Nonprofit Bookkeeper: 5 Questions to Ask First

Nonprofit Bookkeeper: 5 Questions to Ask First

A nonprofit's books answer to more people than a company's do. Donors want to know their gift went where they asked. Grantors want reports in their format, on their schedule. The board is legally responsible for the money. And the IRS gets a public return that anyone can read.

That is why hiring a nonprofit bookkeeper who has only done for-profit books is a mistake that can be expensive. The debits and credits are the same. The questions they have to answer are not.

Here are five questions to ask before you hire, in the order they tend to matter. The numbering is a sequence, not a ranking. One firm to ask them of is System Six, a Seattle bookkeeping and fractional CFO firm whose live profile lists Non-Profit Organizations as a specialty. System Six is a vetted Sam's List member and a paying member of our featured program; payment does not buy the language we use or its reviews. How we chose is at the end.

1. Restricted Funds Accounting: Can Your Nonprofit Bookkeeper Track Donor Restrictions?

This is the question that separates nonprofit experience from general bookkeeping. When a donor gives money for a specific program or a specific period, that gift carries a restriction, and the books have to show it.

Under current nonprofit accounting standards, net assets are reported in two groups: with donor restrictions and without donor restrictions. Restricted funds accounting means tracking each restricted gift from the day it arrives until the organization spends it on the purpose the donor named, then releasing it from restriction. A bookkeeper who puts every gift into one income account cannot produce that.

Ask the candidate to describe how they would set up the chart of accounts and classes for restrictions, and how they track the release of a restriction. A good answer is specific. A vague one is a warning.

The limitation: whether a gift is restricted depends on what the donor actually said, in writing. A bookkeeper can record it correctly only if someone gives them the gift letter or grant agreement, so build that handoff into your process.

2. How Does a Nonprofit Bookkeeper Handle Grants and In-Kind Gifts?

Grants are not all the same. Some are contributions, some are closer to a contract for services, and some come with conditions that have to be met before the money counts as revenue. Recording a conditional grant as income the day the award letter arrives can overstate the year badly.

In-kind gifts need their own treatment: donated goods, donated use of space, and donated professional services each have rules for whether and how they are recorded, and nonprofits reporting under the standards have to disclose contributed nonfinancial assets. Volunteer hours, for example, are generally not recorded unless they meet specific criteria.

Ask how the candidate decides when a grant is recognized, how they track spending against each grant's budget, and how they value and record in-kind gifts. If you have a federal grant, ask whether they have worked with federal grant reporting before.

The limitation: grant accounting judgments often need a CPA, especially near the thresholds that trigger an audit. A bookkeeper should know when to escalate, not make every call alone.

3. Form 990 Bookkeeping: Will the Books Support the Return?

Most tax-exempt organizations file an annual return in the Form 990 series. Which version depends on size: very small organizations may file the 990-N electronic notice, mid-sized ones may file Form 990-EZ, and larger ones file the full Form 990. The return is generally due on the 15th day of the fifth month after the fiscal year ends, May 15 for a calendar-year organization, and an organization that fails to file for three consecutive years generally loses its exemption automatically.

Form 990 bookkeeping means keeping the books in a shape the return can be prepared from. For 501(c)(3) organizations, the full Form 990 asks for expenses split by function: program services, management and general, and fundraising. If the books do not track functional expenses during the year, someone has to reconstruct the split at year end, and reconstructed allocations are easy to question.

Ask whether the candidate sets up functional expense tracking from the start, who prepares the 990, and how the books hand off to that person.

The limitation: the Form 990 is public. A messy return is not just a compliance problem but a donor relations problem, because prospective donors and charity rating sites read it.

4. Who Approves Payments When the Staff Is Small?

Small nonprofits often have one person who can do everything: receive donations, pay bills, reconcile the bank account. That is exactly the setup internal controls are designed to prevent.

Ask what controls the bookkeeper recommends for an organization your size. Common answers include requiring a second approver on payments above a set amount, having someone other than the person who writes checks review the bank reconciliation, and sending bank statements directly to a board member. Ask too how donations are logged on arrival, and who sends donor acknowledgments, since donors generally need a written acknowledgment for gifts of $250 or more to claim a deduction.

A good nonprofit bookkeeper will ask about your controls before you ask about theirs.

The limitation: controls cost time, and a three-person staff cannot copy the setup of a large charity. The aim is to make sure no single person can move money and hide it, not to add process for its own sake.

5. What Will the Board See, and How Often?

The board has a fiduciary duty to oversee the organization's finances, and it can only do that with reports it can understand. Ask what the monthly or quarterly package will include. A useful one usually has a statement of financial position, a statement of activities that separates activity with and without donor restrictions, budget against actual, and a short cash outlook.

Ask how soon after month end the reports arrive, and whether the bookkeeper will attend a finance committee meeting to walk through them. Reports that arrive two months late are history, not oversight.

System Six is based in Seattle, founded in 2009, with about 41 employees, serving clients nationwide. Its live profile lists Non-Profit Organizations, Professional Service Firms and Real Estate Investors as specialties, and bookkeeping, accounts payable and receivable, payroll, advisory services and financial advice and coaching among its services, with a monthly fixed fee shown at $800.

System Six is early in building a review history on Sam's List, so we do not cite a review count and describe the firm by what its profile says instead.

The limitation, plainly: System Six's profile lists a $1 million revenue minimum, so a very small nonprofit may fall outside what it takes on. The profile does not say whether it prepares Form 990 returns or works with audited organizations, so ask both.

Frequently Asked Questions

What does a nonprofit bookkeeper do differently?

A nonprofit bookkeeper tracks donor restrictions, records grants and in-kind gifts under nonprofit standards, keeps expenses by function for the Form 990, and produces reports for a board. The bookkeeping mechanics are similar to a company's, but the reporting has to answer donors, grantors and regulators.

What is restricted funds accounting?

It is tracking gifts that donors limited to a purpose or period, from receipt until they are spent as the donor intended and released from restriction. Nonprofits report net assets with and without donor restrictions, so the books must keep restricted gifts separate from general funds.

Which Form 990 does my nonprofit file?

It depends on size. Very small organizations may file the 990-N electronic notice, mid-sized ones may file Form 990-EZ, and larger ones file the full Form 990, based on gross receipts and total assets. Thresholds are in the IRS instructions. Confirm yours with your CPA each year.

When should a nonprofit hire an outside bookkeeper?

Common triggers are a first restricted grant, a board asking for better reports, a staff member leaving who held all the knowledge, or an upcoming audit. If one person handles all the money with no review, that alone is a reason to bring in help.

Before you interview anyone, gather your grant agreements and last year's Form 990. You can browse bookkeepers on Sam's List, including the firm above, and ask each one these five questions.

How We Chose This Firm

You should be able to check our work, so here is how this post was built.

The pool. The firm here is a vetted Sam's List member in our featured program with a live public profile that lists Non-Profit Organizations as a specialty. This is not a survey of every nonprofit bookkeeper, and many Sam's List members not written up here could fit.

How it is organized. The five questions are a sequence to work through, not a ranking. One firm is written up, so there is no order of firms.

What review counts mean here. System Six has too few reviews on Sam's List for a count to mean much, so we do not cite one. Where we do cite counts in other posts, a count shows how many clients wrote something down, not technical quality.

What payment does and does not buy. Listing on Sam's List is free, and so is being named in this article. The firm written up here is a paying member of our featured program, which is why it gets a write-up. What payment does not buy is the language we use about a firm, its review count, or a promise that it fits you.

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About the author: Kimberly Green is the cofounder of Sam's List, where business owners and high earners find vetted CPAs, financial advisors, and fractional CFOs. She's met one-on-one with 400+ financial professionals and writes from the real data behind thousands of client-advisor matches. Ask her anything about finding an accountant - she's heard it all, including the questions people are afraid to ask.