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How to do nonprofit bookkeeping and accounting: track restricted funds, set up a simple chart of accounts, reconcile every month and close the books on time.
Nonprofit bookkeeping is the routine of recording every gift, grant and expense, coding each one to its fund, restriction and function, and reconciling the accounts every month. Nonprofit accounting turns those records into the statements, allocations and reports that show donors, the board and the IRS where restricted money went.
Nonprofit organization accounting is the system mission-driven organizations use to track, report, and prove stewardship of every dollar, especially restricted gifts from donors and grants.
I've kept those books at Compassion, through Switch Consulting, and as a church treasurer. I use the books to show donors, the board, and the IRS where the money went.
Over those years I've learned that good books do two jobs at once. They're correct, and they're built around the decisions your leaders actually make. This guide covers both, then walks through a simple routine that ends every month with closed books.
A 501(c)(3) that can't show where restricted money went will struggle at grant time and when Form 990 is due. A small, steady routine keeps that picture clear all year.
Nonprofit organization accounting is how a 501(c)(3) records, classifies, and reports money so donors, grantors, and the IRS can see that funds were used as promised. That is what people mean by 501(c)(3) accounting.
Revenue arrives as contributions, grants, program fees, and memberships. Any surplus stays in the mission. The books have to show both where the money came from and what restriction, if any, still sits on it.
If the restriction was never coded when the gift arrived, December is often when that gap shows up. Someone then has to reconstruct that purpose for grant reports and Form 990.
For-profit books show owners a return. A nonprofit has to show that a restricted gift was used as promised. There are no shareholders. Surplus is not distributed.
Equity becomes net assets, split by donor restriction. Before ASU 2016-14 those classes were unrestricted, temporarily restricted, and permanently restricted. Those three labels now report as net assets without donor restrictions and net assets with donor restrictions.
If a restricted gift is deposited with operating cash and never marked restricted, you can spend it on the wrong purpose and not see it until year-end.
The Form 990 series is the public filing most tax-exempt organizations submit each year. GAAP statements and the 990 are related, but they are not the same report.
Organizations with gross receipts normally $50,000 or less may file Form 990-N. Organizations with gross receipts under $200,000 and total assets under $500,000 at the end of the tax year may file Form 990-EZ. At or above either threshold, the full Form 990 applies.
Churches and their integrated auxiliaries are among the organizations the IRS exempts from the annual return. Their boards and donors still expect the same clear picture of every fund.
| Aspect | For-profit | Nonprofit |
|---|---|---|
| Primary goal | Maximize profit | Fulfill the mission |
| Revenue sources | Sales of goods and services | Donations, grants, program fees |
| Equity / net assets | Stockholders' equity | Net assets with or without donor restrictions |
| Income statement | Income statement | Statement of activities |
| Tax filing | Form 1120 or 1065 | Form 990 series |
| Tracking method | Department or cost center | Fund accounting by restriction |
Bookkeeping records the transactions. Accounting turns those records into statements, allocations, and decisions.
A bookkeeper posts the deposit and the invoice. An accountant, or a treasurer doing both jobs, decides whether that deposit is restricted, which function the expense belongs to, and what the board should see. At a small nonprofit, the treasurer often does both.
I see books that code every $3 coffee to its own purpose. Leadership still cannot see meals as one number. One meals account plus a department or class is enough.
That's the difference between accuracy and precision. Accuracy means the coffee landed in the right account. Precision is how finely you split it, and no leader changes a decision over a $3 coffee.
So ask your board and directors which questions they need the books to answer, and set up your coding to answer those. More on that trade-off is in bookkeeping mistakes that waste time.
Nonprofits that follow GAAP use accrual accounting. Revenue is recorded when it is earned or promised under the rules, and expenses when they are incurred.
Cash-basis books record money only when it moves. That can work for a very small organization with simple gifts and no audit. It hides pledges, unpaid bills, and restricted balances that accrual would show.
Keep the books on the same cash or accrual method you will use on the statements. If you will need audited GAAP statements, start on accrual before the first grant demands them.
Most nonprofits need someone keeping the books once gifts carry restrictions or a grant requires reports. That person can be a volunteer treasurer, a part-time bookkeeper on staff, or an outside bookkeeping firm. Many organizations use a mix, with a bookkeeper posting entries and a treasurer or finance committee reviewing them.
A nonprofit bookkeeper typically:
The board keeps oversight whoever does the posting. It approves the budget, reviews the monthly reports and makes sure one person isn't both recording and reconciling the same account. The nonprofit internal controls guide covers how small teams split those duties.
What bookkeeping costs depends on how many transactions you run each month, how many funds and grants you track, and whether the work stays in-house or goes to an outside firm. Fewer accounts, cleaner coding and receipts collected at the time of purchase shorten the hours either way.
Here's how to set up nonprofit bookkeeping and keep it running:
Steps 1 through 4 happen once and get a light review each year. Steps 5 through 7 are the routine, and they're covered in detail below.
A nonprofit chart of accounts sorts activity into assets, liabilities, net assets, revenue, and expenses. Use a class so you do not invent a new account for every program.
Extra accounts for every ministry meal or classroom supply make a simple total harder. One supplies or meals account plus a class for the program is enough.
The numbered template is in the nonprofit chart of accounts guide.
Every expense also belongs to a function: program services, management and general, or fundraising. Salaries and rent often split across all three.
Deciding those splits before the first expense posts means the analysis of expenses by function builds itself all year. The statement of functional expenses guide shows a worked example and how it maps to Form 990.
Fund accounting tracks resources by purpose and restriction. A building gift and an unrestricted donation can share a bank account and still follow different rules.
At my church, someone gave $1,000 for the building fund. QuickBooks showed it as cash and as revenue. I could not spend it on rent, benevolence, or anything else.
Every month I export the balance sheet and subtract restricted balances in Excel so leadership can see what is actually available.
That export is the workaround for a missing per-fund balance sheet. QuickBooks Online can tag classes and locations. It cannot print a balance sheet for one fund from the software. The longer version of that limit is in why QuickBooks can't produce a true fund balance sheet.
One bank account can hold many funds if the ledger keeps a balance for each class. Opening a new checking account for every restriction creates board resolutions, new signers, and a donation platform that still posts to one account.
When the purpose is met, the books should release that amount from net assets with donor restrictions. Skip the release and the restricted balance stays inflated after the cash is gone.
The posting steps after a restricted gift arrives sit in how to track restricted funds. The same building fund gift, followed from deposit to release, is in these fund accounting examples for churches. If you keep a church's books, the church accounting guide covers clergy payroll and the church month-end close.
Nonprofit accounting best practices start with coding restricted gifts when they arrive, not at year-end. Train whoever opens the mail to flag restriction language before the gift hits the ledger.
Reconcile the bank and the funds every month. Compare the budget to actuals in that same monthly review.
Decide functional expense allocations before December. Program, management and general, and fundraising should already be in the books when Form 990 work starts. Keep the chart of accounts small enough that a substitute treasurer can post without a map only you understand.
Those habits fit into a simple calendar.
Record each gift with its donor, amount, fund and any restriction the day it's deposited. Pay bills against the right fund and function. And capture the receipt when the purchase happens, while the person who made it still remembers what it was for.
Match new card activity to its receipts and codes, and follow up on any missing receipts. For example, at one private Christian school, the finance office checks card reconciliation every week, and month-end now takes a few minutes.
Reconcile every bank and card account to its statement. Release restricted amounts whose purpose was met. Compare budget to actual by program; the nonprofit budget template shows one way to set that up. Then close the month, which is the next section.
Prepare Form 990 from the books you already keep, update the budget, and get ready for any audit or review your state, grantors or board require. The nonprofit audit guide explains which level you need and how to prepare.
The month-end close is when you confirm the month's books are complete and lock them so the reports stop changing. A month is closed when every bank and card account is reconciled, every expense has a receipt and a fund, met restrictions are released, and the statements for that month are ready to share.
Closes tend to slip for the same few reasons. Transactions get typed in by hand. The card statement has to arrive before anyone can reconcile it. Receipts trickle in weeks late.
For example, one parish still hadn't closed September by the middle of October. And a church that runs Vacation Bible School in early June may not know what it spent until August.
When leaders work from numbers that are weeks old, they make budget calls on a guess. A close that lands early in the next month gives them a current picture.
A few habits shorten the close more than anything else:
The full checklist, built around receipts, is in our month-end close process guide.
We're also building KleerFi Accounting, a fund accounting product built for nonprofits, to help keep every fund in balance and close the books each month. It's in development now, and you're welcome to join the waitlist.
Card statements and missing receipts can hold up a close, so card spending is worth setting up carefully. With KleerCard, each card's limits, categories and schedules are approved up front, when the card is loaded. A purchase that fits those settings goes through, anything outside them declines, and a cardholder who needs more asks for a higher limit before buying.
Cardholders snap the receipt in the app right after the purchase, receipts can be tied to a program, grant or department, and missing ones are flagged automatically through receipt tracking. Accounting sync then brings those card transactions into the accounting system you already use, so nobody retypes charges.
Every KleerCard plan includes unlimited cards, so each program or grant can have its own. More on connecting the two is in integrate your credit card and accounting for faster reconciliation.
A closed month is what produces reliable statements. Nonprofits that follow U.S. GAAP prepare a statement of financial position, a statement of activities, and a statement of cash flows under FASB ASC 958.
They also present an analysis of expenses by nature and function. That analysis can sit on its own as a statement of functional expenses, on the statement of activities, or in the notes.
The longer walkthrough is in the nonprofit financial statements guide.
The statement of financial position is the balance sheet: assets, liabilities, and net assets at a point in time, split by donor restriction.
The statement of activities replaces the income statement and reports the change in net assets for the period.
The statement of cash flows shows cash from operating, investing, and financing activities.
The analysis of expenses by nature and function lays spending such as salaries and rent across program services, management and general, and fundraising.
Most bookkeeping problems start small and compound by year-end. Here are the five I see most, with the fix for each.
The bookkeeping mistake that still surprises nonprofit boards is treating Form 990 as a separate project. If the books already split net assets by restriction and expenses by function, the 990 can be filled from the statements you already have. If those splits exist only in a year-end spreadsheet, the 990 becomes a reconstruction.
A chart of accounts with a new account for every program, vendor or meal type makes every report harder to read. Keep accounts few, use classes for programs, and code to the questions leaders actually ask.
A restricted gift that lands in operating cash without a fund can be spent on the wrong purpose before anyone notices. Flag restriction language when the gift arrives, and release it when the purpose is met.
Reimbursements added to a payroll run force an extra split at bank reconciliation, because reimbursements under an accountable plan aren't wages and no payroll taxes apply to them. Pay reimbursements separately, under an accountable plan, and the payroll and bank lines match cleanly.
Separate checking accounts feel safe, but each one needs a board resolution and its own signers, and your donation platform may still post to just one of them. One account with a balance per fund in the ledger is simpler to run and easier to reconcile.
Nonprofit accounting software has to track funds, produce the GAAP statements, and keep restriction classes visible. Prices and product fit, by organization size, are in nonprofit accounting software.
Nonprofit organization accounting is the system a mission-driven organization uses to record, classify, and report money so it can prove stewardship of restricted and unrestricted funds. It follows nonprofit rules under FASB ASC 958 rather than owner-equity reporting.
Choose cash or accrual, set up a small chart of accounts with classes or funds, and record each gift with any restriction when it arrives. Code expenses to program services, management and general, or fundraising. Reconcile bank and card accounts every month, release restrictions once they're met, then close the month and produce the statements.
Bookkeeping records and codes each transaction. Accounting turns those records into statements, allocations and decisions for the board. At a small nonprofit, the treasurer often does both.
A nonprofit bookkeeper records donations, grants and bills, codes each to the right fund and function, and collects receipts. They also reconcile bank and card accounts and prepare the monthly reports the treasurer or finance committee reviews.
The cost of nonprofit bookkeeping depends on your monthly transaction volume, the number of funds and grants you track, and whether the work is done in-house or by an outside firm. A small chart of accounts and receipts collected at the time of purchase reduce the hours either way.
A nonprofit should reconcile its bank and card accounts at least once a month and close each month before the next one ends. Reconciling card activity weekly keeps the month-end close short.
The biggest difference is who the books answer to. Nonprofit accounting reports net assets by donor restriction and uses a statement of activities instead of an income statement. For-profit accounting reports equity and profit for owners.
Nonprofits generally use fund accounting. Money is tracked by purpose and donor restriction, not only by department.
Nonprofits follow GAAP when a funder, state rule, or audit requires it, and others follow it as good practice even when no rule requires it. FASB ASC 958 is the nonprofit-specific guidance.
Accrual accounting is the method that matches GAAP and most grant and audit expectations. Cash-basis books can work for a very small organization and become a problem once pledges, unpaid bills, or restricted funds matter.
They do, under slightly different names. Under GAAP, nonprofits prepare a statement of activities in place of an income statement, along with a statement of cash flows. Both are part of the standard set.
GAAP statements are the statement of financial position, statement of activities, statement of cash flows, and an analysis of expenses by nature and function. That analysis can appear as a separate statement of functional expenses or in the notes.
It can get close, with some extra work. QuickBooks Online can track classes and locations, but it cannot print a balance sheet for one fund from the software. One workaround is to export the balance sheet and subtract restricted balances by hand.
If restricted and spendable balances are already on the monthly statements, Form 990 can be prepared from those statements instead of rebuilt in a spreadsheet.
That comes down to a few steady habits: code gifts and expenses when they happen, reconcile every month, release restrictions on time and close before the next month ends. Your board gets current numbers, and your donors get a clear answer about where their gifts went.
If card spending is part of your month, we'd love to help make it the easy part. Get started with KleerCard and give every program its own card, with receipts captured and charges ready for the close.
Speak to a member of our team and we can have you up and running in minutes, not weeks.
