Nonprofit Accounting: A Practical Guide for Small Organizations

How nonprofit books differ from business books

A nonprofit measures mission and stewardship instead of profit. The key difference is tracking donor restrictions on funds.

A for-profit asks, did we earn more than we spent? A nonprofit asks that too, but it must also show that restricted gifts were used for their stated purpose. A grant for a youth program cannot quietly cover the electric bill for another program.

Instead of owner's equity, nonprofit books show net assets, usually split into two groups: those without donor restrictions and those with donor restrictions. That split is the heart of the system.

Fund accounting and restricted money

Fund accounting separates money by purpose so restricted gifts are spent as promised and can be reported clearly.

Most small nonprofits do not need complex software, but they do need a clean way to tag every transaction. A chart of accounts with classes or funds works well.

• General operating: unrestricted gifts and earned income.
• Program funds: grants or donations designated for a specific project.
• Time-restricted gifts: pledges to be used in a future period.

When a restricted gift is spent as intended, it is released from restriction in the books. Your accountant can set up the exact entries.

The statements every nonprofit prepares

The main statements are the statement of financial position, statement of activities, statement of cash flows and statement of functional expenses.

These mirror the standard business reports with nonprofit labels:

• Statement of financial position: assets, liabilities and net assets, similar to a balance sheet.
• Statement of activities: revenue and expenses by restriction category.
• Statement of cash flows: cash in and out from operations, investing and financing.
• Statement of functional expenses: spending divided among programs, administration and fundraising.

For background on the standard versions, read our overview of balance sheets, income statements and cash flow.

Allocating expenses honestly

Shared costs such as rent and salaries should be split between programs, administration and fundraising using a reasonable, documented method.

Donors and watchdogs often look at how much goes to programs versus overhead. That makes allocation important, and it must be defensible. If a director spends half her time on a program, allocate half her salary to it and keep a note of how you decided.

Use time sheets, square footage or headcount, whichever fits the cost. Apply the same method each year and write it down so the next treasurer or auditor understands it.

Records, filings and controls

Keep receipts, grant agreements and board minutes, file the required annual return, and separate who approves from who records payments.

Tax-exempt organizations generally file an annual information return with the IRS, and many states require their own registrations. Deadlines and forms depend on your size and state, so confirm them with your accountant or the IRS.

Basic controls protect small teams:

1. Two people review bank reconciliations.
2. The person who writes checks is not the person who reconciles the account.
3. The board reviews financial statements regularly.
4. Grant agreements are saved with the related spending.

For retention periods, see how long to keep business records.

Cash flow and financing for nonprofits

Many nonprofits wait months for grant reimbursements. Planning cash carefully and knowing your financing options helps bridge the gap.

A nonprofit can be well funded on paper and still short on cash when a reimbursement grant has not arrived. A cash flow forecast shows the gap early. Our guide on why to create a cash flow projection walks through it.

Eligibility for funding depends on the organization. Some nonprofits with steady earned revenue may qualify for working capital through ROI Funder, which considers 500+ FICO, 6+ months in business and $20,000+ monthly revenue. Organizations that rely only on donations may fit a different route, such as the options in SBA loans for nonprofits.