Accounting and Bookkeeping Best Practices for Nonprofit Membership Organizations

Accounting and bookkeeping for nonprofit membership organizations requires maintaining compliance with a variety of rules and regulations that are distinctly different to those for for-profit organizations.

Adding to the complexity is the special nature and financial infrastructure of this type of nonprofit. And most finance departments in small to mid-sized nonprofit membership organizations are resource constrained, creating even more challenges.

At James Moore, we advise many nonprofit membership organizations and have developed a robust understanding of the accounting and bookkeeping techniques they should follow. Here are some of our team’s insights into the best practices nonprofit membership organizations should incorporate into their operations.

Accounting for Nonprofit Membership Organizations

A nonprofit membership organization has a set of members that pays dues to join and receive benefits from the collective organization. These types of nonprofits are typically centered around a specific industry trade, like a membership organization for lawyers or architects. They could also focus on a geographic location, such as the chamber of commerce for a township.

One of the differentiating characteristics of a nonprofit membership organization, from a financial perspective, are the membership dues. These create a unique revenue model for the organization that must be accounted for correctly.

Nonprofit membership organizations face specific challenges with accounting and bookkeeping, such as:

• Recognizing membership revenue during the correct timeframe or enrollment period
• Recording income from member events (such as conferences or continuing education opportunities) throughout the year
• Accounting for different types of grants
• Identifying and managing unrelated business income

To navigate these challenges, nonprofit membership organizations need to know how to best manage the accounting and bookkeeping considerations that apply to their organization.

7 Accounting and Bookkeeping Best Practices for Nonprofit Membership Organizations

To minimize the administrative burden on nonprofit membership organizations, we’ve compiled our top seven best practices for smooth accounting and bookkeeping below.

1. Understand Revenue Recognition Principles for Membership Dues and Events

Nonprofit membership organizations must carefully track when member dues are received and where each member’s enrollment date falls within the year for accounting and bookkeeping purposes.

Revenue should be recognized when it is earned. In this instance, revenue is recorded each month during the course of the members’ twelve month membership, regardless of whether they paid up front or on a monthly basis. This follows the revenue recognition principles outlined in ASC 606.

If a member pays in January, for example, the organization will record 1/12^th of the revenue received for each calendar month. To complicate things further, many nonprofit membership organizations have different tiers of membership — each of which may have differing costs or varying enrollment periods.

To manage this, keep detailed records of each member’s anniversary dates to guide their revenue recognition. Some organizations institute a pooled enrollment period where all members join for the same enrollment term to simplify their financial records.

Similarly, many nonprofit membership organizations run events for their members throughout the year, such as trade conferences or continuing education opportunities. Members might pay for these events in a different fiscal year, which can complicate accounting and bookkeeping for that deferred revenue. We recommend integrating your membership database software with your accounting platform so you can share data regarding membership dues and any event based revenue.

2. Clarify Performance Obligations Associated with Memberships

Members of nonprofit membership organizations might receive non-cash benefits as part of their dues. These could include complimentary tickets to a trade conference or a free sponsored product.

Your organization needs to break out all of these performance obligations that go with your membership dues and assign a dollar value to each one. Come audit time, it’s important to be able to explain how your nonprofit membership organization classifies these revenues.

3. Determine Grant Funding Obligations

If your nonprofit membership organization receives any grant funding — whether it’s from the state or federal government or a private organization — it’s important to know how to properly account for that revenue.

If the funding is a cost reimbursement grant, the receiving organization must incur and pay expenses before receiving the grant funding. If your books show more revenue than expenses, it’s possible there is some deferred revenue in there that needs to be properly accounted for.

If the funding is not cost reimbursed, you may be able to keep whatever funds are not spent. However, we recommend you discuss this explicitly with the grantor if it’s not clear from the contract. Having these details up front, as opposed to during the audit process, can save your organization a lot of headaches.

4. Identify Unrelated Business Income

When nonprofit membership organizations have unrelated business income, there are added wrinkles in accounting and bookkeeping.

For example, your organization has a magazine that focuses on your trade or geographic region, and you sell ads within the magazine. That ad revenue can be classified as unrelated business income, because ads don’t directly serve your members. Or your organization purchases a building and only uses half of it for your offices, renting out the rest. That rental income would also qualify as unrelated business income.

When considering these types of unrelated business incomes, your related expenses and standard deductions, be aware that you may have a tax liability –– even though your organization is a tax-exempt entity.

Learn More: UBI Tax Refresher: What Your Nonprofit Needs to Know

5. Integrate Membership CRM Systems with Accounting Systems

For accounting and bookkeeping success, nonprofit membership organizations must have a strong connection between their membership departments and their accounting departments. Open communication and transparency are essential, as is the integration between your membership customer relationship management (CRM) and accounting software.

Membership dues are the main revenue engine for your organization. Integrating those details with your accounting software will help you not only keep your books clean month to month, but make you audit ready as well. Without effective membership database integration, accounting and bookkeeping can get messy very quickly.

6. Understand Assurance Requirements

Does your nonprofit membership organization require an audit? For many larger organizations, an audit may be required. However, in some cases, a review or a compilation may be more appropriate. A financial statement audit is a relatively significant undertaking; if your organization doesn’t need one, dedicating the resources to prepare for an audit might not make sense.

It’s best to understand whether an audit is required for your nonprofit membership organization based on the level of charitable contributions it receives and its bylaws. The thresholds for an audit requirement differ from state to state.

Sometimes state law does not require that your organization be audited, but the board wants some assurance on the books. In such a case, a financial review might be a better assurance option. This is especially true for smaller organizations that aren’t ready to complete a full audit.

7. Follow General Nonprofit Accounting and Bookkeeping Best Practices

Best practices that apply to other nonprofits also apply to nonprofit membership organizations and can enhance your accounting and bookkeeping processes. For example, consider the following:

• Establish segregation of financial duties.
• Seek expertise in nonprofit accounting and bookkeeping.
• Choose appropriate accounting software, such as QuickBooks.
• Develop and document clear processes and internal controls.
• Reconcile the books each month and produce financial statements to remain audit ready.

For more information on general best practices, check out this article on best practices for managing nonprofit bookkeeping.

James Moore: Accounting Firm for Nonprofit Membership Organizations

Nonprofit membership organizations face particular accounting and bookkeeping considerations. To manage these challenges and ensure your books are clean, it’s best to work with an experienced accounting firm that specializes in nonprofits.

James Moore supports nonprofit membership organizations with comprehensive accounting solutions specific to their needs. Our team of nonprofit CPAs can help you stay compliant with all regulations, produce accurate financial reports and enhance your bookkeeping practices — in addition to offering a range of other assurance services such as audits, reviews, and compilations.

To learn more about how we can help you manage your organization’s finances, contact us today.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.