Quick answer: Nonprofit bookkeeping tracks where each dollar came from, what the donor or grantor gave it for and how it was spent. In practice that means recording gifts with any restrictions, coding expenses to program, management and general, or fundraising, and reconciling every account each month so your board reports and Form 990 are accurate.
Nonprofits answer to donors, grantors, boards and the IRS, so their books need to show more than profit and loss. They need to show where money came from, what it was given for and how it was spent. Here are the basics every executive director and treasurer should know.
How nonprofit books are different
- No owners, no profit. Instead of equity, nonprofits have net assets, split between funds with and without donor restrictions
- Money comes with conditions. Many gifts and grants can only be spent on a specific program or time period
- Expenses are reported by function. Program, management and general, and fundraising costs are tracked separately
Fund accounting in plain English
Fund accounting means tracking each restricted gift or grant as its own pool of money, so you can show it was spent as promised. In practice, small and midsize nonprofits usually do this with classes or tags in their accounting software rather than separate sets of books.
A simple nonprofit chart of accounts
| Section | Examples |
|---|---|
| Revenue | Individual contributions, grants, program fees, events, in kind donations |
| Program expenses | Program salaries, supplies, direct costs |
| Management and general | Accounting, insurance, office costs, administration |
| Fundraising | Event costs, donor software, fundraising staff time |
| Net assets | With donor restrictions, without donor restrictions |
Keep the chart short and consistent. The goal is reports your board can read and a Form 990 that is easy to prepare.
Monthly nonprofit bookkeeping checklist
- Reconcile every bank, credit card and payment processor account
- Record every donation with the donor, date and any restriction
- Track grant spending against each grant budget
- Release restrictions when funds are spent as intended
- Code expenses to program, management and general, or fundraising
- Send donor acknowledgments for gifts of $250 or more
- Prepare a monthly report for the board with budget versus actual
- Lock the month in your accounting software
Common mistakes to avoid
- Mixing restricted and unrestricted money with no tracking
- Recording pledges or grants incorrectly
- Leaving all expenses in one bucket instead of by function
- Waiting until year end to reconcile
- No second person reviewing payments
Nonprofit Bookkeeping FAQs
Should a nonprofit use cash or accrual accounting?
Many small nonprofits keep their books on the cash basis, which is simpler. Accrual accounting is required for financial statements that follow generally accepted accounting principles, so organizations that need an audit or review usually use it.
How do you record in kind donations?
Record donated goods at their fair value when received, as both revenue and an asset or expense. Donated services are recorded only when they require specialized skills, like legal or accounting work, or create or improve a physical asset.
Can a volunteer do the books for a nonprofit?
Yes, many small nonprofits start that way. Make sure someone else reviews bank statements and approves payments, so no single person controls the money from start to finish.
Does a nonprofit need an audit?
The IRS does not require one. Audits are often required by grantors, lenders or state rules, and organizations that spend $1,000,000 or more in federal awards in a year generally need a Single Audit.
How often should nonprofit books be reconciled?
Every month. Monthly reconciliation catches errors early and keeps board reports reliable, while waiting until the end of the year makes problems harder to trace.
Bookkeeping help for nonprofits
We provide nonprofit accounting for organizations across Northern Virginia, DC and Maryland, from monthly bookkeeping by fund to annual returns. Also see our guide to nonprofit financial statements.
This article is general information and not tax advice for your situation. Tax rules change, so talk with a qualified professional before making decisions.
