Running a small nonprofit or church comes with a unique financial responsibility: every dollar is a trust. Good bookkeeping isn’t just about balancing the checkbook—it’s about honoring donor intent, staying compliant, and telling your financial story clearly. Whether you’re a volunteer treasurer or a part‑time administrator, mastering a few fundamentals will protect your organization and build confidence with supporters.

Understand fund accounting

Unlike a typical business, nonprofits must track money by purpose. This is fund accounting: separating resources into funds such as unrestricted, temporarily restricted, and permanently restricted.

  • Unrestricted funds can be used for any mission‑related activity.
  • Temporarily restricted funds come with donor‑imposed time or purpose limits (e.g., a grant for a specific program).
  • Permanently restricted funds (like endowments) must be held indefinitely.

Each fund should have its own income and expense tracking in your accounting system. This prevents accidentally spending restricted donations on general operating costs—a common misstep that can damage trust and even trigger IRS scrutiny.

Track donations and contributions carefully

Every gift, whether cash, check, or in‑kind, needs a clear audit trail. Record the date, amount, donor name, and any restrictions at the time of receipt. For donations of $250 or more, the IRS requires a contemporaneous written acknowledgment from the organization. Your bookkeeping system should make generating these acknowledgments straightforward.

A simple bullet‑proof workflow:

  • Use a dedicated receipt book or digital donation platform that syncs with your accounting software.
  • Reconcile bank deposits to donation records weekly.
  • Maintain a donor database that links to your general ledger.

This discipline not only satisfies IRS requirements but also lets you send timely thank‑you letters—a key to donor retention.

Prepare for Form 990

Most tax‑exempt organizations must file an annual information return—Form 990, 990‑EZ, or 990‑N (e‑Postcard), depending on gross receipts. Even small churches that are not required to file a full 990 still need clean records to answer any IRS inquiries and to provide transparency to their congregation.

Your bookkeeping directly feeds into the 990. Accurate fund balances, properly classified expenses (program vs. management vs. fundraising), and complete donor records ensure the form is correct the first time. Errors can lead to penalties or, in extreme cases, loss of tax‑exempt status.

If your organization is growing, consider a periodic review of your chart of accounts to align with the 990’s functional expense categories. It saves hours of rework at filing time.

Keep the board and donors informed

Good bookkeeping isn’t just for the IRS. Regular financial reports—statement of financial position, statement of activities, and a budget‑to‑actual comparison by fund—help your board make informed decisions. Donors often appreciate a high‑level summary of how funds are used, which can be easily pulled from well‑maintained books.

Key practices to adopt today:

  • Reconcile all bank and investment accounts monthly.
  • Never commingle restricted and unrestricted cash in a single bank account without clear internal tracking.
  • Record in‑kind donations at fair market value on the date received.
  • Retain supporting documents (grant letters, donor correspondence) for at least seven years.

When to seek professional help

Many small organizations start with a volunteer bookkeeper, which works well—until it doesn’t. Complexities like multi‑year grants, payroll for clergy, or unrelated business income tax (UBIT) often require specialized knowledge. A bilingual accounting partner who understands both the IRS and the unique needs of nonprofits can help you stay compliant and focus on your mission.

At Andean Consultants, we provide bookkeeping and advisory services tailored to small nonprofits and churches, from setting up fund accounting to preparing Form 990. If you’d like a second set of eyes on your books or need help designing a system that grows with you, reach out for a conversation. No pressure, just practical guidance from professionals who speak your language.