Money Matters

Nonprofit accounting basics and best practices

If you’re managing the accounting for a nonprofit, you already know how crucial it is to stay accountable to your supporters and donors. Discover the best practices for nonprofit accounting and how the right software simplifies your operations.

Published August 26, 202614 min read Share

This article was originally published on February 4, 2025 but has been refreshed and re-published with new content on August 26, 2026.

Nonprofit accounting may happen behind the scenes, but it helps turn funding, passion, and purpose into programs that keep serving people and communities. Every donation, grant, and expense needs to be recorded and managed clearly so your organization can show how its resources are supporting the mission.

Most nonprofit professionals did not choose this work to spend their days reconciling accounts, preparing reports, or tracking funding restrictions. Yet strong accounting gives your team, board members, donors, and funders the financial clarity they need to make informed decisions and plan with confidence.

That’s why understanding the basics of nonprofit accounting, following good accounting practices, and using the right software matters. It can help your team spend less time untangling the numbers and more time advancing the mission.

Key takeaways

• Nonprofit accounting focuses on stewardship, accountability, and using financial resources to support the organization’s mission.
• Core accounting documents include the budget, statement of financial position, statement of activities, statement of cash flows, and functional expense analysis.
• Strong nonprofit accounting practices include monthly budget reviews, cash flow forecasting, internal controls, and audit-ready recordkeeping.
• The right nonprofit accounting software should support fund and grant tracking, reporting, controls, and the complexity of your organization’s funding and financial operations.

Here’s what we’ll cover

What is nonprofit accounting?

Nonprofit accounting is the process that mission-driven organizations use to record, organize, analyze, and report their financial activity.

It helps nonprofits show where donations, grants, and other funding come from, how they are used, and whether any donor restrictions are being followed.

Rather than measuring returns for owners or shareholders, accounting for nonprofits focuses on stewardship and accountability. Accurate records give finance teams, board members, donors, and funders a clearer view of the organization’s financial position and how effectively its resources are supporting the mission.

How is nonprofit accounting different from for-profit accounting?

Nonprofit and for-profit accounting both track revenue, expenses, assets, and liabilities, but the key difference is what that financial information is designed to show. For-profit accounting measures profitability and owner or shareholder value, while nonprofit accounting shows how resources are managed to advance a mission.

Difference	Nonprofit accounting	For-profit accounting
Primary focus	Mission, accountability, and responsible stewardship	Profitability and returns for owners or shareholders
Sources of funds	Donations, grants, program revenue, and other funding that may carry donor restrictions	Revenue from selling goods or services and other business activities
Net assets / equity	Net assets with and without donor restrictions	Owners’ or shareholders’ equity
Financial performance	Change in net assets	Net income or loss
Core financial reports	Statement of financial position and statement of activities	Balance sheet and income statement

These differences shape how accounting for nonprofit organizations handles fund tracking, financial reporting, and the chart of accounts.

What are the basics of nonprofit accounting?

The basics of nonprofit accounting include keeping accurate financial records, creating and monitoring a budget, preparing financial statements, tracking restricted funding, and meeting applicable reporting requirements. Together, these processes help your organization understand its financial position, manage resources responsibly, and make informed decisions about the mission.

Essential nonprofit accounting documents

Accounting for a nonprofit relies on both planning documents and financial reports. Budgets guide how resources are allocated, while nonprofit financial statements show what the organization owns, owes, receives, and spends—giving finance teams and board members a clearer view of financial position and performance.

Nonprofit budget

A nonprofit budget estimates the revenue your organization expects to receive and the expenses it expects to incur over a set period.

When planning a nonprofit budget, include donations, grants, program revenue, and other funding alongside planned program, administrative, and fundraising expenses. The budget should also account for any donor or grant restrictions that affect how specific resources can be used.

Statement of financial position

The statement of financial position, also known as a nonprofit balance sheet, provides a snapshot of your organization’s assets, liabilities, and net assets at a specific point in time.

The basic equation is:

On a nonprofit balance sheet, positive net assets mean the organization owns more than it owes, but this figure should be considered alongside liquidity, outstanding obligations, and donor restrictions. Some resources may not be available to cover immediate operating needs.

Statement of activities

The statement of activities shows your nonprofit’s revenue, expenses, and change in net assets over a reporting period.

Revenue may include donations, grants, program fees, and investment income. Expenses commonly include program services, management and general expenses, and fundraising. A nonprofit statement of activities also distinguishes between activity with and without donor restrictions.

Statement of cash flows

The statement of cash flows shows how cash enters and leaves your organization through operating, investing, and financing activities.

This report helps your team understand where cash is coming from, where it is going, and whether enough is available to meet payroll, supplier payments, and other short-term obligations.

Functional expense analysis

A functional expense analysis shows both what your nonprofit spends money on and why each expense was incurred.

Expenses are classified by nature, such as salaries, rent, or supplies, and by function, such as program services, management and general activities, or fundraising. Nonprofits reporting under US Generally Accepted Accounting Principles (GAAP) must present this analysis in one location. It may appear in the statement of activities, the financial statement notes, or a separate statement of functional expenses.

Which accounting standards and compliance requirements apply to nonprofits?

Nonprofits may be subject to a range of financial reporting and compliance requirements, including financial statements prepared in accordance with GAAP, federal tax filings, state reporting obligations, and independent audits. The exact requirements depend on your organization’s tax status, activities, funding sources, governing documents, and where it operates or raises funds.

Your organization should confirm its specific reporting and compliance obligations with a qualified nonprofit accounting or legal professional.

US accounting standards (GAAP)

GAAP guidelines provide a framework for preparing consistent, comparable financial statements. While not every nonprofit is legally required to follow GAAP, organizations may need or choose to do so because of requirements or expectations from grant providers, lenders, auditors, boards, and other stakeholders.

The Financial Accounting Standards Board (FASB) establishes GAAP for nongovernmental organizations in the US. Its Accounting Standards Codification Topic 958 includes guidance for nonprofit entities on areas such as contributions, net assets with and without donor restrictions, and financial statement presentation.

Form 990 series

Most tax-exempt organizations must submit an annual information return or electronic notice from the Form 990 series to the Internal Revenue Service (IRS).

The appropriate filing depends on factors such as the gross receipts, assets, and organization type. Smaller organizations may qualify to submit Form 990-N, while others may need to file Form 990-EZ, Form 990, or Form 990-PF. Certain organizations, including churches and some church-affiliated organizations, are exempt from the annual filing requirement.

State reporting requirements

Nonprofit reporting requirements vary by state, particularly for organizations that solicit charitable contributions.

Depending on where your organization is formed, operates, or raises funds, it may need to submit annual reports, charitable solicitation registrations, financial statements, or other filings to state agencies. Your nonprofit should review the requirements that apply in each state where it carries out activities that trigger registration or reporting obligations.

Audit requirements

Not every nonprofit is required to undergo an independent financial audit, but audit requirements can arise from several sources.

Audit requirements may depend on state law, grant or funding agreements, lender requirements, governing documents, and the amount of federal funding the organization expends. Under federal Uniform Guidance, a nonfederal entity that expends $1 million or more in federal awards during its fiscal year must generally undergo a single audit, unless it qualifies for a program-specific audit.

How should nonprofits track donations and grants?

Nonprofits should record donations and grants by source, amount, date, purpose, and restriction status. Clear records help your organization use funds as intended, prepare accurate reports, and understand which resources are available for programs or operating expenses.

A nonprofit chart of accounts can organize revenue by funding source, program, grant, or donor restriction. Supporting records such as grant agreements, award letters, pledge documentation, and donor correspondence should be stored alongside the related accounting records.

Donor restrictions and funding conditions should also be tracked separately and accurately. A donor restriction limits how or when a contribution can be used, while a donor-imposed condition can affect when the contribution is recognized.

Accounting records should be reconciled with fundraising or grant management systems so finance and development teams work from consistent information. Tracking reporting periods, spending deadlines, and remaining grant balances also helps your organization prepare funder reports and keep spending aligned with the terms of each award or donation.

What are the best accounting practices for nonprofits?

The best accounting practices for nonprofits include reviewing performance regularly, explaining costs, planning ahead, protecting assets, and keeping records current.

Together, these practices help your organization strengthen financial control, respond to change, and make better-informed decisions about how resources support the mission.

Review your budget versus actual results every month

Compare actual revenue and expenses with your approved budget at least once a month. Regular reviews help your team spot significant differences early and decide whether spending, fundraising, or program plans need to change.

Look beyond the total variance to understand what caused it. A grant may arrive later than expected, a program may cost more to deliver, or a fundraising campaign may perform differently from its forecast. Recording the reason gives board members and finance teams the context they need to respond. Tracking nonprofit financial metrics alongside budget variances can also help your organization identify broader financial trends.

Connect overhead spending to mission delivery

Administrative and fundraising costs help keep your nonprofit running and create the infrastructure needed to deliver programs effectively. Staff support, office space, technology, and donor outreach may not be direct program expenses, but they can still play an important role in achieving your mission.

Rather than treating a single overhead percentage as a universal target, report these costs accurately and explain how significant investments support the organization. For example, spending more on finance staff or cybersecurity may increase overhead in the short term while improving financial control or strengthening the systems that protect your organization.

Plan beyond the annual budget

An annual budget provides a starting point, but nonprofit financial planning should also account for changes in funding, cash flow, and demand for programs.

Rolling cash flow forecasts can help your team anticipate when money will enter and leave the organization, so you can spot potential shortfalls before they affect day-to-day operations.

Scenario planning can prepare your nonprofit for several possible outcomes, such as a base case, a funding shortfall, and an increase in demand for services. Longer-term planning can also account for reserve needs, future staffing, equipment investments, and program expansion.

Build internal controls into day-to-day work

Internal controls reduce the risk of errors, unauthorized transactions, and misuse of nonprofit resources. Controls are most effective when they are built into routine financial processes rather than checks performed only at the end of a reporting period.

Practical internal controls include:

• Separating responsibility for authorizing, recording, and reconciling transactions.
• Restricting access to financial systems based on each person’s role.
• Requiring documentation and approval for payments.
• Reconciling bank and credit card accounts each month.
• Maintaining an accurate record of fixed assets.

Smaller nonprofits may need to adapt these controls when staffing is limited. Board or treasurer oversight can provide an additional level of review when the same employee must perform more than one financial task.

Keep financial records audit-ready

Audit-ready records are complete, organized, and supported by documentation throughout the year. Keeping reconciliations, approvals, grant agreements, and supporting schedules current makes financial reviews easier and reduces the need to reconstruct transactions later.

Even when an external audit is not required, regular internal reviews can help your organization spot missing documentation, inconsistent procedures, or control gaps early—before they turn into larger reporting or financial management problems.

How do you choose the best nonprofit accounting software?

The best nonprofit accounting software should support the specific requirements of accounting for nonprofit organizations, including complex funding, reporting, and oversight needs. Rather than choosing software based on a general feature list, assess how well each system handles the financial processes your nonprofit relies on every day.

Capability	Why it matters	What to look for
Fund and grant accounting	Your organization needs to track financial activity across funds, grants, and programs while respecting donor restrictions.	Reporting by fund, grant, and program, tracking for net assets with and without donor restrictions, and visibility into grant balances and spending deadlines.
Customizable reports and dashboards	Finance teams, board members, and program leaders may need different views of the same financial information.	Customizable reports, budget-to-actual reporting, role-based dashboards, real-time data, and the ability to drill down from summary reports to underlying transactions.
Fundraising and customer relationship management integrations	Finance and development teams need consistent records for donations, pledges, grants, and donor restrictions.	Connections with fundraising or customer relationship management systems that reduce duplicate data entry and keep financial and donor information aligned.
Permissions and transaction history	The system should support internal controls and make each financial activity easy to trace and review.	Role-based permissions, approval workflows, audit trails, document storage, and reports that can be shared with auditors or funders.
Ease of use and support	A system only improves efficiency when employees can use it accurately and consistently.	Clear navigation, accessible training, implementation support, and controls that match your team’s responsibilities and level of accounting expertise.

Once you have identified the essential capabilities, consider how your organization’s size, structure, funding complexity, and future plans affect the level of software it needs.

How should organization size affect your software choice?

Organization size matters when choosing nonprofit accounting software, but financial complexity may matter more than the number of employees. Consider the number of funds, grants, programs, entities, and reporting requirements your finance team manages, as well as how those needs may change as your organization grows.

Organization profile	Priorities to consider
Small nonprofits	Ease of use, affordable implementation, core fund tracking, straightforward reporting, and accessible support.
Growing and midsize nonprofits	Customizable reports, grant tracking, approval workflows, and integrations with fundraising or customer relationship management systems.
Large and multi-entity nonprofits	Multi-entity consolidation, entity-level reporting, management of transactions between related entities, role-based permissions, and scalability.

A small nonprofit with several restricted grants may need more advanced reporting than a larger organization with simpler funding. That’s why software should be evaluated against financial complexity, not headcount alone. Choose a system that can support both your current workflows and the needs you expect over the next few years.

Turn nonprofit accounting best practices into action

Good nonprofit accounting gives you a clearer answer to the questions that matter: What funding is available? Where can it be spent? Are programs tracking to budget? And what needs attention before it becomes a bigger problem?

That comes from getting the fundamentals right—keeping records current, tracking grants and restrictions carefully, reviewing performance regularly, forecasting cash flow, and building controls into everyday finance processes.

As those processes become more complex, the right software can help you manage them without adding more manual work. Bring fund tracking, reporting, and financial controls into one connected system with Sage Intacct for nonprofits, or explore our nonprofit accounting software to find the right fit for your organization.

Frequently asked questions about nonprofit accounting

What accounting method should a nonprofit use?

The right method of accounting for a nonprofit depends on its reporting requirements, funding arrangements, and financial complexity.

Cash-basis accounting records revenue and expenses when money is received or paid, while accrual accounting records financial activity when it is earned or incurred. Organizations that need financial statements prepared under US GAAP use accrual accounting. For Form 990 reporting, the IRS permits organizations to report using either the cash or accrual method, provided the selected method is applied consistently across the return.

What is the difference between nonprofit bookkeeping and nonprofit accounting?

Nonprofit bookkeeping records day-to-day transactions such as deposits, invoices, payroll, and payments. Nonprofit accounting uses those records to interpret financial performance, reconcile accounts, prepare financial statements, and support reporting and compliance.

Understanding this distinction is one of the nonprofit accounting basics because reliable financial reporting depends on complete and accurately categorized bookkeeping records.

When should a nonprofit hire or outsource an accountant?

A nonprofit should consider professional accounting support when its funding, reporting, or organizational structure becomes too complex to manage confidently with existing internal resources. Common signs include managing several grants or donor restrictions, falling behind on reconciliations or month-end reporting, and preparing for an audit or GAAP-based financial reporting.

As accounting for nonprofit organizations becomes more complex, an experienced nonprofit accountant can help strengthen financial processes, review reporting, and give leadership and the board clearer financial insight.

What should a nonprofit include in its month-end close?

A nonprofit month-end close should confirm that the accounting records for the period are complete and accurate. The process commonly includes reconciling bank and credit card accounts, reviewing receivables and payables, posting adjusting entries, and checking grant and donor-restricted balances.

A consistent close process is one of the most useful nonprofit accounting best practices because it gives leadership timely, reliable information for budget reviews, cash flow planning, and board reporting.

How should nonprofits account for in-kind donations?

Nonprofits following GAAP should recognize qualifying contributed goods and services in accordance with the applicable accounting requirements and retain documentation supporting how their value was determined. Examples may include donated supplies, equipment, property, or professional services that meet the relevant recognition criteria.

For financial reporting, contributed nonfinancial assets must be presented separately from cash contributions and disclosed by category, along with other required information.

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