Nonprofit status does not remove the need to keep complete books or meet annual federal and state reporting duties. A sound accounting process records and reconciles transactions, tracks donor restrictions and program costs, produces useful financial statements, and supplies accurate information for the organization’s federal return and any state filings that apply.
What does nonprofit accounting involve?
Nonprofit accounting is the process of recording, classifying, reviewing, and reporting an organization’s financial activity. It serves two connected but distinct purposes: helping leaders and boards understand how resources are being used, and providing accurate records for required tax and regulatory filings.
Financial accounting is not the same as the IRS information return. Form 990 reports an organization’s activities, finances, governance, compliance, and certain compensation. The IRS generally expects the return to use the accounting method regularly used for the organization’s books and records, subject to the form’s instructions and applicable rules. If a return presentation differs from the books, keep a clear reconciliation.
For external financial statements, certain nonprofits follow FASB Accounting Standards Codification Topic 958 (ASC 958). The IRS says ASC 958 is not required for Form 990, although a return prepared under ASC 958 is acceptable. The Financial Accounting Standards Board describes the FASB Accounting Standards Codification as “the single official source of authoritative, nongovernmental U.S. generally accepted accounting principles.”
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What accounting records should a nonprofit keep?
Records should let someone who was not involved in a transaction understand what happened, when it happened, how it was classified, and what evidence supports it. The exact system will depend on the organization’s size and obligations, but the following routine creates a useful foundation.
- Set up a chart of accounts. Use consistent categories for assets, liabilities, revenue, and expenses. Arrange categories so reports can distinguish programs from management and fundraising, and so restricted contributions can be tracked to their purposes and release conditions.
- Record transactions promptly. Keep invoices, receipts, bank records, contracts, contribution acknowledgments, grant agreements, payroll records, and other supporting documents. Record the date, amount, counterparty, purpose, and account classification.
- Track gifts and grants with their terms. Retain donor communications and grant agreements that establish whether money is restricted, what it may fund, and when it may be used. Record restrictions in a way that allows later review of spending and any release from restriction.
- Classify expenses consistently. Track costs by program and by supporting function, such as management and general or fundraising, using a consistent allocation method when costs serve more than one function.
- Reconcile accounts regularly. Compare the books with bank, credit-card, payroll, and payment-processor statements. Investigate old checks, deposits in transit, unexplained differences, and transactions that lack documentation.
- Review financial reports. Provide appropriate staff and board oversight with reports that show financial position, activity over a period, budget comparisons, and restricted resources. Review unusual transactions and significant variances rather than treating report generation as the final control.
These are practical bookkeeping practices, not a prescribed software configuration. The records should be detailed enough to meet the organization’s reporting, grant, board, and audit needs.
What is the difference between restricted and unrestricted funds?
Under ASC 958, net assets are reported in two classes: with donor restrictions and without donor restrictions. Donor restrictions can govern timing, purpose, or both. The IRS’s 2025 Form 990 instructions explain that donor restrictions may require resources to be used after a specified date, for a specified purpose, or both.
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- Purpose restriction: A donor gives money to support a named program, such as a food pantry. The organization tracks the gift and eligible spending so it can show whether the funds were used for that program.
- Time restriction: A donor says a gift may not be used until a future date. The gift remains subject to that timing requirement until the restriction is met.
- Endowment restriction: A donor may require the organization to preserve principal, with only some or all investment returns available for spending. Applicable state law, including the Uniform Prudent Management of Institutional Funds Act (UPMIFA) where relevant, can affect endowment administration and reporting.
A board may designate funds without donor restrictions for a reserve or another internal purpose. That board decision does not turn the funds into donor-restricted net assets; the designation can generally be changed by the board, subject to the organization’s governing rules and obligations.
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Not every nonprofit uses ASC 958 for every purpose. Its application to external financial statements, state reporting, grants, and audits depends on the organization’s circumstances and applicable requirements.
What accounting method should a nonprofit use?
There is no single method that is right for every nonprofit. An organization should understand the method it regularly uses for its books, apply it consistently, and check the requirements that affect its reporting. The IRS generally expects Form 990 to use the method regularly used to keep books and records, while noting that an exempt organization may adopt methods for certain tax items.
Before choosing or changing a method, consider whether it will support the organization’s required financial statements and audits, track donor restrictions and program/function expenses, reconcile cleanly to federal and state filings, and fit staff capacity. Grant agreements, board policies, and internal-control needs also matter.
State requirements can differ from federal presentation. The IRS instructions warn that some states require accrual reporting and provide for reconciliation when state and federal presentations differ. A nonprofit should not assume that the method acceptable for one filing automatically satisfies every grant, audit, or jurisdictional requirement.
Does every nonprofit have to file Form 990?
No. Many organizations exempt under section 501(a) file an annual Form 990 or Form 990-EZ, or submit the shorter Form 990-N electronic notice. The applicable route depends on the organization’s type, gross receipts, assets, activities, and filing exceptions. Some organizations are excepted from filing particular returns.
The thresholds below are general rules in the IRS 2025 Instructions for Form 990; they are not universal exemptions and should not be carried forward automatically to other tax years.
| General filing route | 2025 instructions’ general criteria | Important qualification |
|---|---|---|
| Form 990 | Generally required when gross receipts are at least $200,000 or year-end assets are at least $500,000. | Exceptions and special categories apply; check the applicable year’s instructions. |
| Form 990-EZ | May be an option when gross receipts are below $200,000 and year-end assets are below $500,000. | Eligibility rules and exceptions apply; the organization may instead need Form 990 or another filing. |
| Form 990-N | Organizations normally at or below $50,000 in gross receipts may submit the electronic notice if eligible and not filing a return. | The threshold is a general rule, not a blanket exemption. Confirm eligibility and exceptions in current instructions. |
The IRS’s 2025 Form 990 instructions and its annual filing overview explain filing routes and exceptions. Verify the version for the organization’s tax year rather than relying on a threshold remembered from an earlier year.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.What does Form 990 report, and who can see it?
Form 990 is an annual information return, not a substitute for maintaining the organization’s accounting records or preparing financial statements needed for other purposes. It covers exempt and other activities, finances, governance, compliance, and certain compensation. The schedules required depend on the filer’s type and activities.
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A completed Form 990 is generally available for public inspection. Review the return and attachments before submission, check that disclosures are complete and consistent with supporting records, and do not include Social Security numbers in public filing materials.
What state and local accounting requirements should a nonprofit check?
Federal filing does not necessarily satisfy state charity registration, financial reporting, or audit obligations. Depending on the jurisdictions and circumstances, state or local rules may require supplementary statements, an audit report, a different deadline, or accrual-basis reporting. Grant agreements and an organization’s own audit obligations may add requirements as well.
The IRS’s 2025 instructions note that some states require use of the AICPA Audit and Accounting Guide, Not-for-Profit Entities and reference its 2018 edition. That reference does not establish the guide’s current edition or the rule in any particular state. Check the relevant state regulator’s current instructions and verify any required accounting guidance directly.
Maintain a jurisdiction-by-jurisdiction calendar for applicable federal, state, and local filings, registrations, and audit deadlines. Requirements vary, so a federal return alone is not proof that all state obligations have been met.
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