Bookkeeping for nonprofits can feel challenging, especially when you’re unsure whether your current process is actually giving you the clarity you need.
Nonprofits have unique rules and reporting expectations, so it’s common to wonder whether your records truly reflect your organization’s financial health. If that sounds familiar, you’re in good company.
Many nonprofit leaders juggle program responsibilities alongside the specialized bookkeeping tasks required to stay compliant and financially strong. When books are unclear or incomplete, it becomes harder to make informed decisions, report accurately to funders, or maintain donor trust.
The good news is that nonprofit bookkeeping doesn’t have to feel overwhelming. With the right systems and a strong understanding of how nonprofit accounting works, you can build a financial foundation that supports your mission.
This guide walks through the essentials, common mistakes, useful tools, and best practices that help nonprofits stay confident and financially organized.
Nonprofit bookkeeping involves the ongoing work of tracking the money coming into and out of a tax-exempt organization. The following must be recorded in a way that reflects how the nonprofit actually operates:
When the books are maintained carefully, reporting, audits, and compliance are much easier to manage.
Since many nonprofits receive restricted gifts or grant funding, the books must show how those funds are spent. When records clearly reflect donor intent, they support credibility and strengthen relationships with supporters.
Nonprofits and for-profits track money differently because their goals differ. A for-profit company focuses on profit and shareholder value. A nonprofit exists to carry out a mission and reinvest its revenue to support programs.
This difference creates unique accounting needs. Nonprofits typically use fund accounting or fund-based tracking to separate resources based on donor restrictions.
Financial statements also differ. Nonprofits use reports like the Statement of Financial Position and Statement of Activities instead of the balance sheet and income statement used by for-profit companies.
While both types of organizations need accurate records, nonprofits face added expectations for transparency, accountability, and compliance with grant and donor restrictions.
Accurate bookkeeping begins with clear processes. Most nonprofits follow a consistent set of steps that ensure transactions are recorded correctly and categorized according to accounting standards. These steps outline how to do bookkeeping for nonprofits in a clear, organized way that supports accurate reporting.
Nonprofits begin by recording all revenue. This includes:
These funds must be tracked and coded properly. Grants and restricted gifts require special attention because they may only be used for specific programs or time periods. This often determines how expenses are allocated.
Next, expenses must be entered and categorized. Expenses are typically separated into:
This breakdown is important because it appears in financial reports, grant applications, and IRS Form 990.
Reconciling accounts is another important step. Comparing your books with bank statements ensures accuracy and helps catch errors early. Many nonprofits complete this process monthly.
Finally, nonprofits prepare reports that communicate financial health. These include:
The clarity of your bookkeeping directly affects the quality of these reports.
These best practices help nonprofits build a financial structure that supports transparency, growth, and efficient operations.
Fund accounting helps nonprofits organize their revenue according to how donors expect the funds to be used. Restricted funds are set aside for a specific program or project, while unrestricted funds can support the organization’s day-to-day operations. Keeping these funds separate makes reporting clearer and helps maintain donor confidence.
A well-organized chart of accounts creates consistent coding for your financial activity. It helps your nonprofit track programs, grants, and administrative expenses. A detailed chart of accounts also makes reporting easier, especially when preparing your annual Form 990 or grant reports.
Donations make up a significant part of nonprofit revenue, so it’s important to record them with care. The following must be recorded in a way that reflects how the nonprofit actually operates:
Entering donations soon after they’re received keeps your records current and helps acknowledgments go out on time.
Supporters and grantmakers want clarity on how funds are used, so it’s important to divide expenses into program, administrative, and fundraising categories. When these costs are separated correctly, your nonprofit can show how resources support the mission and create cleaner reports for grants, audits, and annual filings.
Reconciling accounts each month helps ensure your books match your bank activity. This routine step makes it easier to spot problems early, confirm that income and expenses are recorded in the right period, and keep your reports accurate. Monthly reconciliation also prevents issues from piling up at year-end.
Written financial procedures give your team a clear path to follow. They outline responsibilities, approval steps, and how documentation should be handled. These procedures help prevent errors, reduce the risk of fraud, and make transitions smoother when staff or volunteers change roles.
Regular financial reporting keeps leadership informed and programs on budget. Nonprofits commonly generate the Statement of Activities, Statement of Financial Position, and cash flow reports monthly or quarterly. Preparing these reports consistently supports planning, grant compliance, and communication of results to stakeholders.
The right bookkeeping tools can make nonprofit accounting much easier. Many organizations start with free bookkeeping software for nonprofits.
Choosing the right software depends on your size, complexity, and reporting needs. Free tools can help new or smaller nonprofits establish good bookkeeping habits, while paid tools support more advanced financial management as the organization grows.
Nonprofit bookkeeping comes with unique challenges that can cause financial problems if overlooked.
Understanding these challenges helps nonprofits create stronger systems and avoid preventable issues.
Hiring a nonprofit bookkeeper depends on the size of your organization and the complexity of your financial activity. Smaller nonprofits may begin with part-time support or a contractor. As the organization grows, more structured bookkeeping becomes essential.
When hiring, look for someone familiar with fund accounting and nonprofit reporting requirements. Ask about their experience with restricted funds, grant tracking, and donor reporting. Many nonprofits benefit from bookkeeping services for nonprofits that provide specialized expertise without requiring a full-time hire.
When budgets are limited, some nonprofits consider using volunteers. Volunteers can help with simple tasks; however, they’re not always the best fit for work that requires specialized accounting knowledge. A trained bookkeeper brings accuracy and consistency that support long-term financial stability.
Fund accounting organizes funds by purpose. Nonprofits use it to separate restricted funds from unrestricted funds and ensure donor money is spent as intended. It allows the organization to track financial activity by program or grant, which supports compliance and transparent reporting.
New nonprofits often start with a free QuickBooks Online subscription through TechSoup.
Nonprofits typically prepare the Statement of Activities, Statement of Financial Position, and detailed cash flow reports. Fund-specific reports, grant reports, and budget-to-actual comparisons are also common. These reports help leaders understand financial health and communicate clearly with donors and grantmakers.
Volunteers can be helpful for basic administrative work, but bookkeeping often needs regular attention and some accounting experience. Bringing in a bookkeeper, even on a part-time basis, can improve accuracy and reduce the chance of compliance problems. Many nonprofits find that professional support strengthens their financial systems over time.
Nonprofits often outsource bookkeeping when their financial activity grows, or their internal process can’t keep up. This can be useful for organizations handling grants, restricted funds, or detailed reporting requirements. Outsourcing offers experienced support while avoiding the cost of bringing on a full-time staff member.
Some nonprofits also bring in fractional controller services when they need deeper oversight, help interpreting financial data, or guidance with long-term planning.
Reliable bookkeeping helps nonprofits stay compliant, protect donor confidence, and make informed financial decisions. When your tools and processes work well, it becomes much easier to manage funds, track programs, and support the long-term health of your mission.
With accurate records and expert oversight, your nonprofit can plan ahead with confidence and manage its resources more effectively.
If your nonprofit wants support setting up or improving its bookkeeping system, our team can walk you through each step and help you create a dependable financial foundation. Contact us to get started.
