Nonprofit Accounting: A Complete Guide to Accounting for Nonprofits

What is nonprofit accounting?

Nonprofit accounting is a system of financial management, recordkeeping and reporting designed specifically for not-for-profit organizations. These organizations:

• Operate for purposes that benefit the public rather than earning profit for owners or shareholders.
• Are exempt from paying income taxes under IRS Code Section 501(c)(3) and related provisions.
• Must comply with specialized accounting standards under Financial Accounting Standards Board (FASB) Topic 958.

Nonprofit accounting uses specific language and designations to track funded activities and show donors how their money is being used. Under FASB Accounting Standards Update (ASU) 2016-14 (Topic 958), organizations must classify net assets into two primary categories:

• Net assets without donor restrictions: Funds that can be used for any purpose that supports the organization’s mission.
• Net assets with donor restrictions: Funds that are limited by donor-imposed restrictions, either temporarily (for specific purposes or time periods) or permanently (such as endowments).

Here are a few key terms and concepts you’ll see in nonprofit accounting:

• Programs: The services a nonprofit provides. Each program generally has its own revenue, expenses and records.
• Donor restrictions: Some donors restrict their contributions to specific purposes or programs. Nonprofits must account for these restrictions in their financial management. Funds that aren’t donor-restricted can be used for any program, administrative costs or other needs.
• Fundraising: Activities that raise an organization’s profile or solicit donations, such as direct mail campaigns, email newsletters and fundraising events.
• Administration: Funds used to manage and operate the nonprofit. These costs are necessary to keep the organization running and must be tracked and reported to donors. Donors often prefer nonprofits to keep overhead costs, such as salaries, relatively low so more funds can go toward programs.

According to Eileen Gwaltney, a certified public accountant with more than 20 years of experience, one of the biggest accounting mistakes nonprofits make is improperly allocating administration expenses. Good financial management ensures the organization can function and grow, but donors may hesitate to give if functional expenses become too large.

“With donors focused on making the most of their contribution, it is important for nonprofits to allocate costs correctly,” Gwaltney explained.

Nonprofit accounting vs. nonprofit bookkeeping

Nonprofit organizations depend on sound bookkeeping and accounting practices to stay compliant and financially healthy. While these terms are often used interchangeably, they represent distinct functions within financial management.

• Nonprofit bookkeeping: Nonprofit bookkeeping involves recording day-to-day financial transactions, such as donations, grants, expenses, payroll and other financial activity. It ensures the organization has a clear, organized record of its financial inflows and outflows.
• Nonprofit accounting: Nonprofit accounting takes a broader view, focusing on the bigger financial picture and its strategic implications. Accountants use the data bookkeepers provide to prepare financial statements like balance sheets, income statements and cash flow statements. They also ensure compliance with nonprofit-specific accounting standards such as FASB Topic 958, helping keep the organization’s financial reporting accurate and reliable.

What’s the difference between nonprofit and for-profit accounting? 

Nonprofit and traditional business accounting follow the same core principles, but they differ in how organizations track revenue, classify funds and report financial activity. Nonprofits focus on donations, grants and donor restrictions, while businesses focus on sales, profit and shareholder value. Here’s a side-by-side look at the key differences:

While the terminology differs, nonprofits and for-profits rely on the same core accounting principles. In practice, the biggest differences come down to how nonprofits track and report funding compared with how businesses record revenue and profit.

Business development strategist Maggie Tallman emphasized that nonprofits need clear, real-time visibility into their financial and program data to manage resources effectively and stay accountable to donors. “Those nonprofit organizations that understand how to manage this data, and the insights and results derived from that data, are the ones that will leapfrog everyone else in donor and constituent engagement and organizational effectiveness,” Tallman explained.

How nonprofit accounting works: Key records and compliance requirements

Now that you understand the basics of nonprofit accounting, it helps to see how it works in practice. Nonprofits must maintain detailed financial records and meet strict reporting requirements at both the federal and state levels. Together, these responsibilities ensure transparency, support decision-making and help organizations stay compliant.

Here’s a closer look at the key records nonprofits must maintain and the compliance requirements they need to meet.

Financial records and documents

Nonprofit accounting relies on accurate, well-organized records that show how funds are received, managed and spent. These documents support financial reporting, demonstrate accountability to donors and help ensure compliance with regulatory requirements. They include the following: 

Financial statements:

• Statement of Financial Position (balance sheet)
• Statement of Activities (revenue and expenses)
• Statement of Cash Flows
• Statement of Functional Expenses (required for some nonprofits and widely used to show how funds are allocated)

Supporting documentation:

• General ledger and chart of accounts
• Bank statements and bank account reconciliations
• Donor acknowledgment letters
• Grant agreements and compliance reports
• Board meeting minutes and resolutions
• Audit trails for all financial transactions

Additional records to maintain:

• Bylaws and articles of incorporation
• IRS determination letter confirming tax-exempt status
• State registration certificates and annual filing confirmations
• Employment records and payroll documentation
• Contracts with vendors, consultants and service providers
• Insurance policies and coverage documentation

Federal tax requirements for nonprofits

Nonprofits must also comply with federal tax regulations that govern how they report financial activity and maintain their tax-exempt status.

IRS Form 990 filing requirements and deadlines

Form 990 provides the IRS and the public with a detailed view of a nonprofit’s financial and operational activity. It’s due by the 15th day of the fifth month after the organization’s fiscal year ends. For nonprofits operating on a calendar year, that means filing by May 15 of the following year.

The form includes:

• Financial statements and summaries
• Governance and management policies
• Executive compensation details
• Program service accomplishments
• Fundraising activities and expenses
• A list of board members and key employees
• Detailed schedules for specific activities (such as lobbying or political activity)

Nonprofits that need more time can request a six-month automatic extension by filing Form 8868 by the original deadline.

Unrelated business taxable income (UBTI)

Some nonprofit income may be taxable if it isn’t properly reported or managed. Rules around UBTI can be complex, and changes in tax law can affect how income must be classified and reported.

“Under the 2017 Tax Cuts and Jobs Act, a nonprofit can no longer aggregate the profits and losses from various trades and businesses in computing their unrelated business taxable income,” warned Julie Treppa, a tax attorney and partner at Farella Braun + Martel LLP. “[Nonprofits must] be sure to segregate income and expenses from each trade or business in which it engages … UBTI is now computed separately with respect to each trade or business.”

Treppa also noted that certain employee benefits may count as taxable income if not reported properly. “A nonprofit’s UBTI includes any qualified transportation fringe benefits and on-premises athletic facilities provided to employees,” she said.

However, proper reporting can help avoid additional tax liability: “The organization can avoid the addition of these items as UBTI if it includes the cost of the benefits on its employees’ Form W-2,” Treppa added.

State compliance requirements

In addition to federal obligations, nonprofits must meet state-level requirements that vary by jurisdiction. Most states require nonprofits to register, file annual reports and maintain good standing to operate legally.

Many states also require charitable organizations that solicit donations to register before fundraising. According to the National Council of Nonprofits, most states require charitable solicitation registration.

Common triggers for state registration include:

• Soliciting donations from state residents
• Holding charitable assets within the state
• Receiving grants from in-state foundations

Most states require organizations receiving more than $25,000 annually to register. Still, you should check your state’s requirements, as rules can vary.

Filing deadlines also differ by state. Here are a few examples:

• California: October 15
• New York: November 15
• Minnesota: July 15
• Fiscal-year organizations: Typically due on the 15th day of the seventh month after the fiscal year ends

Some states accept the IRS Form 990 as part of their reporting requirements, but most have additional forms or filings.

Best practices for accounting for nonprofits

Nonprofit organizations must balance mission-driven work with responsible financial tracking and management. Here are some best practices nonprofits should follow:

1. Establish internal controls.

A strong system of internal controls helps safeguard resources and build trust with donors and stakeholders. Consider:

• Requiring dual signatures on checks above a certain threshold
• Separating cash handling and recording duties among different staff members
• Performing monthly bank reconciliations
• Setting clear approval processes for significant expenditures

2. Follow GAAP principles.

Generally accepted accounting principles (GAAP) are a set of accounting standards issued by the Financial Accounting Standards Board (FASB). Many nonprofits follow GAAP when preparing financial statements, which helps create transparency for donors and grant-makers and allows regulators to assess whether an organization should retain its tax-exempt status.

Specific rules for nonprofits include:

• Classifying funds into two categories: Labeling money that donors have restricted for specific purposes versus money that can be used for general organizational needs.
• Reporting expenses by purpose: Showing how much is spent on programs, administrative costs and fundraising activities.
• Disclosing available cash and resources: Explaining what money and assets are available within the next year to support operations.
• Recording donations when promised: Recognizing revenue when a donor makes a firm commitment to give, not when the money is received.

3. Use high-quality accounting software.

No matter who manages your books, choosing the right accounting software makes it much easier to track finances and stay prepared for tax season. Nonprofits should look for tools that go beyond basic bookkeeping and support nonprofit-specific needs, such as donor management, FASB compliance and grant tracking.

Several accounting platforms are designed specifically for nonprofits, including:

• Aplos: Aplos is a cloud-based platform built for nonprofits and faith-based organizations. It includes core features like donation tracking, donor statements, pledge tracking and FASB-compliant reporting, with higher-tier plans adding budgeting tools, advanced reporting and payroll integration.
• Financial Edge NXT: Financial Edge NXT is Blackbaud’s nonprofit accounting solution. It includes features such as activity tracking, accounts receivable (AR), accounts payable (AP), bank reconciliation and FASB-compliant reporting.
• Sage Intacct: Sage Intacct is a cloud-based system with nonprofit-specific tools like fund accounting, grant management and compliance reporting, along with budgeting and financial tracking capabilities.

Some of the more traditional best accounting software platforms also offer features for nonprofits:

• QuickBooks: Known for its ease of use, QuickBooks includes a nonprofit version that supports donation tracking, program-based expense tracking and standard accounting functions like payroll, invoicing and reporting. Organizations can upgrade to QuickBooks Enterprise Nonprofit as they grow. Read our QuickBooks Online review to learn more about the platform’s core features and how it can support nonprofit accounting.
• Oracle NetSuite: Oracle NetSuite is a flexible platform that supports both for-profit and nonprofit accounting. Through its Social Impact program, eligible nonprofits can access discounted tools for grant accounting, FASB reporting and budgeting. See our review of NetSuite for more information on the software’s core features.
• FreshBooks: While designed primarily for service-based businesses, FreshBooks can work for smaller nonprofits that need simple invoicing and expense tracking. However, it lacks nonprofit-specific features like fund accounting and donation tracking. Our FreshBooks review has more details.

4. Keep lines of communication open.

No matter which software you use, one of the most important parts of nonprofit accounting is communication. Tiffany Couch, a CPA and CEO of forensic accounting firm Acuity Forensics, recommends keeping staff and board members informed about what your accountants are doing and what they’re finding.

“Make sure you have a CPA who will walk you through your numbers — ensuring that you understand the profit-and-loss statement, the balance sheet and your cash flow statement,” Couch advised. “The more knowledgeable you become, the more empowered you are to make financial decisions that support your organization.”

Couch said this kind of communication between accountants and decision-makers is essential to building a sustainable nonprofit. “If you don’t have a CPA assisting you in this process, find one who will.”

Common nonprofit accounting scenarios

Here are examples of a few real-world scenarios nonprofits may encounter as they manage their accounting:

• Donor-restricted gifts: A donor gives your nonprofit $25,000 to support youth programming. That money can’t be used elsewhere, so it’s recorded as temporarily restricted revenue when it comes in. As your team spends on youth programs, those expenses are tracked separately and the restriction is gradually released.
• In-kind donations: A local business donates $5,000 worth of office supplies to your nonprofit. Even though no cash changes hands, the value still needs to be recorded — typically at fair market value — along with a matching expense or asset. Most organizations will also keep a written acknowledgment of the gift on file.
• Volunteer time valuation: While volunteer services generally can’t be recorded as contributions under GAAP, they should still be tracked for internal reporting and Form 990 purposes.

This kind of reporting can also affect how nonprofits present their financials. As Tab Burkhalter, managing partner at the Burkhalter Group, explained, “The market value of the donated services are reportable on [tax form] 990 as program service revenue and can reduce the percentage of administrative and management costs that is directly paid for by the organization’s cash contributions.”

Do nonprofits need accountants?

Like any organization managing cash flow and tax obligations, nonprofits should invest in a qualified accounting and finance team. However, many don’t allocate resources for a dedicated professional. Instead, financial responsibilities often fall to an untrained staff member or volunteer — a common and costly mistake, according to Couch.

Mistakes are often unintentional, arising from a lack of oversight or experience. Volunteers often comprise a significant part of a nonprofit’s staff and may leave an organization on short notice, which can cause recordkeeping gaps. That’s why nonprofits shouldn’t hesitate to seek professional guidance, including hiring an accountant when possible. 

“Don’t have a mindset of scarcity when it comes to ensuring you have appropriate resources in terms of handling your money,” Couch advised. “There are plenty of CPAs who would be willing to provide a discount or pro bono services.”

The role of accountability in nonprofit accounting

At its core, nonprofit accounting comes down to accountability. Unlike for-profit businesses that answer to a smaller group of owners, nonprofits are answering to a much broader mix of stakeholders, all with their own expectations. That group usually includes:

• Donors and foundations that fund operations and programs
• Beneficiaries who receive services
• Board members who provide governance oversight
• Government agencies that grant tax-exempt status
• The general public that supports the organization’s mission
• Volunteers who contribute time and expertise

That’s why getting your accounting right matters. It’s not just about staying compliant — it’s about showing how funds are used and building trust with the people who support your work.

When your financial practices are clear and consistent, it becomes easier to maintain that trust, secure ongoing support and keep your mission moving forward.

Mike Berner contributed to this article. Source interviews were conducted for a previous version of this article.