Choosing an accounting system: spreadsheet, software or bookkeeper?

This guide is for treasurers, founders and volunteers deciding how to keep a small charity's books: in a spreadsheet, in accounting software, or by paying a bookkeeper who uses their own system. There's no single right answer, and we don't recommend any product. After reading, you'll know what the IRS expects your records to show, the signs that you've outgrown a spreadsheet, and a list of features to compare so you can choose with confidence.

What your books need to show

The IRS doesn't require any particular software. Its compliance guide for public charities, Publication 4221-PC, says that "except in a few cases, the law does not require a special kind of record. A public charity can choose any recordkeeping system, suited to its activities, that clearly shows the organization's income and expenses."

Whatever you choose, it must let you:

• Show where money came from and went. Publication 4221-PC says a charity "must be able to document the sources of receipts and expenditures reported on Form 990 or Form 990-EZ and Form 990-T." The books "must show gross receipts, purchases, expenses (other than purchases), employment taxes and assets."
• Keep the documents behind each entry. Deposit slips, invoices, receipts, canceled checks and bank statements support what's in the books. The guide says charities "should keep supporting documents organized by year and type of receipt or expense."
• Track donors and grantors. The guide says an organization "should maintain a list of its donors and grantors and the amount of cash contributions or grants (or a description of the noncash contributions) received from each."
• Separate programs. If you run more than one program, the guide says the records should be set up to track each one. Our guide to restricted funds explains why donor restrictions need tracking too.
• Work to your tax year. Books are kept by an annual accounting period. Our guide to fiscal year and accounting basis explains the choice between cash and accrual.

The three main options

These can overlap: many charities use software that a volunteer or paid bookkeeper keeps up to date.

Signs a spreadsheet isn't enough

• You have more than one bank account, card or payment platform to reconcile each month.
• You receive restricted grants and need to show funders how each was spent.
• You file Form 990 (not 990-EZ). Its Part IX instructions say 501(c)(3) organizations must report expenses in columns for program services, management and general, and fundraising. Our guide to building an annual operating budget explains these columns.
• You have employees and run payroll.
• More than one person needs to enter or review transactions.
• Your board can't get a clear monthly report without someone spending hours on it.

Features to compare

Use this list to compare any system, including the one a bookkeeper proposes.

Fit for a charity

• Tracks income and expenses by program or class and by fund or restriction, not just by account.
• Produces the reports you need: a statement of activities, a statement of financial position, budget against actual, and expenses by function.
• Lets you set up a chart of accounts that matches the lines on Form 990 or 990-EZ, so the year-end return is easier.
• Records non-cash gifts and in-kind donations.

Controls

• Separate logins for each person, with different permission levels (for example, view-only for board members). CISA recommends granting "access and admin permissions based on need-to-know and least privilege."
• An audit trail showing who entered or changed each transaction.
• A bank reconciliation tool. Our financial controls guide explains why monthly reconciliation matters.
• Multifactor authentication (two-step login), especially for anyone with admin rights.
• The ability to "close" a period so past months can't be changed by accident.

Your data

• You can export everything (transactions, accounts and reports) in a standard format, so you can leave if you need to.
• The charity, not an individual, owns the account, and at least two people can get in.
• Backups: who makes them, and how you'd restore your books.
• How long you'll keep access to old years. Publication 583 says that when books move to an electronic system, you "must maintain the electronic storage systems for as long as they are material to the administration of tax law." If you switch systems, export and keep the old years first.

Cost and support

• The total cost per year, including add-ons such as payroll, extra users or donor-management links. Ask about nonprofit pricing; our guide to free and discounted tech explains how these programs work.
• Whether your bookkeeper, accountant or auditor already knows the system.
• Whether it connects to your bank, payment platforms and donor database, or whether you'll enter data twice.
• Help and training available to volunteers.

Making the switch

1. Pick a start date, ideally the first day of your fiscal year.
2. Set up your chart of accounts, programs and funds before you enter anything. Ask your accountant to check it.
3. Enter opening balances from your last reconciled bank statements and balance sheet.
4. Run the old and new systems side by side for a month if you can, and check they agree.
5. Export and archive the old records, and keep them as long as your document retention policy requires.
6. Write down how you use it: who enters what, when you reconcile, and who reviews. Store the notes with your succession plan.

Your checklist

• Our system clearly shows all income and expenses, and we keep the documents behind them
• We can report by program, by fund or restriction, and by function
• Each person has their own login, with permissions to match their role
• Two-step login is turned on for anyone with admin rights
• We reconcile every bank and card account monthly
• At least two people can get into the system, and the charity owns the account
• We can export all our data, and we've kept the records from any old system