Nonprofit accounting protects an organization’s mission and funding by showing donors, grant makers, and the board that every dollar was used as intended. Accurate fund tracking, timely reports, and audit-ready records keep an organization eligible for grants and maintain the trust that donations depend on.
How is nonprofit accounting different?
A nonprofit reports on accountability. Money often arrives with conditions, and the accounting must track each restricted gift or grant separately and report expenses by purpose.
| Term | What it means |
|---|---|
| Net assets with donor restrictions | Funds that must be used for a purpose or period the donor set |
| Net assets without donor restrictions | Funds the board can direct where needed |
| Statement of Financial Position | The nonprofit version of the Balance Sheet |
| Statement of Activities | The nonprofit version of the Profit and Loss statement |
| Statement of Functional Expenses | Expenses reported as program, management, and fundraising |
| Form 990 | The annual information return most tax-exempt organizations file with the IRS |
How does weak accounting put funding at risk?
- Grant compliance. Funders can deny reimbursement or ask for money back when spending cannot be tied to the grant budget.
- Late reports. Missed reporting deadlines can delay payments and hurt renewal.
- Audit findings. Findings in an audit are visible to funders and can limit future awards.
- Tax-exempt status. An organization that fails to file its Form 990 series return for three consecutive years loses its exemption automatically.
- Donor confidence. Unclear reporting makes major donors hesitant to give again.
What should a nonprofit track for every grant?
- The approved budget by category
- Spending to date against each category
- Allowable and unallowable costs
- Staff time charged to the grant
- Reporting deadlines and the reports submitted
What should the board see every month?
- Statement of Financial Position and Statement of Activities
- Budget compared with actual results
- Cash on hand, shown as months of operating expenses
- Grant spending compared with each grant budget
- Restricted and unrestricted balances
How does an organization stay audit-ready?
- Reconcile every account each month.
- Keep documentation for every grant expense.
- Separate duties so that one person does not approve, record, and reconcile the same transaction.
- Review restricted fund balances monthly.
- Close the books on a set schedule.
Common questions
Fund accounting is a method that tracks money by its purpose or restriction, so an organization can show how each grant or restricted gift was used.
Restricted funds must be used for a purpose or time period set by the donor. Unrestricted funds can be used wherever the board decides.
It depends on the organization’s size, its funders, and state rules. Many grant makers and some states require an audit above certain revenue or spending levels.
An organization that does not file the required Form 990 series return for three years in a row automatically loses its federal tax-exempt status.
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