Non-profit organizations must use fund accounting, an accounting system specialized for recording resources whose use has been limited by the donor. Fund accounting is important because nonprofits will often receive funds earmarked for a specific purpose by the donor.
Additionally, non-profit organizations must employ the use of purchase orders in order to provide detailed and adequate documentation of how funds are used.
Non-profit organizations must also account for what is known as in-kind donations. In-kind donations are donations that are charitable gifts that do not consist of money. In-kind donations are valued at market value. The IRS defines market value as “what willing buyer would pay and a willing seller would accept for the property, when neither party is compelled to buy or sell, and both parties have reasonable knowledge of the relevant facts.”
For example, if an attorney volunteers their time for your non-profit, this in-kind donation is valued at their regular hourly rate times the hours they gave.
Small in-kind donations (defined by the IRS as totaling under $5,000) can be valued internally. However, in-kind donations totaling over $5,000 must be appraised by an independent expert.