Money Matters

Nonprofit accounting standards: A guide to compliance and best practices

Running a nonprofit means answering to more than just your board: donors, grantmakers, and the IRS all expect to see exactly where the money went. Nonprofit accounting standards are what make that possible. Here’s what they actually require and how to build compliance into the way your organization already works.

Published August 26, 202613 min read Share

This article was originally published on February 13, 2025 but has been refreshed and re-published with new content on August 26, 2026.

Every nonprofit, whether it’s a small community group or a major research institution, needs to answer the same basic question: can you show, clearly and consistently, where your resources came from, how they were used, and whether any donor restrictions were followed?

That question sits behind everything from board meetings to grant applications and financial reporting. Getting the answer right helps your organization meet its reporting requirements, demonstrate accountability, and build trust with the people who support it.

Understanding nonprofit accounting standards is an important part of that. This guide explains what’s actually required, the financial statements you need to prepare, how to build sound accounting processes into your operations, and where organizations most often go wrong.

Key takeaways

• Nonprofit accounting standards are based on US Generally Accepted Accounting Principles (GAAP), with nonprofit-specific guidance primarily contained in FASB ASC Topic 958.
• Nonprofits preparing financial statements under US GAAP generally present a statement of financial position, statement of activities, and statement of cash flows, and must also report expenses by both function and nature.
• Nonprofits classify net assets as either with donor restrictions or without donor restrictions, while contribution and revenue recognition depends on the nature and terms of each transaction.
• The accounting standards and reporting requirements that apply can vary according to your nonprofit’s activities, funding arrangements, state requirements, audits, and other obligations, so it’s important to understand which requirements apply to your organization.

Here’s what we’ll cover

What are nonprofit accounting standards?

Nonprofit accounting standards are guidelines that govern how nonprofit organizations record, report, and disclose their financial activities.

They exist to ensure accuracy, transparency, and consistency when reporting to donors, board members, funders, auditors, and regulatory agencies, and they apply whether your organization is a small community group or a major research institution.

In the US, nonprofits that prepare financial statements under Generally Accepted Accounting Principles (GAAP) follow standards established by the Financial Accounting Standards Board (FASB). The main nonprofit-specific accounting guidance sits within ASC Topic 958, Not-for-Profit Entities, alongside other GAAP standards that may apply to particular transactions.

GAAP applies more broadly than the nonprofit sector, so this guide focuses specifically on the accounting standards and reporting requirements most relevant to nonprofit organizations.

How is nonprofit accounting different from for-profit accounting?

Nonprofit accounting standards differ from for-profit accounting because financial reporting has a different focus. While for-profit organizations report financial performance and profitability, nonprofits place particular emphasis on stewardship and accountability—showing how resources were received, whether donor restrictions apply, and how spending supports the organization’s mission.

In practice, nonprofit accounting includes specific requirements around contributions, donor restrictions, net asset presentation, and functional expense reporting. These areas are particularly important to nonprofit financial reporting and reflect the sector’s responsibility to donors, funders, boards, and other stakeholders.

What financial statements do nonprofits need to prepare?

Nonprofits preparing financial statements under US GAAP generally present a statement of financial position, a statement of activities, and a statement of cash flows. They must also provide an analysis of expenses by both function and nature, which can be presented within the financial statements, in the notes, or as a separate statement of functional expenses.

• Statement of financial position (balance sheet): breaks down your assets, liabilities, and net assets, useful for understanding your organization’s overall financial health and planning for growth.
• Statement of activities (income statement): shows revenue and expenses over a period, revealing whether you ran a surplus or a deficit, and lets you compare actual results against budget.
• Statement of cash flows: tracks cash moving in and out through operations, investing, and financing activities, so you can confirm you can meet short-term obligations.
• Functional expense analysis: shows expenses by both function—such as program services, management and general, and fundraising—and by nature, such as salaries, rent, and supplies. Nonprofits can present this analysis on the statement of activities, in the notes, or in a separate statement of functional expenses.

Understanding fund restrictions and functional expenses

Beyond the core statements, nonprofits need to classify net assets based on donor restrictions and report expenses by both function and nature. These classifications help show where resources can be used and how spending supports the organization’s mission.

How are nonprofit funds classified by donor restrictions?

Under ASU 2016-14, nonprofits classify net assets in two classes: net assets without donor restrictions and net assets with donor restrictions:

• Net assets without donor restrictions: can generally be used for any organizational purpose, giving your nonprofit the most flexibility.
• Net assets with donor restrictions: carry donor-imposed restrictions, often based on time, purpose, or a specific program, such as funds earmarked for a particular outreach campaign. Some restrictions may also require resources to be maintained in perpetuity, as with certain endowment gifts.

Getting this classification right matters for compliance and for donor trust: a donor who restricted a gift to a specific program has every right to expect it wasn’t quietly spent elsewhere.

Functional expense categories: program, management, and fundraising

Separately, GAAP requires nonprofits to report expenses by function, not just by type. Expenses are generally classified between program services and supporting activities, while also being reported by their natural type, such as salaries, rent, or supplies. Every expense function falls into one of three common categories:

• Program services: costs directly tied to your mission, staff time, program supplies, or event costs.
• Management and general: administrative costs that keep the organization running, office rent, accounting services, or executive salaries.
• Fundraising: costs related to raising money, marketing campaigns, or donor events.

Reporting expenses this way shows donors and grantmakers exactly how much of their support goes toward your mission versus overhead, giving them greater visibility into how your organization’s resources are being used.

Key nonprofit accounting standards and updates

A handful of FASB standards shape how nonprofits handle specific transactions, from everyday revenue recognition to newer rules on credit losses and crypto assets.

What are the main accounting standards for nonprofits?

The main accounting standards nonprofits are likely to encounter include ASC 958 for nonprofit-specific reporting, ASC 606 for exchange transactions, and ASC 842 for leases.

Which standards apply to your organization depends on the activities and transactions you have:

• ASC 958, Not-for-Profit Entities: the primary framework for nonprofit accounting and financial reporting, including contributions, financial statement presentation, and net asset classification.
• ASC 606, Revenue From Contracts With Customers: governs revenue recognition for exchange transactions, like membership fees or paid consulting services, as distinct from donations.
• ASC 842, Leases: generally requires nonprofits that are lessees to recognize lease assets and liabilities on the statement of financial position, subject to available exceptions and accounting elections.

Leases are an easy thing to overlook: if your nonprofit rents office space, vehicles, or equipment, those commitments may need to be recognized as a lease asset and liability rather than recorded only as rent expense as payments are made. Reviewing your lease agreements against ASC 842 is worth doing even if nothing about your leases has recently changed.

What recent FASB accounting updates should nonprofits know about?

Recent FASB updates may affect your nonprofit if you hold certain assets or enter into specific types of transactions. ASU 2025-05 relates to expected credit losses on certain receivables and contract assets, while ASU 2023-08 changes how qualifying crypto assets are measured and disclosed:

• ASU 2025-05, Credit losses (CECL): introduces a practical expedient and accounting policy election that can simplify how eligible organizations account for expected credit losses on certain current accounts receivable and contract assets arising from ASC 606 transactions.
• ASU 2023-08, Crypto assets: requires qualifying crypto assets held by nonprofits to be measured at fair value each reporting period, with changes in fair value recognized in the statement of activities, plus new disclosures.

How do nonprofits recognize contributions and exchange transactions?

Nonprofits first need to determine whether a transaction is a contribution or an exchange transaction, and whether a contribution is conditional or unconditional. That classification determines which accounting guidance applies and when revenue can be recognized.

FASB ASU 2018-08 clarified how nonprofits make those distinctions:

• Unconditional contributions: recognized when received or when an unconditional promise to give is made, subject to applicable recognition requirements.
• Conditional contributions: recognized only once the specified conditions are met, such as matching funds or a program milestone.
• Exchange transactions: recognized as the obligation is fulfilled, similar to how a standard business contract works under ASC 606.

Getting this distinction right is central to accurate grant management, since misclassifying a conditional grant as immediately recognizable revenue can overstate revenue in your financial statements.

Why accounting standards compliance matters

Following the accounting guidelines for nonprofit organizations protects your organization’s financial credibility and ability to meet relevant reporting requirements.

Meeting tax and regulatory reporting requirements

GAAP financial reporting and federal tax reporting are separate requirements. Most tax-exempt organizations have IRS filing obligations, such as Form 990, while GAAP may apply through funder, lender, state, audit, or other reporting requirements. Keeping accurate financial records helps your organization meet the different obligations that apply.

Meeting grantmaker and auditor expectations

Funders, lenders, auditors, and other stakeholders may expect or require GAAP-compliant financial statements, depending on the organization and reporting arrangement. Consistent financial reporting gives them a clearer basis for assessing your nonprofit’s financial position and performance.

Building credibility and trust

Accurate, standardized reporting shows donors, board members, and the community that your organization is professional and trustworthy. That trust directly affects people’s willingness to give their time, effort, and money, and it’s much harder to rebuild once it’s been shaken than it is to maintain from the start.

Supporting transparency and accountability

As your organization grows and staff changes, standardized reporting keeps financial data consistent and traceable. That matters for internal accountability day to day, and it matters even more when you’re staring down an audit and need records that hold up under scrutiny.

What are the most common nonprofit accounting mistakes?

Misclassifying restricted funds, misreporting conditional grants too early, inconsistent expense allocation, and failing to check which reporting requirements apply are among the mistakes that can create problems for nonprofit financial reporting.

These issues often arise from limited resources, competing priorities, complex funding arrangements, or uncertainty about how specific accounting rules apply.

Misclassifying restricted and unrestricted funds

Confusing donor-restricted funds with general operating funds is a significant accounting risk for nonprofits. Spending restricted funds on the wrong purpose, even accidentally, can damage donor trust and create real compliance problems.

Misreporting conditional grants as unrestricted revenue

A grant with unmet conditions isn’t yet recognizable as revenue, but it’s easy to record it too early if your team isn’t clear on the distinction between conditional and unconditional contributions. This overstates income and can mislead your board and funders about your actual financial position.

Inconsistent expense allocation

Sorting expenses into program, management, and fundraising categories gets complicated fast, especially when staff or resources serve multiple functions at once. Inconsistent allocation methods from year to year make it hard to compare performance and can raise questions during an audit.

Not checking which reporting requirements apply

Reporting requirements can vary depending on your nonprofit’s funding arrangements, lenders, state requirements, audit obligations, and other circumstances. Assuming the same rules apply in every situation can lead to incomplete or inconsistent reporting, so it’s important to confirm which financial reporting requirements apply to your organization.

How do you build a compliant nonprofit accounting process?

Building compliance into your operations means understanding the standards that apply, putting strong financial policies and controls in place, reviewing your records regularly, and keeping your team’s knowledge up to date.

1. Understand the standards

   The more your team knows about GAAP principles, FASB standards, and the broader accounting guidelines for nonprofit organizations, the easier compliance becomes. Staying current can be difficult without a dedicated financial expert on staff, but FASB itself offers educational resources, including webinars covering recent updates and their impact on nonprofits.

2. Implement strong financial policies

   A strong financial policy should have three characteristics:

   • Clear: everyone knows what data is required, how it should be formatted, and when it’s due.
   • Secure: financial data is protected with practices like encryption and multi-factor authentication.
   • Transparent: more than one person reviews data before it’s submitted, reducing errors and building both internal accountability and external trust.

3. Review and reconcile your financial records regularly

   No system is perfect, so regular financial reviews and reconciliations matter:

   • Monthly or quarterly reviews: can often be handled internally to identify errors, inconsistencies, or control issues early.
   • Independent audits or reviews: may be required depending on your organization’s size, state requirements, funding arrangements, or other obligations. Where one is required, an independent CPA should carry it out.

4. Invest in training and education

   The more your staff understands accounting rules and regulations, the better equipped they are to apply those requirements consistently. In-person or online courses that build both knowledge and practical skills are worth the investment, especially for staff directly responsible for tracking and reporting financial data.

Best practices for nonprofit accounting

Beyond the compliance basics, following sound accounting guidelines for nonprofit organizations comes down to a few habits that can help you maintain consistent, accurate financial reporting throughout the year.

Review financial policies regularly

FASB standards and GAAP guidance change over time, so policies written even a year or two ago may no longer reflect current expectations. Review your accounting policies at least annually, and whenever a significant accounting standard, funding arrangement, organizational activity, or internal process changes.

Separate duties across your team

Having different people responsible for recording, approving, and reconciling transactions reduces error and fraud risk, even in a small organization where the same person might wear several hats. Keeping detailed records of authorized payments, plus performing monthly bank and credit card reconciliations, helps catch discrepancies early.

Leverage nonprofit accounting software

Using nonprofit accounting software can make it easier to follow consistent accounting processes by automating tasks like tracking grants, categorizing expenses, and preparing financial statements, reducing manual work as your organization grows.

Choosing the right nonprofit accounting software

Compliance isn’t a one-time task. Accounting standards, funding requirements, and your organization’s reporting needs can change over time. Keeping up with those requirements can be difficult to manage manually, especially as your nonprofit grows.

This is where the right software can help: by bringing financial data, controls, tracking, and reporting into one system, it can make consistent accounting processes easier to maintain.

The right platform typically helps with:

• Revenue recognition: Sage Intacct nonprofit revenue recognition tools help automate revenue recognition for conditional grants and contributions and track barriers, conditions, and recognition status, reducing the risk of misclassifying a grant.
• Financial statements: strong financial reporting software makes it far easier to prepare accurate financial reports and statements consistently.
• Expense tracking: a well-organized nonprofit chart of accounts keeps expenses categorized and reported consistently as your organization grows.
• Cross-border operations: accounting software for international nonprofits and NGOs can help manage additional currency, entity, and reporting complexity for organizations operating across multiple countries.

Simplify your nonprofit compliance

Compliance shouldn’t rest entirely on manual tracking and year-end scrambles. The right accounting software brings grant tracking, fund restrictions, and financial reporting into one system, helping your team maintain consistent accounting processes and clearer financial oversight.

Ready to simplify and streamline your nonprofit accounting processes? See how nonprofit accounting software from Sage can support your organization from the ground up.

Nonprofit accounting standards frequently asked questions

How often should a nonprofit update its accounting policies?

Review your accounting policies at least annually and whenever a significant accounting standard, funding arrangement, organizational activity, or internal process changes. Tying the review to a regular point in your calendar, such as year-end planning or your annual audit or financial review, can help make sure it isn’t overlooked.

Does a small nonprofit need the same accounting rigor as a large one?

Small nonprofits still need accurate records, appropriate financial controls, and reporting processes that fit their activities. However, the specific reporting requirements that apply can vary depending on factors such as funding arrangements, state requirements, and whether the organization prepares GAAP financial statements.

Who is responsible for GAAP compliance at a nonprofit?

The board is responsible for overseeing the nonprofit’s financial governance, while day-to-day accounting and financial reporting usually sit with finance staff such as the CFO, controller, treasurer, or bookkeeper. The exact responsibilities will depend on the size and structure of your organization.

Can a nonprofit lose its nonprofit status over an accounting error?

A single accounting error would not ordinarily cause a nonprofit to lose its federal tax-exempt status. Tax-exempt status is governed by IRS requirements, so the greater risk comes from failures such as not meeting required filing or tax obligations rather than simply making a GAAP accounting error.

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