Managing the finances of a nonprofit organization can feel overwhelming, especially when you’re wearing multiple hats. Whether you’re a nonprofit accountant, a board member, or a volunteer trying to help with the books, you likely know the pressure of making sure every dollar is accounted for.

When you work in nonprofits you’re not just crunching numbers. You’re making sure that your organization can keep serving its community. While accounting for nonprofits has some quirks that set it apart from for-profit businesses, once you understand the basics and get a few best practices in place, it all starts to make sense.

In this blog, we’ll walk through the best practices for nonprofit accounting that can help you keep your organization financially sound while staying true to your mission.

What is Nonprofit Accounting?

Nonprofit accounting is the process of managing and recording financial transactions for an organization that operates for a charitable purpose, rather than to generate profit. This includes tracking donations, grants, and other sources of income, as well as monitoring expenses and maintaining compliance with tax laws and regulations.

Nonprofit Accounting vs. For-Profit Accounting: What’s the Difference?

At its core, nonprofit accounting differs from for-profit accounting in its objectives. In a for-profit business, the goal is to maximize profits and satisfy shareholders. Nonprofits, on the other hand, aim to sustain their mission while balancing the needs of their community, staff, and programs.

Here are a few specific standout differences:

Revenue Tracking and Fund Accounting

Nonprofits rely heavily on fund accounting, which tracks revenue sources separately—whether donations, grants, or restricted gifts. For-profit accounting doesn’t typically require the same granularity in tracking. With nonprofits, every restricted dollar must be used for its intended purpose. It’s like having a special envelope for every donation to make sure it gets spent on exactly what it was meant for.

Reporting and Compliance

Nonprofits must provide a statement of financial position (similar to a balance sheet), a statement of functional expenses, and a statement of activities (akin to an income statement). These financial statements help stakeholders understand how well the organization’s funds are managed and whether they align with the mission. Regular audits, filing an annual tax form, and adhering to the Financial Accounting Standards Board (FASB) guidelines are crucial for nonprofits to maintain their tax-exempt status. We’ll go further into these statements and reports in detail later on in this blog.

Mission Over Profit

Nonprofits track their financial success not by profit margins but by their ability to sustain programs and services. It’s about net assets—both restricted and unrestricted—and confirming that functional expenses align with mission-driven activities. The goal is to maximize the impact of donations and make sure that funds are being used effectively to achieve the organization’s goals.

These are the main ways that nonprofits are different than for-profit businesses, where profit is the ultimate measure of success.

Understanding Nonprofit Financial Statements

As we talked about above, one of the key ways nonprofit accounting differs from for-profit accounting is the way that success is measured. Instead of focusing on profits, nonprofits focus on their mission and impact. This means that their financial statements will look different than those of a for-profit business.

In this sense, financial statements are the backbone of nonprofit accounting. They provide a clear, transparent picture of the organization’s financial health, showing stakeholders how funds are being managed and used to further the mission. While nonprofits don’t focus on profits, these statements are critical for demonstrating fiscal responsibility and accountability. Let’s break down the key nonprofit financial statements and accounts you need to understand.

Statement of Financial Position (Balance Sheet)

The statement of financial position is the nonprofit equivalent of a balance sheet. It outlines the organization’s assets, liabilities, and net assets (equity) at a given point in time. Here’s what’s included within it:

• Assets: Anything the nonprofit owns, such as cash, investments, property, or equipment. Assets are broken down into current assets (easily converted to cash within a year) and long-term assets (such as property).
• Liabilities: These are the nonprofit’s obligations—debts, accounts payable, and any other amounts the organization owes.
• Net Assets: This is essentially what’s left when liabilities are subtracted from assets. Nonprofits break this down into restricted and unrestricted net assets. Restricted net assets are funds that donors have specifically designated for a certain purpose (like a grant for a specific project), while unrestricted net assets can be used as the organization sees fit.

A strong statement of financial position will give you a clear snapshot of the organization’s financial standing—whether you’re running a surplus, managing debts responsibly, or needing to reassess your cash flow.

Statement of Activities (Income Statement)

The statement of activities is the nonprofit version of an income statement. It tracks the organization’s revenue and expenses over a specific period, usually a fiscal year. Unlike for-profit businesses that report profit or loss, nonprofits focus on changes in net assets. The information included in it can be:

• Revenue: This includes all sources of income, such as donations, grants, program fees, and any earned income from services or events.
• Expenses: Nonprofit expenses are generally categorized into three functional areas:
  • Program Services: Expenses that directly support the mission or programs of the organization.
  • Administrative Costs: Expenses related to the overall management and administration of the nonprofit (e.g., rent, utilities, office supplies).
  • Fundraising Expenses: The costs incurred to raise money for the organization, such as event costs or marketing expenses.

This statement helps board members, donors, and grantmakers understand where the nonprofit’s money is coming from and how it’s being spent.

Statement of Functional Expenses

The statement of functional expenses is a detailed breakdown of the nonprofit’s expenses, categorized by their purpose (program, administration, or fundraising). This report is required by the IRS for Form 990, and it shows how well the organization is allocating its resources toward its mission.

This statement is especially important for donors and funders who want to see that the majority of their contributions are being used for program services, rather than being eaten up by administrative or fundraising costs.

Statement of Cash Flows

The statement of cash flows tracks the movement of cash in and out of the organization. This report is critical for understanding your organization’s ability to maintain liquidity and meet its financial obligations. It’s broken into three categories:

• Operating Activities: Day-to-day transactions related to running the organization.
• Investing Activities: Any purchases or sales of long-term assets, such as property or equipment.
• Financing Activities: Cash flows related to loans or other long-term liabilities.

Monitoring cash flow is essential for nonprofits because of the unpredictability of donations and grants, which may not align with regular expenses.

Nonprofit Accounts You Should Know

Just like nonprofit statements are different from for-profit financial statements, nonprofit accounts also have their own unique categories that you should be familiar with. Let’s take a look at these different kinds of accounts and their purposes:

Restricted Funds

These are funds that donors have given for a specific purpose. You can’t use these funds for anything else until the donor’s restrictions are met. For example, a grant to fund a youth program must be used only for that program. Properly tracking and reporting these funds is crucial for maintaining trust with donors and compliance with legal requirements.

Unrestricted Funds

These are donations or income that the nonprofit can use at its discretion. Unrestricted funds provide flexibility, allowing you to cover overhead or unexpected expenses without worrying about specific donor restrictions.

Accounts Payable and Receivable

Nonprofits, like any organization, need to manage their incoming and outgoing cash. Accounts receivable refers to money owed to the nonprofit, such as pledges from donors or unpaid grant funds. Accounts payable, on the other hand, are bills or expenses the nonprofit needs to pay, such as rent, utilities, or vendor payments.

Net Assets

As mentioned in the statement of financial position, net assets are the difference between assets and liabilities. This account is split into temporarily restricted, permanently restricted, and unrestricted net assets. Tracking these carefully allows your organization to know what funds can be used freely and what needs to be reserved for specific purposes.

Overhead Expenses

These include administrative costs that are necessary for keeping the organization running but don’t directly contribute to the mission. It’s important to track overhead carefully and allocate these expenses accurately in your statement of functional expenses to maintain transparency and trust with donors.

Program Expenses

These are the costs directly tied to delivering your programs and services. They should be the largest portion of your expenses and are often scrutinized to confirm that the majority of your nonprofit’s resources are going toward its mission.

Accurate financial reporting not only helps you stay compliant with IRS requirements but also builds trust with your donors and stakeholders. By mastering the use of these statements and accounts, your nonprofit can stay mission-driven while maintaining solid financial health.

6 Best Practices for Nonprofit Accounting

Running the finances of a nonprofit is no small task, but here are some practices to help you stay organized, accountable, and mission-focused.

1. Leverage Fund Accounting Software

When dealing with multiple revenue streams and varying restrictions, you need a system that’s specifically designed for nonprofits. A good fund accounting software will help track restricted and unrestricted funds, manage grants, and generate financial reports that are easy to understand and share.

If you’re unsure where to start, check out our blog on which fund accounting software you should choose. The right software provides your team with the tools to manage finances efficiently while staying compliant.

Consider solutions like Sage Intacct for charities, which offers features tailored to nonprofit accounting, such as multi-dimensional reporting, grant tracking, and real-time visibility into your organization’s finances. Having this clarity helps you make informed decisions and communicate financial data to stakeholders.

2. Implement Strong Internal Controls

Strong internal controls are your organization’s financial safety net. This involves everything from making sure no single person has control over all financial processes to having routine checks in place to avoid errors or fraud. Simple steps like requiring multiple sign-offs for large expenses or separating duties (so one person isn’t both writing and approving checks) can prevent costly mistakes or worse, intentional misuse of funds.

Internal controls also extend to having a solid audit trail. A proper trail allows every transaction to be traced back to its origin. Regular internal or external audits will help identify weak spots in your financial system. This nonprofit audit checklist is a great resource to help you prepare for these reviews.

3. Financial Reporting is Non-Negotiable

Transparent financial reporting is key. It’s not just a requirement—it’s a best practice that builds trust with donors, board members, and regulatory bodies. Nonprofits need to produce several core financial statements:

• Statement of Financial Position: This shows the nonprofit’s assets, liabilities, and net assets.
• Statement of Activities: Similar to a for-profit’s income statement, this tracks revenue and expenses over a specific period.
• Statement of Functional Expenses: This breaks down expenses by category (programs, fundraising, administration) to show how resources are being allocated.

Accurate and timely financial reporting is also critical when applying for grants. Many funders require detailed financial reports to confirm their contributions are being used effectively. There are specific tools like Sage Intacct for grant management that help streamline this process, keeping you compliant and making it easy to report to grant providers.

4. Plan and Monitor Your Cash Flow

Maintaining healthy cash flows is essential to your organization’s longevity. It’s not uncommon for nonprofits to face cash flow issues, especially when donations or grants don’t come in on a regular schedule. That’s why planning is crucial.

Tracking cash flow regularly helps you anticipate shortages and avoid financial crises. Creating a reserve fund can help cover expenses when incoming donations don’t align with immediate needs. You’ll also want to keep a close eye on program expenses and administrative costs to confirm you’re not overspending in one area at the expense of another.

5. Allocate Functional Expenses Properly

One of the quirks of nonprofit bookkeeping is the need to allocate expenses across categories—programs, administration, and fundraising. This not only helps with financial reporting but also gives donors confidence that their money is being spent wisely.

If you’re struggling to allocate expenses accurately, consider investing in accounting software that simplifies the process. The right tool can help you track expenses by category and generate the financial reports you need for compliance and fundraising.

6. Engage Your Board in Financial Oversight

Your board members are key players in maintaining sound financial management. They should be actively involved in overseeing the organization’s finances, from reviewing financial statements to approving budgets and confirming that financial decisions align with the organization’s mission. A well-informed board adds another layer of accountability, helping you keep an eye on long-term sustainability while also navigating day-to-day challenges.

By following these best practices, you can keep your nonprofit organization financially sound while staying true to your mission.

Final Take on Accounting for Nonprofits

Effective nonprofit accounting is about building trust, maintaining transparency, and making sure that every dollar supports your organization’s mission. By adopting the right tools, like fund accounting software, and implementing best practices such as strong internal controls and clear financial reporting, your nonprofit can stay financially stable while continuing to make a meaningful impact in the community.

Whether you’re navigating cash flow challenges, allocating functional expenses, or preparing reports for donors and board members, mastering these best practices will set your organization up for long-term success.

Ready to take your nonprofit’s financial management to the next level? Talk to a Sage Intacct specialist today to learn how our solutions can help you streamline your accounting processes, improve transparency, and give you the financial clarity needed to focus on your mission.

Key Takeaways

• Use Fund Accounting Software: Invest in software designed for nonprofits, like Sage Intacct, to streamline tracking restricted and unrestricted funds and improve reporting accuracy.
• Establish Strong Internal Controls: Apply proper checks and balances within your financial processes to prevent errors or fraud and maintain transparency.
• Prioritize Financial Reporting: Produce detailed financial statements such as the statement of financial position and statement of activities to build trust with stakeholders and comply with regulatory requirements.
• Monitor Cash Flow Closely: Regularly review your cash flow to avoid shortages and confirm your organization can sustain itself during periods of irregular revenue.
• Allocate Expenses Accurately: Make sure expenses are categorized appropriately between programs, fundraising, and administration to provide clear, transparent reports to donors.
• Engage the Board in Financial Oversight: Keep board members involved in financial decisions to confirm your organization’s finances are aligned with its mission and long-term goals.

Frequently Asked Questions