What nonprofit records should be kept?
Except in a few cases, the IRS does not require a special kind of record. A public charity can choose any nonprofit record keeping system, suited to its activities, that clearly shows the organization’s income and expenses. The types of activities a public charity conducts determines the type of records that should be kept for federal tax purposes. A public charity should set up a record keeping system using an accounting method that is appropriate for proper monitoring and reporting of its financial activities for the tax year. If a public charity has more than one program, it should ensure that the records appropriately identify the income and expense items that are attributable to each program.
A nonprofit record keeping system should generally include a summary of transactions. This summary is ordinarily written in the public charity’s books (for example, accounting journals and ledgers). The books must show gross receipts, purchases, expenses (other than purchases), employment taxes, and assets. For most small organizations, the checkbook might be the main source for entries in the books while larger organizations would need more sophisticated ledgers and records. A public charity must keep documentation that supports entries in the books.
Accounting Periods and Methods
A public charity must keep its books and records based on an annual accounting period called a tax year in order to comply with annual reporting requirements.
Accounting Periods – A tax year is usually 12 consecutive months.There are two types of tax years.
Calendar tax year—a period of 12 consecutive months beginning January 1 and ending December 31.
Fiscal tax year—a period of 12 consecutive months ending on the last day of any month except December.
Accounting Method – An accounting method is a set of rules used to determine when and how income and expenses are reported. A public charity chooses an accounting method when it files its first annual return.There are two basic accounting methods:
Cash method—Under the cash method, a public charity reports income in the tax year received. It usually deducts expenses in the year paid.
Accrual method—Under an accrual method, a public charity generally records income in the tax year earned, (i.e., in the tax year in which a pledge is received, even though it may receive payment in a later year.) It records expenses in the tax year incurred, whether or not it pays the expenses that year.
For more information about accounting periods and methods, see Publication 538, Accounting Periods and Methods, and the instructions to Form 990 and Form 990-EZ.
Organization transactions such as contributions, purchases, sales, and payroll will generate supporting documents.These documents — grant applications and awards, sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks — contain information to be recorded in accounting records. It is important to keep these documents because they support the entries in books and the entries on tax and information returns. Public charities should keep supporting documents organized by year and type of receipt or expense. Also, keep records in a safe place.
See Part 2 coming up….
This information was adapted from the IRS 501(c)(3) Compliance Guide
Nothing contained herein is to be construed as legal or accounting advice.