What Is Non-Profit Accounting? And Best Practices

Good nonprofit accounting practices help you create accurate, timely financial reports, demonstrate proper fund usage, track program outcomes against expenses, and provide clear impact measurements. The key to proper nonprofit accounting is tracking and understanding how financial resources align with donor restrictions and nonprofit accounting rules. A $10,000 unrestricted donations are managed differently from a $10,000 grant earmarked for specific programs.

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• So check with your tax/legal team to make sure you’re prepared for any potential tax bills.
• One critical requirement is the annual filing of Form 990, which provides the IRS with a comprehensive overview of the nonprofit’s financial activities.
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• As a result, nonprofits will issue a statement of activities instead of the income statement issued by for-profit businesses.
• One of the biggest challenges in nonprofit accounting is managing restricted funds.
• Board finance committees should also review financial reports at least quarterly to maintain proper oversight.
• Since nonprofits don’t secure revenue for internal gain, nonprofit accounting is all about staying accountable for your finances, instead of making a profit.

Understanding these local nuances is essential for effective operational planning and risk management. Nonprofits should regularly review their compliance obligations to remain informed of any changes in the law. In addition to federal regulations, nonprofits must also consider state and local laws that may impose additional compliance obligations.

Business Planning

As a small business owner, you must know how to go about opening your bank account and managing your finances through business banking. Check that payroll taxes were paid correctly and look for any unusual patterns. Regular reconciliation catches problems while they’re still small and manageable.

What kind of accounting do nonprofits use?

Charitable organizations rely on donors and grant funders to obtain the funds they need. As a result, they must spend these funds according to donors’ and grant funders’ terms and restrictions. Nonprofit accounting is how charitable organizations record, track, summarize, and report their financial transactions. Since nonprofits operate to better society and source their revenue through donations and grants, their accounting practices look different from those of for-profits. Fund accounting helps account for restricted donations and contributions with terms such as conditional https://nerdbot.com/2025/06/10/the-key-benefits-of-accounting-services-for-nonprofit-organizations/ grants.Nonprofits can also choose between a cash or accrual method of accounting, depending on their goals.

• The statement of cash flows (or cash flow statement) is one of the main financial statements (along with the income statement and balance sheet).
• Nonprofit bookkeeping focuses on day-to-day financial record-keeping and management, while nonprofit accounting encompasses a broader scope, including financial analysis, reporting, and tax compliance.
• By the end of this guide, you’ll have the skills to confidently manage your nonprofit’s accounting needs.
• We work with hundreds of nonprofits to provide bookkeeping and accounting support so they can focus on their mission.
• Aplos is a comprehensive solution for nonprofits, but it’s not cheap — especially if you need features like recurring transactions, which requires an upgrade.

• This financial statement reports the revenues and expenses and the changes in the amounts of each of the classes of net assets during the period shown in its heading.
• Each funding source comes with its own nonprofit accounting rules and reporting requirements.
• These are usually substantial expenditures that go beyond the scope of annual operating expenses and require separate planning to ensure they align with long-term strategic goals and financial capacity.
• Additionally, nonprofits must adhere to specific operational guidelines to retain their tax-exempt status.
• Your specific needs might vary—organizations with government contracts might require bigger reserves to handle payment delays.

This approach encourages nonprofit staff to review their budgets from the ground up, itemizing and evaluating each expense. A balance sheet line that includes cash, checking accounts, and certain marketable securities that are very close to their maturity dates. It is also the term used by not-for-profit organizations instead of owner’s equity or stockholders’ equity. Since resource development is often ongoing, budgets may require frequent modification. Good accounting software will also allow directors to compare budgeted amounts to actual amounts and make the necessary adjustments.