Best practices in nonprofit accounting: A complete guide
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.

The world of nonprofits is driven by passion and purpose, with every organization striving to make a difference. But alongside your dedication to causes and communities comes the essential task of managing finances effectively. That’s where your role in nonprofit accounting becomes critical—not just for keeping things running smoothly, but for ensuring transparency and building trust with donors and supporters.
The truth is, most people join nonprofits to focus on advancing the mission, not to get tangled in bookkeeping, compliance rules, or financial reporting. But these financial elements are the backbone of any successful organization. They’re what keep everything accountable, build donor confidence, and make sure resources are used wisely.
The good news? With the right nonprofit accounting software these tasks become much simpler, giving you more time to focus on what really matters: making a difference.
This article will cover everything you need to know, including:
- What is nonprofit accounting?
- How is nonprofit accounting different?
- Nonprofit accounting standards
- Nonprofit accounting basics
- Best practices in accounting for nonprofit organizations
- How to choose the best nonprofit accounting software
- How to evaluate software based on your organization’s size and needs
- Simplify nonprofit financials with accounting software
- FAQs about nonprofit accounting
What is nonprofit accounting?
Before diving into the how-to of nonprofit accounting, it’s important first to understand what it’s all about. Nonprofit accounting is tailored to meet the unique needs and regulatory requirements of mission-driven organizations like yours.
At its core, the main goal of accounting for nonprofits is to ensure transparency and accountability to stakeholders–think donors, grant-makers, and regulatory agencies. This transparency isn’t just a box to check; it’s essential for building trust, showcasing responsible fund use, and ultimately supporting your mission and long-term sustainability.
How is nonprofit accounting different?
Working in a nonprofit allows you to quickly learn how to differentiate it from for-profit organizations. While both involve tracking revenues and expenses, nonprofit accounting has unique requirements—like categorizing funds as restricted or unrestricted based on donor intentions.
Your nonprofit also needs to produce specialized financial reports, such as statements of activities, to show how funds are used to support its mission. That’s why it’s so important to choose accounting software that’s designed to meet these specific needs. Finding the right fit can make managing your nonprofit’s finances much simpler.
Here’s how nonprofit accounting stands apart:
- Mission-driven transparency—nonprofits must create detailed reports to show how revenue and funds are spent to advance their mission.
- Regulatory compliance—filing Form 990 and meeting state-specific reporting requirements are non-negotiable for nonprofits.
- Fund accounting—nonprofits organize their funds into three categories based on donor guidelines to make sure they’re making a proper use.
- Restricted funds—designated for a specific project or purpose.
- Temporarily restricted funds—reserved for a particular use or time period; once conditions are met, they become unrestricted.
- Unrestricted funds—can be used freely for any purpose that supports the mission.
These differences make choosing the right nonprofit accounting software critical. The right tools simplify fund tracking, ensure compliance, and give you peace of mind so you can focus on your responsibilities.
Nonprofit accounting standards
Nonprofit accounting standards give your organization a clear roadmap for recording, reporting, and sharing financial information.
Following these standards helps you ensure your financial practices are transparent, consistent, and accurate. These qualities make it easier for donors, regulators, and other stakeholders to understand your nonprofit’s financial health. Two key pillars of nonprofit accounting standards are Generally Accepted Principles (GAAP) and the Financial Accounting Standards Board (FASB).
GAAP
GAAP sets the standard for financial reporting in the U.S. It forms the foundation for nonprofit accounting with a consistent set of rules that ensure financial statements are reliable, consistent, and easy to compare. GAAP covers key areas like revenue recognition, expense matching, and fund classification.
By following GAAP in your accounting practices, you build trust with donors and stakeholders, offering them clear insights into how funds are being used to support your mission.
FASB
Financial Accounting Standards Board (FASB) issues specific GAAP guidelines tailored to nonprofits’ unique needs. These guidelines, outlined in FASB’s Accounting Standards Codification (ASC) 958, address critical areas such as net asset classification, donor restrictions, and financial disclosures.
Nonprofit accounting basics
Sometimes, going back to the basics is the smartest move. It’s important for you and your team to have a strong understanding of the fundamentals of nonprofit accounting, whether it’s tracking donations or meeting specific regulatory requirements.
Here are some key components to keep in mind:
1. Essential nonprofit accounting documents
Reliable financial documentation is the foundation of effective nonprofit accounting. The primary financial statements your organization should maintain are:
Nonprofit budget
A nonprofit budget is a detailed financial plan that outlines projected income and expenses to help your organization allocate resources effectively. It provides a clear picture of the costs your organization expects to incur and the revenue it anticipates receiving over a set period of time. To boost effective budgeting, your team should focus on the following elements:
- Expected revenue—understand the sources and amounts of income, including donations, grants, and other funding streams.
- Expense budget—identify and categorize expenses, such as program costs, administrative expenses, and fundraising activities.
Statement of financial position
Also known as a balance sheet, the statement of financial position provides a snapshot of your organization’s assets, liabilities, and net assets at a specific point in time. It can be summarized with the following equation:
Net Assets = Assets – Liabilities
Understanding these components helps your team get a clear picture of your organization’s overall financial health. Positive net assets shows that you’re in a strong financial position, while negative net assets are a sign that it’s time to reevaluate and adjust your financial strategy to stay sustainable.
Statement of activities
This report provides a detailed overview of your organization’s revenue and expenses over a specific period, illustrating how funds are utilized to support its mission.
For example, if you manage the accounting of an education nonprofit that receives $500,000 in donations and spends $300,000 on programs such as teacher training and student scholarships, the statement of activities will clearly show how these funds were allocated to advance the organization’s goals.
Revenues | Unrestricted funds | Temporarily restricted | Total |
Individual donations | 400,000 | 100,000 | 500,000 |
Grants | 100,000 | 50,000 | 150,000 |
Invested income | 50,000 | 150,000 | 200,000 |
Total revenues | 550,000 | 300,000 | 850,000 |
Expenses | |||
Program services | 100,000 | 200,000 | 300,000 |
General and administrative | 50,000 | 0 | 50,000 |
Fundraising | 30,000 | 0 | 30,000 |
Total expenses | 180,000 | 200,000 | 380,000 |
Change in net assets | 370,000 | 100,000 | 470,000 |
Statement of functional expenses
The statement of functional expenses provides a detailed breakdown of your nonprofit’s expenditures by function (program, administrative, and fundraising) and by nature (such as salaries, supplies, and marketing). This statement enhances financial transparency by showing stakeholders how resources are allocated to support your organization’s mission.
For example, the table below illustrates how your nonprofit might allocate its expenses across various functions and categories, providing a detailed view of financial priorities and operational efficiency.
Expense category | Program expenses | Administrative expenses | Fundraising expenses | Total expenses |
Salaries and wages | 100,000 | 50,000 | 30,000 | 180,000 |
Supplies | 20,000 | 5,000 | 10,000 | 35,000 |
Professional services | 15,000 | 10,000 | 5,000 | 30,000 |
Marketing | 10,000 | 5,000 | 15,000 | 30,000 |
Rent and utilities | 30,000 | 20,000 | 10,000 | 60,000 |
Totals | 175,000 | 90,000 | 70,000 | 335,000 |
Statement of cash flows
The statement of cash flows clearly shows how cash moves in and out of your organization, broken down into operating, financing, and investing activities. This report is essential for understanding your nonprofit’s liquidity.
With this statement, your team can pinpoint where funding is coming from and determine if there’s enough cash available to cover expenses on time.
2. Compliance requirements in accounting for nonprofits
Compliance is crucial to 501c3 accounting, as your nonprofit must follow specific reporting rules to maintain its tax-exempt status and demonstrate financial accountability.
Form 990
Filling the 990 form is an annual requirement for tax-exempt organizations, mandated by the IRS to demonstrate financial accountability. This document highlights your organization’s financial health, programs, and accomplishments, offering a clear view of the allocation of funds.
Timely filling Form 990 is critical for maintaining tax-exempt status and ensuring compliance with IRS and state regulations. Delays or inaccuracies in filing result in penalties and risk compromising your nonprofit’s standing.
State reporting requirements
Be sure to check whether your organization must file additional financial reports at the state level. Depending on its registration and activities, these reports ensure compliance with state-specific regulations and enhance transparency around your nonprofit’s financial operations.
Financial reporting solutions tailored to the compliance landscape, offer centralized financial data and streamlined reporting processes, making it easier to meet state requirements efficiently.
Audit requirements
Many nonprofits must undergo annual audits, especially if they receive significant federal funding or meet certain state thresholds. As mission-driven organizations that rely on public trust and contributions, your nonprofit uses audits to verify financial records and demonstrate accountability. These documents provide an independent review of financial statements, showcasing your organization’s credibility and financial stewardship.
3. Donor management strategies for nonprofits
Managing your donors effectively is key to securing ongoing support and understanding the impact of their contributions:
- Importance of nonprofit donor management—a strong donor management strategy helps you build lasting relationships with supporters and boosts donor retention.
- Types of donors—your nonprofit works with a range of donors—individuals, corporations, and foundations—each with unique expectations and reporting needs. Tailoring your approach to these groups makes a big difference.
- Accounting strategies for tracking donations and grants—accurately tracking donations, including restricted and unrestricted funds, makes sure you honor donor intentions, and makes financial planning much easier.
4. Multi entity accounting
If you’re handling the accounting for a nonprofit with multiple entities or related organizations, you know how quickly things can get complicated. Multi-entity accounting involves managing specialized processes to consolidate financial information, ensure accurate reporting, and comply with FASB guidelines and donor requirements.
By adopting best practices for multi-entity accounting, you can simplify financial management and improve your organization’s overall visibility—understanding how each entity contributes to your mission.
Best practices in accounting for nonprofit organizations
Poor accounting practices can lead to mismanagement of funds, regulatory issues, and a loss of credibility, jeopardizing your organization’s mission and long-term sustainability.
Adopting best accounting practices for nonprofits is essential for maintaining financial health, transparency, and donor trust. These practices include:
Understanding and managing overhead expenses
Properly categorizing overhead costs is essential for maintaining effectively managing expenses of your organization. Overhead costs are necessary for running a nonprofit but are not directly tied to specific programs or services. These include administrative, operational, and fundraising expenses—such as staff salaries for support roles, office rent, and donor outreach efforts.
While your nonprofit may often strive to minimize overhead, these expenses are key for sustaining daily operations and enabling growth. At times, increasing the overhead budget is necessary to invest in areas like technology, staffing, or fundraising initiatives that support long-term success. To justify such increases, ensure these expenses align with your mission and demonstrate a measurable impact.
Misreporting or inadequately explaining overhead expenses can risk donor trust and make securing funding for future projects difficult. Transparent and accurate reporting fosters trust and helps donors and stakeholders understand how overhead investments contribute to your organization’s mission.
Regular budget check-ins
Regularly monitoring your nonprofit’s spending against budget is essential to avoid unexpected financial shortfalls and maintain organizational stability. In addition to having real-time visibility into budget spending and actuals, reviewing historical financial data enables your team to understand overall financial performance.
This is where financial planning and budgeting tools empower you to make strategic decisions that align with your nonprofit’s needs and goals. These tools provide insights to adjust plans as circumstances change, ensuring your organization stays on track. Failing to closely track expenses leads to overspending, cash flow issues, or potential disruptions to your nonprofit operations.
Creating a long-term strategic financial plan
Building a long-term strategic financial plan is key to setting your nonprofit up for future growth and handling unexpected expenses with confidence. A forward-thinking financial strategy helps your organization manage resources wisely, stay financially stable, and take advantage of opportunities to expand your impact.
For example, if your nonprofit is focused on environmental conservation, you might anticipate the need to expand its programs to additional regions in the next five years. Your organization can set fundraising goals and allocate resources effectively by including projected staffing, equipment, and outreach costs in its financial plan. Additionally, your plan might include a contingency fund to cover unexpected expenses, such as emergency repair or fluctuations in donation levels.
Implementing internal checks and balances
Establishing internal controls is critical for reducing the risk of errors and fraud. By separating financial duties and implementing specific controls, your organization safeguards assets and maintains transparency.
Key internal controls to consider include:
- Segregation of duties: share financial responsibilities among your staff to prevent fraud and errors. For example, separate the roles of authorizing, recording, and reconciling financial transactions to create a system of checks and balances.
- Access controls: implement internal security policies that restrict access to financial systems and sensitive information. Clearly define protocols for handling sensitive transactional data to protect your organization from misuse.
- Inventory of fixed assets: regularly monitor office assets such as computers, tablets, and other equipment your team uses. Periodic inventories ensure accountabilities for all items taken out of the office.
Auditing finances regularly
Conduct regular audits to ensure compliance with regulations and build trust with donors and stakeholders. Third-party auditors can give objective assessments of the business, while internal auditing can help ensure compliance and effective process iterations. Skipping or delaying audits can lead to compliance problems and damage the organization’s reputation.
How to choose the best nonprofit accounting software
Finding the perfect software for your nonprofit’s finances is a game-changer—it makes managing money easier and gives you the tools to succeed. Here’s five key points to keep in mind as you explore your options:
1. Fund accounting capabilities
Make sure the software builds in fund accounting for nonprofits, allowing you to categorize and track restricted and unrestricted funds. This feature is a great ally in ensuring compliance with donor requirements and providing clear visibility into fund allocation.
2. Customizable reports
Look for accounting software with robust financial reporting features and a user-friendly dashboard. Customizable reports make tracking and visualizing your nonprofit’s financial health easier. You should be able to generate unlimited reports, tailor pre-built dashboards to meet your needs, and gain real-time insights into your finances to guide your planning and strategy.
3. Donor management integration
Opt for a cloud accounting solution that includes built-in tools for tracking donations, pledges, and grants seamlessly. Software with integrated fundraising capabilities is ideal to enhance donor management. This allows real-time access to donor data, customizes donor communication, and automates updates. You can analyze supporter data to tailor your message, create targeted outreach campaigns, track engagement, and build stronger relationships.
4. Automated compliance reminders
Search software that offers automated compliance reminders, including built-in alerts for crucial filing dates, such as IRS Form 990 and state-specific reports. These features help you stay on track with deadlines, reduce non-compliance risk, and promptly file all necessary documentation.
5. User-friendly interface
A simple, intuitive interface is vital for nonprofits, especially those with limited accounting expertise. The software should offer you an easy-to-navigate dashboard and straightforward features that allow access financial information quickly without extensive training.
A user-friendly design reduces errors, saves time, and helps your team focus on strategic tasks rather than getting bogged down by complex processes.
How to evaluate software based on your organization’s size and needs
When evaluating nonprofit accounting software, it’s essential to consider your organization’s size and specific requirements. Small nonprofits should focus on software that is both cost-effective and easy to use. Medium-sized nonprofits may benefit from solutions that offer more robust reporting and integrated donor management capabilities. For large nonprofits, it’s essential to prioritize software with scalability and advanced compliance features to manage intricate financial and reporting requirements.
Taking the time to assess your organization’s unique needs before deciding helps you select the best fit, saving time and resources in the long run.
Simplify nonprofit financials with accounting software
Managing your nonprofit’s finances doesn’t have to be overwhelming. With the right accounting software, you can simplify your financial processes, stay compliant, and create a strong financial foundation for your mission’s success.
Explore our nonprofit accounting software to discover how we can help you manage your organization’s finances more efficiently by giving you more time to focus on making a positive impact in your community.
FAQs about nonprofit accounting
1. Do nonprofits have to follow GAAP?
Nonprofits are generally expected to follow GAAP to maintain compliance, secure funding, and demonstrate financial transparency. While GAAP compliance isn’t legally required for all nonprofits, it is strongly advised, especially for those receiving government grants, substantial donor contributions, or filing an IRS Form 990. GAAP ensures that your nonprofit’s financial statements are consistent, accurate, and comparable, making it easier for donors, regulators, and stakeholders to assess your organization’s financial health.
2. What do nonprofit accountants do?
Nonprofit accountants manage nonprofit organizations’ financial activities. They handle tasks such as tracking donations, managing budgets, preparing financial statements, ensuring compliance with regulations, and filing required tax forms like IRS Form 990.
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