes. Choose a platform based on your needs and budget.

If you’re setting up a business structure with multiple entities, look out for platforms that support multi-entity accounting (and associated features, like automated consolidations, inter-entity transactions functionality, and multi-currency capabilities).

• Recommended platforms
• Configuration

Auditors & accountants

Audits ensure compliance with reporting requirements and safeguarding of company assets.

The financial statements of most companies are audited annually by an external CPA firm, although you may not require an external audit. Check your local audit requirements or get in touch with a local CPA firm to discuss details.

An audit will likely set you back $10K–$15K.

External accountants

Accounting is one of the cheapest things you can outsource that is very expensive to fix if you do it incorrectly (both in professional fees and staff capacity).

For a list of recommended accountants, see .

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