Running a nonprofit is about more than pursuing a mission—it also means managing money responsibly. While the goals of nonprofit organisations differ from those of businesses, the need for accurate, organised financial records is just as critical. Without a solid accounting foundation, even the most well-intentioned charity can find itself struggling to stay afloat.
Good accounting helps nonprofits maintain donor trust, meet regulatory requirements. It also helps make smart decisions about how to use their funds. You’ll find Forbes saying as much in this article.
It also ensures that resources are being used efficiently and ethically in support of the organisation’s mission.
But nonprofit accounting can be a little different from what you might expect. It comes with its own terms, rules, and reporting standards that can feel overwhelming to new leaders or first-time administrators.
This beginner’s guide will walk you through the essential steps of nonprofit accounting—from the basics and bookkeeping to tools and financial statements. Whether you’re starting a grassroots organisation or joining an established charity, this guide will help you understand how to build a strong financial foundation for your cause.
Step 1: Understand the Basics of Nonprofit Accounting
Before diving into the day-to-day tasks of accounting, it’s important to understand how nonprofit financial management differs from that of a traditional business. The main difference comes down to purpose. While for-profit businesses aim to generate income for owners or shareholders, nonprofits exist to serve a mission. This shift in purpose also affects how their finances are tracked and reported.
Key Differences
One of the most noticeable distinctions is how revenue is classified. Nonprofits rely on a variety of funding sources—such as donations, grants, membership dues, and fundraising events—and must account for these differently than a business would with sales revenue. Additionally, nonprofits don’t have “owners” or “equity” in the traditional sense. Instead, they track net assets, which represent the resources available to further their mission.
Another key difference lies in the emphasis on accountability. Donors, grantmakers, board members, and regulators expect transparency on how funds are being used. Financial reports aren’t just for internal decision-making—they’re also a key part of maintaining public trust and fulfilling compliance obligations.
Common Terms to Know
Here are a few essential terms you’ll encounter in nonprofit accounting:
- Restricted funds: Donations or grants that are designated for a specific purpose, project, or time period. These must be tracked separately and cannot be used for general expenses.
- Unrestricted funds: Contributions that can be used at the nonprofit’s discretion, usually for operational costs or wherever the need is greatest.
- Temporarily restricted funds: These funds are restricted by time or purpose, but the restrictions lift after certain conditions are met.
- Grants: Financial awards provided by governments, foundations, or other organisations, often with reporting requirements and specific allowable uses.
- Statement of Financial Position: A snapshot of what the organisation owns and owes at a given point in time—similar to a balance sheet.
- Statement of Activities: A report showing revenue and expenses over a period, detailing how funds were received and spent.
Getting familiar with these concepts early will help you make sense of the rest of the accounting process and build confidence as you manage your nonprofit’s finances.
Step 2: Set Up Your Accounting System
Once you understand the basics, the next step is to build a system that helps you track, organise, and report your financial information accurately. A well-structured accounting system makes it easier to stay on top of your nonprofit’s finances, prepare reports, and meet legal obligations. It also saves time and reduces the risk of errors down the line.
Choosing the Right Accounting Software
There are many accounting software options available today—some designed specifically for nonprofits, others more general but adaptable with the right setup. Here are a few commonly used tools:
- QuickBooks (Nonprofit Edition): Widely used and feature-rich, QuickBooks offers customisable reports and donor tracking features tailored to nonprofits.
- Wave: A free option suitable for smaller organisations, offering basic income and expense tracking.
- Xero: Cloud-based, easy to use, and suitable for organisations looking for strong reporting and integrations.
- Aplos: Specifically built for nonprofit accounting, Aplos includes fund tracking, donation management, and built-in compliance features.
When selecting software, consider factors like the size of your organisation, the number of users, budget, and whether you’ll need to track grants, donations, or multiple programs.
Building a Chart of Accounts for Nonprofits
Your chart of accounts is the foundation of your accounting system. It’s a structured list of all the categories your organisation will use to record financial transactions—such as income, expenses, assets, and liabilities.
A good nonprofit chart of accounts should include:
- Revenue accounts for donations, grants, program fees, and fundraising events
- Expense accounts for rent, utilities, staff wages, supplies, and more
- Program-specific accounts to track income and costs related to individual projects
- Fund categories to distinguish between restricted, temporarily restricted, and unrestricted funds
Taking the time to set up your chart of accounts correctly from the beginning will make it much easier to generate reports, track spending, and comply with financial reporting standards.
Step 3: Track Income and Expenses
With your accounting system in place, the next step is maintaining it through consistent, accurate tracking of income and expenses. This is the heartbeat of nonprofit financial management. It keeps your organisation informed, accountable, and prepared for everything from grant applications to annual audits.
Best Practices for Categorising Revenue and Expenses
Every dollar that comes in or goes out should be recorded in the right place. This means using your chart of accounts to assign transactions to the correct categories. Misclassifying entries—like putting a grant under general donations, or an event cost under office supplies—can create confusion and lead to inaccurate reports.
To keep things tidy:
- Record income based on its source—separate individual donations from grants or program fees.
- Log expenses by purpose—general operations, fundraising, or specific programs.
- Split shared costs where necessary. For example, if rent covers both office and event space, allocate the expense proportionately.
It’s also a good idea to regularly review your records and reconcile them against your bank statements. Doing this monthly can help catch discrepancies early and prevent minor issues from snowballing into bigger problems.
Why Transparency Matters
For nonprofits, transparency isn’t just good practice—it’s essential. Stakeholders want to know where their money is going and whether it’s making a difference. Accurate tracking allows you to:
- Report on how donations are being used
- Demonstrate compliance with grant requirements
- Provide clarity to your board and management team
- Build trust with donors, members, and the broader community
Many organisations also choose to publish annual financial reports or summaries, which can be shared on websites or in newsletters. While this isn’t always required, it shows a commitment to openness and accountability.
Strong tracking habits don’t just support compliance—they create a financial narrative that shows your impact and builds confidence in your leadership.
Step 4: Prepare Financial Statements
Financial statements are the formal reports that summarise your organisation’s financial health. They show how funds are being used, what resources are available, and how well the nonprofit is managing its obligations. These documents are not only essential for internal planning—they’re also required by regulators, grantmakers, and auditors.
Key Documents for Nonprofits
Two of the most important financial statements for nonprofits are:
- Statement of Financial Position
Similar to a balance sheet, this report shows what the organisation owns and owes at a specific point in time. It includes:
- Assets (e.g. cash, equipment, receivables)
- Liabilities (e.g. unpaid bills, loans)
- Net assets, broken down by restriction type: unrestricted, temporarily restricted, and permanently restricted
- Assets (e.g. cash, equipment, receivables)
- Statement of Activities
This document outlines your revenue and expenses over a period—usually monthly, quarterly, or annually. It helps show whether the organisation is operating at a surplus or deficit. It typically categorises income and expenses by program, fundraising, and administration, and also reflects the release of restricted funds.
Depending on your size and reporting needs, you may also need to prepare:
- Statement of Cash Flows: Tracks how money moves in and out of your accounts, highlighting cash availability.
- Statement of Functional Expenses: Breaks down expenses by both function (e.g. program, admin, fundraising) and natural classification (e.g. salaries, rent, supplies).
How to Use Financial Reports for Better Decisions
These statements are more than just paperwork—they’re powerful tools for decision-making. Reviewing them regularly can help answer questions like:
- Are we spending too much on overhead?
- Do we have enough cash to sustain operations for the next three months?
- Are our programs financially sustainable?
- Is there room to grow, or should we scale back?
Financial statements also help identify trends, such as seasonal dips in revenue or rising costs in a particular area. Armed with this data, nonprofit leaders can make informed choices about budgeting, staffing, fundraising strategies, and more.
Clear, consistent financial reporting is a cornerstone of good governance. It empowers your board, satisfies funders, and strengthens your ability to deliver on your mission.
Conclusion
Nonprofit accounting may seem complex at first, but it’s a vital part of running a successful and sustainable organisation. By understanding the basics, setting up the right systems, tracking your income and expenses accurately, and preparing the right financial reports, you lay the groundwork for transparency, accountability, and long-term impact.
Financial clarity isn’t just about ticking boxes for compliance—it’s about ensuring your mission can thrive. Donors want to see that their contributions are being used wisely. Grantmakers expect proper documentation and reporting. And your team needs accurate information to plan ahead with confidence.
Fortunately, you don’t have to figure it all out on your own. Tools and resources exist to help simplify the process. Platforms like Rekonect offer a range of financial management and reporting solutions tailored to the nonprofit sector. Whether you’re looking for templates, guidance on best practices, or digital tools to help automate your bookkeeping, their resource directory is a great place to start.
Strong accounting isn’t just a back-office function—it’s a strategic asset. And with the right knowledge and tools, even the smallest nonprofit can build a financial foundation that supports real, measurable change.
Ready to learn more about running a nonprofit? Reach out to Rekonect today!