Nonprofit Accounting Basics

What's different about nonprofit books

• Net assets, not equity. Two categories: without donor restrictions and with donor restrictions. (FASB collapsed the old three-category model in 2018.)
• Functional expense reporting. You report expenses by both natural category (salaries, rent) and functional category (program, M&G, fundraising). Funders read the program ratio.
• Contribution accounting. Pledges are recorded when promised, not when paid. Restricted gifts go to a separate net-asset class until released.
• In-kind contributions. Donated goods and professional services are recorded at fair value if material. New disclosure rules (ASU 2020-07) require a separate line on the Statement of Activities.
• Form 990. Every year. No exceptions for active orgs. Public document.

Sample chart of accounts

This is a starter chart for a small nonprofit. Add detail as your org grows. Numbering follows the standard pattern: 1xxx assets, 2xxx liabilities, 3xxx net assets, 4xxx revenue, 5xxx–7xxx expenses by function.

Fund accounting in 5 minutes

Restricted funds are donor money you've promised to spend on a specific purpose, in a specific time window, or to keep as endowment. The accounting matters because misusing restricted funds is one of the fastest ways to lose your 501(c)(3) status.

The mechanics

1. When the gift arrives with a restriction, code it to Net assets with donor restrictions.
2. When you spend on the restricted purpose, charge the program expense to the unrestricted side and record a release from restriction — debit "Net assets with restrictions — released," credit "Net assets released from restriction" (a revenue account on the unrestricted side).
3. Result: net assets shift from the restricted bucket to the unrestricted bucket exactly equal to the qualifying expense.

Most accounting software supports this through "classes" (QuickBooks) or "tags" (Xero) on each transaction. Tag every transaction with the relevant grant or restricted fund name.

The Form 990 timeline

The 990 is your annual federal filing. Public — on Candid/GuideStar within weeks of filing. Funders read it.

Deadlines

• Due 4.5 months after fiscal year end (May 15 for calendar-year orgs).
• One automatic 6-month extension via Form 8868 (no reason required).
• Miss 3 years in a row: automatic loss of tax-exempt status. Reinstatement is painful.

QuickBooks for nonprofits — setup checklist

QuickBooks Online has a built-in nonprofit edition, and TechSoup offers it at deep discount.

1. Apply through TechSoup for the discounted QuickBooks Online subscription.
2. When setting up the company, choose "Nonprofit" as the industry. This loads a nonprofit-flavored chart of accounts.
3. Replace QuickBooks's default chart with the one above (or your own).
4. Turn on Classes (Settings → Account and Settings → Advanced → Categories). Use one class per program.
5. Turn on Locations if you have multiple sites. Optional.
6. Set up Tags for grants. One tag per grant.
7. Connect bank feeds. Set up bank rules to auto-categorize routine transactions.
8. Customize donation receipts in Sales → Customers.
9. Set up the Statement of Activities, Statement of Financial Position, and Functional Expense reports as memorized monthly reports.

Alternatives: Aplos (built specifically for nonprofits, great for fund accounting), Xero (cleaner UI, weaker nonprofit-specific features), Wave (free, very basic).

Audit, review, or compilation — which do you need?

Many states require an independent audit at certain revenue thresholds. Funders may require one regardless. Three escalating levels:

• Compilation — CPA puts your numbers in standard format. No assurance. Cheapest. ~$500–$2,000.
• Review — CPA performs analytical procedures and inquiries. Limited assurance. ~$3,000–$8,000.
• Audit — CPA tests transactions, confirms balances, examines internal controls. Highest assurance. $10,000–$30,000+.

State thresholds vary widely. National Council of Nonprofits maintains a state-by-state guide.