Nonprofit Accounting: Complete Guide to Fund Accounting & Compliance

Updated March 2026 · 20 min read · 1,900 monthly searches

How Nonprofit Accounting Differs from For-Profit

Nonprofit accounting has several fundamental differences from for-profit accounting:

Fund Accounting Explained

Fund accounting is the system nonprofits use to track money based on its intended purpose. Unlike for-profit accounting (which tracks money by department), fund accounting tracks money by restriction level — what the donor said the money could be used for.

Why Fund Accounting Exists

When a donor gives $50,000 "for the after-school tutoring program," that money can only be used for tutoring. It can't pay the executive director's salary or cover the electric bill. Fund accounting ensures every dollar is spent as intended — and that the nonprofit can prove it.

How It Works in Practice

• Each fund has its own mini set of books (revenue, expenses, assets)
• The chart of accounts includes fund codes to track restrictions
• Reports can be generated per fund or consolidated
• Year-end, you reconcile each fund to ensure no "borrowing" between restricted funds

Nonprofit Financial Statements

FASB ASC 958 requires four financial statements for nonprofits:

1. Statement of Financial Position (Balance Sheet)

Similar to a for-profit balance sheet, but the equity section shows net assets classified by donor restriction instead of stockholders' equity.

2. Statement of Activities (Income Statement)

Shows changes in net assets — revenue and expenses broken out by restriction category. This is where you see if the organization is growing or shrinking its net assets.

3. Statement of Cash Flows

Same concept as for-profit — operating, investing, and financing activities. Critical for nonprofits that may show a "surplus" while actually burning through cash.

4. Statement of Functional Expenses

Unique to nonprofits. Breaks expenses into three categories:

• Program services: Direct mission work (tutoring, meals served, research conducted)
• Management & general: Admin overhead (accounting, HR, insurance)
• Fundraising: Costs to raise money (events, mailings, donor cultivation)

Donors and rating agencies (Charity Navigator, GuideStar) scrutinize the ratio of program spending to total spending. A healthy ratio is 75%+ on programs.

Net Asset Classifications (ASU 2016-14)

Since 2018 (ASU 2016-14), nonprofits classify net assets into just two categories:

Without Donor Restrictions

Money the board can use for any purpose. This includes:

• Unrestricted donations
• Program service revenue
• Membership dues
• Investment income (unless restricted)

The board may internally designate some of these funds (e.g., "board-designated reserve fund"), but these are not donor-restricted — the board can change the designation at any time.

With Donor Restrictions

Money that comes with strings attached. Two sub-types:

• Purpose-restricted: "This $10,000 is for the scholarship fund" — once scholarships are awarded, the restriction is satisfied and funds are released
• Time-restricted: "This pledge will be fulfilled over 3 years" — each year's payment is released from restricted as it's received/earned
• Perpetual (endowment): "The principal must be invested forever; only the income can be spent" — the principal stays in restricted net assets permanently

Form 990: What You Need to Know

Form 990 is the nonprofit equivalent of a tax return. Unlike for-profit returns, Form 990 is public — anyone can look it up on GuideStar/Candid. This means accuracy and transparency matter enormously.

Which Form to File

• 990-N (e-Postcard): Gross receipts ≤ $50,000 — simple online filing
• 990-EZ: Gross receipts < $200,000 AND total assets < $500,000
• 990: Gross receipts ≥ $200,000 OR total assets ≥ $500,000

Key Sections

• Part I: Summary — revenue, expenses, net assets
• Part VII: Compensation — officer and key employee pay (public!)
• Part VIII: Revenue detail — contributions, program service, investment
• Part IX: Statement of functional expenses (matches your financial statements)
• Schedule A: Public charity status and public support test
• Schedule B: Schedule of contributors (confidential from public)

Common 990 Mistakes

1. Functional expense allocation doesn't match financial statements
2. Missing or incorrect officer compensation
3. Failing the public support test (risks losing tax-exempt status)
4. Not reporting related party transactions
5. Missing the deadline (5/15, with extensions to 11/15)

Grant Accounting & Compliance

Government and foundation grants come with strict reporting requirements. This is where many nonprofits get into trouble — and where advisory professionals provide enormous value.

Key Grant Accounting Concepts

• Conditional vs. unconditional: Conditional grants have barriers that must be met; revenue is recognized as conditions are satisfied. Unconditional grants are recognized immediately (with purpose/time restriction if applicable).
• Cost-reimbursement vs. advance: Cost-reimbursement grants pay you back for expenses incurred. Advance grants give you money upfront.
• Allowable vs. unallowable costs: Federal grants (under Uniform Guidance 2 CFR 200) specify what you can and can't charge. Alcohol? Never. Office supplies? Usually yes.
• Indirect cost rates: Your admin overhead allocated to grants. Negotiate your rate or use the 10% de minimis rate.

Single Audit (2 CFR 200)

Nonprofits spending $750,000+ in federal funds per year must have a Single Audit. This is a big deal — it's a full audit of your federal grant compliance. Having clean books throughout the year (not scrambling at audit time) is critical.

Best Accounting Software for Nonprofits

Building a Nonprofit Advisory Practice

Nonprofits are an ideal niche for advisory professionals:

• 1.5M+ nonprofits in the US — massive market
• Most are underserved — small nonprofits can't afford big accounting firms
• Sticky clients — switching costs are high, especially with grant compliance
• Recurring revenue — monthly bookkeeping + Form 990 + grant reporting = predictable income
• Mission-driven work — many accountants find nonprofit work more fulfilling

Service Packages

Frequently Asked Questions

Related Articles

• Bookkeeping for Nonprofits
• Chart of Accounts Guide
• Financial Statement Analysis
• General Ledger Guide
• Accrual Accounting Guide