Whether running a nonprofit or for-profit organization, understanding the accounting cycle is critical for any company. This holistic process comprises a sequence of steps that identify, track, analyze, and record the financial activities of your nonprofit. The goal of an accounting cycle is to protect your company’s assets and financial health. It also makes financial reporting less complex and error-free. This guide explains the steps of the nonprofit accounting cycle.

8 Steps of the Nonprofit Accounting Cycle

The accounting cycle comprises eight steps as standard. Whether it’s managing HOA capital contribution fees or reserve funds, these methodical steps help guarantee the accuracy of your nonprofit or association’s financial statements. They ensure the accounts department can account for every penny that comes in or goes out during the accounting period. They include:

Identify Transactions

Identifying your nonprofit’s financial activities is the first of the 8 steps of the accounting cycle. Financial transactions in nonprofits include revenue from donations, membership dues, and fundraiser proceeds. Expenses range from rent and salaries to postage and travel.

Record Transactions

After identifying transactions, the next is to record them using journal entries. Each transaction has a separate entry to prevent inaccuracies.

Post Transactions

Once you record your transactions as journal entries, the accountants or bookkeepers should post them in the general ledger. A general ledger provides an accurate breakdown of the recorded transactions.

Prepare the Unadjusted Trial Balance

Creating an unadjusted trial balance determines whether your account balances have any discrepancies. The debits and credits in your trial balance should be equal.

Analyze Worksheets

Another step of the nonprofit accounting cycle is analyzing the worksheets. A worksheet contains tabulated debits and credits, allowing you to identify errors quickly.

Adjust Journal Entries

Once you notice discrepancies, you can adjust journal entries based on corrections on the worksheet. You can also adjust the trial balance to match the new entries.

Generate Financial Statements

The penultimate step of the nonprofit accounting cycle is the generation of financial statements. Financial statements for nonprofits include a statement of activities, a statement of financial position, and a statement of cash flow.

Close the Books

The last step is closing the books on a specified date before preparing a post-closing trial balance. Once closed, the next accounting cycle begins with a new reporting period.

Enlist Professional Nonprofit Accounting Services

If you need more assistance in understanding the nonprofit accounting cycle, Abel Accountants can help. Contact us for professional nonprofit bookkeeping and accounting services.