Nonprofit Accounting Basics: What Every Organization Should Know

Nonprofit accounting is the process of tracking, organizing, and reporting all financial activity for nonprofit groups. It is the way these groups record every dollar they get and every dollar they spend.

Why Nonprofit Accounting Matters

It is not only about keeping records. It also helps groups:

• Stay on mission
• Follow laws and grant rules
• Report to donors and boards
• Plan for the future

When done well, nonprofit accounting proves that a group uses its money to help others. It keeps trust strong and shows impact.

Differences Between Business and Nonprofit Accounting

Business and nonprofit accounting are not the same. Businesses work to earn profits. Nonprofits work to support a cause. This changes how money is tracked and reported.

Key differences:

• Goal: Businesses focus on profit; nonprofits focus on service
• Owners: Businesses have owners; nonprofits do not
• Profits: Business profits go to owners; nonprofit profits support programs
• Reports: Businesses report equity; nonprofits report net assets

Net assets in nonprofits are sorted into:

• Unrestricted: Can be used for any purpose
• Temporarily restricted: Must be used within a certain time or for a project
• Permanently restricted: Kept forever, only earnings may be used

Each donation must be placed into the correct group. This helps keep money safe and used as promised.

What Is Fund Accounting and How It Works

Fund accounting is a system that breaks money into smaller groups. These groups, called funds, each have their own rules, income, and costs.

Why use fund accounting:

• Keeps restricted money separate
• Makes reports to donors easier
• Shows real use of each grant
• Tracks spending per project

Each fund has its own balance. For example:

• A food bank may have one fund for food drives, one for shelter care, and one for education programs.
• Each fund shows how much money came in and how it was spent.

Fund accounting helps staff and boards stay organized. It makes reviews and audits easier.

Four Main Financial Reports Every Nonprofit Needs

Every nonprofit must prepare these four reports. They show the group’s financial health and how money is used.

1. Statement of Financial Position

• Shows assets, debts, and net assets
• Lists cash, property, accounts, loans, and total net worth
• Like a balance sheet used in business

2. Statement of Activities

• Lists income and expenses by category
• Shows changes in net assets over time
• Includes donations, grants, and program costs

3. Statement of Functional Expenses

• Breaks costs into:
  • Program services
  • Admin and support
  • Fundraising
• Also shows types of expenses: rent, pay, travel, supplies

4. Statement of Cash Flows

• Tracks how cash moves in and out
• Shows if the group can pay bills
• Breaks into operating, investing, and finance sections

Together, these reports give a full view of where money comes from and how it is used.

Why a Strong Chart of Accounts Is a Must

A chart of accounts lists all codes used to sort and track money. It includes account numbers, titles, and types.

Examples:

• 4000: Donation income
• 5000: Program supplies
• 6100: Office rent

A good chart of accounts helps to:

• Group income and costs clearly
• Make reports easy to read
• Match expenses to programs and grants
• Stay audit-ready

Each account should match how your nonprofit works. Add or remove accounts as the group changes.

How to Track Donations and Grants Step-by-Step

Tracking donations and grants the right way is key to good records.

Steps to track funds:

1. Log the gift or grant as soon as it arrives
2. Record the donor’s name and date
3. Note any restrictions or deadlines
4. Add it to the right fund in your software
5. Attach any forms or letters from the donor
6. Update records when the funds are used

Also track non-cash gifts like food, clothes, or services. Estimate fair value and record it. This shows full support received.

Building and Managing a Solid Budget

A budget is a plan that shows how much the group expects to get and spend. It covers a set time, often one year.

Steps to create a budget:

• List all expected income: grants, gifts, service fees, and more
• Plan for all costs: program work, office needs, payroll, events
• Break down costs by function: program, admin, fundraising
• Compare to last year’s actual totals
• Get input from staff and program leaders
• Share the budget with the board for approval

Once in use, check the budget each month. If income drops or costs rise, revise the plan.

How to Track Costs for Each Program

Each service or program must have its own cost report. This proves to donors and boards how money supports the mission.

Steps to track program costs:

• Assign each cost to a program when logged
• Create cost centers or use tags in software
• For shared costs, divide by:
  • Staff hours worked per project
  • Room or space used
  • Estimated time spent

Examples:

• A teacher working across two programs should have pay split based on hours
• Rent for a shared office should be divided by space used per team

This helps track real costs and meet grant terms.

Setting Up Internal Controls to Stay Safe

Internal controls are steps that stop fraud, errors, and misuse.

Controls every nonprofit should have:

• Two signatures required for payments
• Staff submit receipts and backup docs
• Monthly reviews of bank accounts
• Limits on who can access accounts
• Written rules for spending and approval

Also:

• Keep digital backups of all records
• Review all controls once a year

These steps protect the group and help build trust with funders.

What the Board Should Do About Finances

The board does not handle daily tasks but must give full oversight.

Board duties:

• Approve and review yearly budgets
• Read and ask about monthly reports
• Help plan for large costs or risks
• Support audits and financial reviews

Some boards create a finance or audit group. This team works closely with staff to check numbers and help with rules.

The board must help steer the group—not just watch from the side.

Choosing the Right Accounting Software

Nonprofits need tools built for their needs. Pick software that fits your group’s size and style.

Features to look for:

• Fund tracking
• Grant management
• Donor records
• Custom reports
• Staff access with roles

Popular options:

• QuickBooks for Nonprofits
• Aplos
• Blackbaud
• Sage Intacct

Test tools with a free trial. Make sure reports are easy to use and updates are simple.

When It Makes Sense to Outsource Accounting

Outsourcing means hiring another company or person to handle some accounting work.

When to outsource:

• Small team with no accountant
• Not enough hours to manage books
• Need for expert help with taxes or grants

Common outsourced tasks:

• Bookkeeping
• Monthly reports
• Payroll
• Budget prep
• Form 990 filing

Choose partners with nonprofit experience. They know the rules and can keep things clean.

Why Reports Must Be Accurate and On Time

Late or wrong reports hurt trust. Funders, boards, and staff all rely on clear data.

Good reports show:

• What was earned and spent
• What each program cost
• How cash flows each month

Missed reports can:

• Lead to lost funding
• Raise audit risks
• Break trust with donors

Stay on a clear report schedule. Use checklists to meet deadlines.

What You Should Know About Audits and Reviews

Audits and reviews check your records. Some are required by funders or the IRS.

Types:

• Audit: Full check by a CPA; most detailed
• Review: Less deep, confirms logic
• Compilation: No checks, just a basic report

To prepare:

• Gather bank reports, grant letters, board minutes, receipts
• Make sure all accounts are up to date
• Explain any changes or big shifts

Plan early. Keep files organized. Ask your auditor what to prepare in advance.

Best Habits for Strong Nonprofit Accounting

Simple steps help stay ready all year:

• Track each gift or grant by type
• Record all income and spending right away
• Use software with fund tags
• Check reports every month
• File taxes on time
• Back up all files
• Train staff on rules
• Use written policies
• Share reports with the board
• Review budget vs actuals often

These habits help avoid stress and meet funder needs.

How good accounting can support your whole non-profit mission

Strong records don’t just help with money. They help serve people better.

With good accounting, you can:

• Show proof of work to donors
• Plan smarter and grow
• Meet grant terms with ease
• Keep boards and staff informed

Groups with weak records struggle. Good records help missions grow and make real change. Every nonprofit must treat accounting as part of its work. It protects the mission and shows real results.

Money supports the cause. Good records show how. Clear reports build trust, help raise funds, and keep the group ready for growth. Need help managing your nonprofit accounting with care and clarity? Confiance offers expert solutions for nonprofit organizations.

FAQs

1. What are restricted and unrestricted funds in nonprofit accounting?
   Restricted funds must be used for a specific purpose set by the donor. Unrestricted funds can be used for any activity that supports the group’s goals.
2. How should a nonprofit track volunteer time and donated services?
   Volunteer hours and donated services should be logged with dates, type of work, and fair value. This supports full reporting and shows total support received.
3. Can a nonprofit use business accounting software?
   Yes, but it should include fund tracking and nonprofit features. Standard business tools may not meet reporting needs or handle donor limits.
4. What makes nonprofit payroll accounting different?
   Nonprofit payroll must split wages by program when staff work across tasks. It must also follow grant rules and tax filing rules for nonprofit workers.
5. Why is it important to track in-kind donations?
   In-kind gifts like food, clothes, or time reduce cash costs. Tracking them shows full support and helps with audits and reports.
6. What is the role of board members in nonprofit budgeting?
   Board members review the draft budget, approve the final version, and check that spending stays within limits. Their review adds oversight and control.
7. How do nonprofits handle shared costs between programs?
   Shared costs are split using fair methods such as time worked, space used, or units served. This keeps cost records honest and grant-ready.
8. What financial policies should a nonprofit have in place?
   A nonprofit should have rules for spending, reimbursements, bank access, donation handling, and record storage. Clear policies support accuracy and trust.