Nonprofit Accounting: An Overview & How to Get Started

Wednesday, February 12, 2025

If you’re like most nonprofit professionals, the reason you chose to work in this sector was to further a good cause, not to crunch numbers and worry about compliance. However, effective financial management is critical for your nonprofit to make a difference in its community. After all, you need to bring in and properly allocate funding just to keep your organization’s lights on, let alone launch mission-critical programs and projects.

Whether you’re brand-new to the world of nonprofit accounting or want to brush up on the basics, you’ve come to the right place! In this guide, you’ll learn all you need to know to get started with this critical aspect of managing your organization, including:

• What Is Nonprofit Accounting?
• Accounting in the Nonprofit Financial Management Landscape
• Key Nonprofit Accounting Documents
• Additional Nonprofit Accounting Best Practices
• Working With a Nonprofit Accountant

Let’s get started by ensuring we’re on the same page about what nonprofit accounting is and how it’s different from business accounting.

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What Is Nonprofit Accounting?

Nonprofit accounting is the unique process that charitable organizations use to plan, record, and report their finances. The core of nonprofit accounting is accountability, meaning your goal in your accounting practices should be ensuring honesty and transparency with your donors, other stakeholders, and the government.

While for-profit organizations use their accounting practices to help them turn a profit and pay dividends to their investors, nonprofits aren’t allowed to do this by definition. Instead, your organization has to reinvest all of its funding into its mission and operations, and proper accounting will help you make sure you always do this, even as your nonprofit grows and changes over time.

Accounting in the Nonprofit Financial Management Landscape

While the terms “accounting” and “financial management” are sometimes used interchangeably, accounting actually falls under the larger umbrella of financial management. Accounting is also often confused with another element of financial management, bookkeeping. To clear up this confusion, let’s break down some of the differences:

• Bookkeeping covers your nonprofit’s day-to-day financial needs, mostly concerning recordkeeping. Your organization’s bookkeeper should be responsible for tasks like basic data entry, writing checks, making bank deposits, managing invoices, and processing payroll. While bookkeepers need some on-the-job training to perform well in their roles, they aren’t required to have any specialized education or certifications.
• Accounting involves a wide variety of more complex financial tasks related to analysis and reporting. Accountants will come in behind your bookkeeper to review transactions, perform bank reconciliations, and compile essential financial documents to help your nonprofit make informed decisions. Accountants need at least a bachelor’s degree in accounting or a related field and a CPA certification to do their jobs well.

Effective nonprofit financial management also involves duties related to strategy and oversight. These areas are typically covered by your organization’s chief financial officer (CFO) and treasurer, respectively. Having at least four people working on your nonprofit’s finances allows them to delegate responsibilities and check each other’s work, reducing the risk of human error and creating a more efficient system.

Key Nonprofit Accounting Documents

Since reporting is critical for ensuring accountability, let’s dive into the practical aspects of nonprofit accounting by reviewing the most important documents your accountant will create.

Chart of Accounts

Your nonprofit’s chart of accounts (COA) is essentially a directory of its finances and the backbone of all accounting procedures at your organization. It organizes all of your financial accounts and ledgers into a table-style list for easy reference.

Most nonprofits divide their COA into five categories:

• Assets: Everything your organization owns, such as cash, property, and accounts receivable.
• Liabilities: Everything your organization owes, such as debt, deferred revenue, and accounts payable.
• Net Assets: What your nonprofit is worth, calculated by subtracting your total liabilities from your total assets.
• Revenue: All of the funding your organization receives from individual donors, corporate partners, grantmakers, and other funders.
• Expenses: All of the funding your organization spends on its mission-related activities, administrative needs, and the upfront costs of fundraising campaigns.

These categories are based on the Unified Chart of Accounts (UCOA), a standardized COA model that aligns with nonprofit reporting requirements. However, most small to mid-sized organizations find the UCOA too detailed and prefer to use other online templates that they can customize to only include the accounts they need.

Track your nonprofit’s finances with our customizable chart of accounts template.

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Financial Statements

Financial statements are among the most critical reports your nonprofit’s accountant will compile every year. Each of these documents organizes and summarizes your accounting data in a different way to help you glean unique, actionable insights into your organization’s financial situation.

The four core nonprofit financial statements are as follows:

• Statement of activities: The nonprofit parallel to the for-profit income statement, this report breaks down your revenue, expenses, and change in net assets over the past year to inform the budgeting process for the coming year.
• Statement of financial position: Also known as a balance sheet, this statement lists your nonprofit’s assets, liabilities, and net assets to provide a snapshot of its financial health and potential for growth.
• Statement of cash flows: This report shows how cash moves in and out of your organization through operating, investing, and financing activities. It’s usually pulled monthly as well as annually to help your nonprofit keep its spending and fundraising on track with its goals.
• Statement of functional expenses: The one financial statement unique to nonprofits, this report organizes your expenditures into the categories of program, administrative, and fundraising costs so you can see how your spending furthers your mission.

Many nonprofits attach their financial statements as appendices to their annual reports so supporters who want to learn more about their financial situations can easily dig deeper. These statements are also essential for correctly completing your organization’s annual tax returns.

Tax Forms

When your nonprofit was first incorporated, its founders filed Form 1023 with the IRS to secure 501(c)(3) status, meaning your organization would be exempt from federal income tax. However, just because your nonprofit has this status doesn’t mean you can completely write off tax season! There are several tax forms you still need to file each year, including:

• IRS Form 990. This is the federal return for exempt organizations, which you’ll need to file by the 15th day of the fifth month after your fiscal year ends (May 15 if your fiscal year follows the calendar year). Depending on your nonprofit’s size and designation, you may need to complete Form 990-N (small organizations), Form 990-EZ (mid-sized nonprofits), the full Form 990 (large organizations), or Form 990-PF (private foundations of all sizes), so check with your accountant to ensure you file the correct form.
• State-specific tax returns. Some states have additional annual filing requirements for nonprofits to remain exempt from state and local taxes. For example, organizations registered in New York are required to file Form CHAR500, and California nonprofits have to complete Form 199. However, other states (such as Connecticut and Georgia) will accept copies of nonprofits’ Form 990s for this purpose.
• Employer tax forms. Because your nonprofit is an employer, you’re also obligated to help your staff members file their annual tax returns. Issue Form W-2 to each individual employee on your nonprofit’s payroll and Form 1099 to any contractors you work with no later than January 31 each year.

There are penalties for filing each of these forms late, and failing to file them for several consecutive years risks your organization’s exempt status. Work with your accountant to plan ahead and ensure you can complete all of them accurately and on time.

Budgets

In essence, a budget is a financial planning document used to predict expenses and allocate revenue for your nonprofit. Your organization may create budgets for various reasons, such as:

• Laying out all of your expenditures and fundraising activities for the fiscal year (operating budget)
• Monitoring your expenses incurred and revenue raised for a large-scale, multi-year project (capital budget)
• Detailing the costs of launching a new program and how you’ll cover them (program budget)
• Monitoring your upfront spending on planning and promoting a fundraising event (event budget)
• Showing a grantmaker how you’d use their funding if they awarded it to you (grant proposal budget)

Since budgeting is a strategic activity, your CFO will usually take the lead on creating budgets. However, your accountant will typically review all budgets to ensure they’re feasible based on your organization’s current financial situation and relevant to your goals.

Additional Nonprofit Accounting Best Practices

In addition to knowing how your nonprofit’s financial data is recorded and reported, you should also be familiar with how to use that information to make decisions. Let’s walk through a few accounting best practices that nonprofit professionals should implement.

Categorize Revenue by Source

You’ve probably heard that you shouldn’t put all of your eggs in one basket when it comes to nonprofit revenue generation. While revenue diversification mostly falls under the financial strategy umbrella, it also touches the analysis and reporting aspects of accounting.

Here is a breakdown of the five major nonprofit revenue categories and some sources that fall under each one:

• Individual donations: Small, mid-sized, and major monetary gifts; event revenue; in-kind donations of goods or services
• Corporate philanthropy: Sponsorships, matching gifts, volunteer grants, internal employee fundraising campaigns
• Earned income: Membership dues, merchandise sales, fees for services provided
• Investments: Endowments, mutual funds, stocks, bonds, cryptocurrency
• Grants: Federal and state government grants; private, public, and family foundation grants

Organize your nonprofit’s revenue according to these categories in your financial records, reports, and budgets. This way, all of your data will be consistent, and it’ll be easier to review your funding model and make adjustments to increase your organization’s financial stability.

Correctly Understand Overhead Expenses

The term “overhead” has historically had a negative connotation in the nonprofit sector, since spending funding on overhead was seen as taking that funding away from mission-critical work. However, overhead isn’t something to be afraid of—in fact, some overhead spending is necessary and good for your organization to operate.

Overhead simply refers to the combination of your nonprofit’s administrative and fundraising costs from your statement of functional expenses, so it covers everything from employee compensation and utility bills to marketing and fundraising software fees. While these expenses are important to your cause, they contrast with program costs, which are directly related to the initiatives that further your organization’s mission.

In the past, the general rule was that nonprofits should put at least 65% of their funding toward program expenses and spend no more than 35% on overhead. However, it’s now commonly accepted that the exact breakdown will look different for every organization.

Treat the 65/35 “rule” more like a guideline to direct as much of your nonprofit’s funding toward its programs as is reasonably possible. If you have to cut costs at your organization, see if you can reduce overhead spending before taking any funding away from your programs.

Honor Funding Restrictions

When donors make large contributions to your nonprofit, they often want some control over how you use that funding to further your mission. So, they may place restrictions on their gift, or designate it for a specific initiative.

To make sure your organization spends contributions as they’re intended, separate the following categories of funds in your accounting system:

• Unrestricted funds have no limitations on their use, so you can use them to cover any of your organization’s expenses—whether they’re program-related or overhead costs. Most small to mid-sized individual donations, corporate contributions, and earned income fall into this category.
• Permanently restricted funds usually take the form of endowments, which your nonprofit can’t spend directly. Instead, you’ll invest these contributions and use the interest they generate to fund a donor-designated program or initiative.
• Temporarily restricted funds include most major and planned gifts, grants, and sponsorships (the one restricted type of corporate contribution). These gifts are designated for specific purposes, but once the project is finished or a certain time period elapses, any leftover funding is released from restrictions.

By accounting for restricted funds correctly, your nonprofit can stay accountable to and keep its promises to stakeholders, making them more likely to support you long-term.

Use Dedicated Accounting Software

To effectively track all of your nonprofit’s revenue streams, expenses, and restricted funds, you’ll need the right tools. While many organizations start out managing their finances in a spreadsheet, a specialized accounting platform will become necessary as your nonprofit grows.

At Jitasa, we recommend the Intuit Quickbooks suite of accounting solutions. These powerful, trusted platforms are primarily designed for business accounting, but their robust features can be configured for nonprofit use fairly easily.

We find that small to mid-sized nonprofits benefit most from investing in the Plus or Advanced plans of QuickBooks Online. The Plus plan includes all of the essential accounting features your organization needs in a cloud-based platform and provides access for up to five users. However, if you want to add more users to your account or leverage more complex tools like batch invoices and fixed asset auto-tracking, it’s worth upgrading to the Advanced plan.

For large nonprofits, the Intuit Enterprise Suite solution provides additional project management and multi-entity reporting features that are particularly useful for tracking finances across locations.

Working With a Nonprofit Accountant

As mentioned previously, the best way to ensure your nonprofit’s finances are tracked and reported properly is to work with an accountant. Especially if they have experience in the nonprofit sector (which you should look for during recruitment!), they’ll have a deeper understanding of compliance requirements, problem-solving approaches, and other best practices to level up your organization’s financial management.

There are three ways your nonprofit can gain access to an accountant:

• Hiring for an in-house position. This option works well for large nonprofits with many accounting needs that would benefit from a dedicated professional’s expertise. However, recruiting, onboarding, and compensating a new employee can be time-consuming and expensive.
• Receiving an in-kind donation of accounting services. Brand-new organizations may choose this option to get their financial management practices off the ground at no cost. But when you don’t compensate a professional for their services, they often lose motivation over time and prioritize paid projects, so this option isn’t sustainable.
• Outsourcing to a nonprofit accounting firm. Outsourcing provides access to the consistent expertise of a full-time accountant at a fraction of the cost of hiring—it’s a win-win! Plus, these services are usually scalable, so they work for nonprofits of various sizes over long periods of time.

We may be biased, but we recommend that your organization outsource its accounting services to a nonprofit-specific firm like Jitasa. Our expert accounting team has worked with nonprofits of various sizes and missions for more than 15 years, and we use our experience to create tailored solutions for every organization. We also offer bookkeeping services and fractional CFO guidance through the Jitasa Strategic Advisory Team (J-SAT) to develop a well-rounded financial management system for your organization.

By understanding the basics of nonprofit accounting, your team will be better equipped to fund its mission and make strategic decisions about your organization’s future. Use the tips above to get started, and don’t hesitate to contact an accountant (like our team at Jitasa!) with any questions or to take your systems to the next level.

For more information about nonprofit accounting, check out these resources:

• Understanding and Applying GAAP for Nonprofits: FAQ Guide. Discover the standardized guidelines that inform all aspects of for-profit and nonprofit accounting.
• Church Accounting: Ultimate Guide + Best Practices to Know. Church accounting is very similar to general nonprofit accounting, but there are a few key differences—learn more in this guide.
• What Is a Nonprofit Audit? Ultimate Guide + Checklist. Explore a critical accounting-adjacent (and often misunderstood) process—the independent financial audit.

See how Jitasa’s affordable, tailored bookkeeping and accounting services can work for your nonprofit.

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