Nonprofit Accounting Services: What They Cover

Quick Answer: Nonprofit accounting services keep books that answer a different question from a company's: not "did we make a profit?" but "did we spend each donor's money the way it was given, and what did our programs cost?" That means fund accounting with restricted and unrestricted net assets, grant-by-grant tracking, expenses split between program, management and fundraising, and records that produce the right Form 990 each year.

A for-profit bookkeeper can reconcile a nonprofit's bank account perfectly and still leave the organization in trouble, because the bank balance is not the hard part. The hard part is knowing which dollars in that balance are free to spend, which belong to a grant with conditions, and how the year's spending divides among programs, administration and fundraising.

How is nonprofit bookkeeping different from regular bookkeeping?

Four requirements have no real counterpart in a small business's books.

Money carries strings. A donor who gives $20,000 "for the after-school program" has restricted that gift. Spending it on rent is not a bookkeeping error you fix with a journal entry; it is a broken promise to the donor. The books have to show restricted balances separately so nobody spends them by accident.

Revenue is mostly contributions and grants. There are no sales invoices to speak of. Income arrives as checks, online gifts, event proceeds and grant drawdowns, each needing a donor or funder name attached.

Expenses are reported by purpose. The IRS asks larger organizations to show what share of spending went to programs versus overhead, and donors read that split.

The year ends in a public filing. Most exempt organizations file a Form 990-series return, much of which anyone can look up.

Fund accounting: restricted and unrestricted net assets

"Fund accounting" sounds heavier than it is. In practice it means tagging every transaction with the fund it belongs to, so you can run a balance per fund as well as for the whole organization.

The IRS Form 990 instructions tell organizations that follow the nonprofit accounting standard (ASC 958) to report two classes of net assets on Schedule D: net assets without donor restrictions and net assets with donor restrictions. Your chart of accounts and your software's class or tag feature should mirror those two buckets at minimum.

A typical small-organization fund list:

• General operating (without donor restrictions): unrestricted gifts, membership dues, event income.
• Board-designated (still without donor restrictions): money the board has set aside, such as a building reserve. The board can undo the designation, so it is not donor-restricted.
• One fund per restricted gift or grant (with donor restrictions): each with its own purpose, and sometimes a time limit.

When restricted money is spent for its stated purpose, the restriction is "released": the amount moves from the restricted class to the unrestricted class, matched by the expense. That release entry is the step volunteer treasurers most often miss.

Tracking grants by funder

Grants add reporting on top of restriction. A foundation that awards $50,000 for a literacy program may want a budget-versus-actual report every six months, may only allow certain expense types, and may claw back unspent money.

For each grant, keep:

1. The award letter or agreement, with the allowed uses and reporting dates.
2. A budget by line (staff, supplies, rent share) taken from the proposal.
3. A class, tag or sub-account so every expense charged to the grant can be filtered.
4. A running balance: awarded, received, spent, remaining.
5. The reports you sent, and the date each was due.

Government grants often add rules on allowable costs and documentation. Ask the funding agency for its requirements in writing at the start; your accounting service should be able to read them and set up the books to match.

Functional expense allocation

Part IX of Form 990, the Statement of Functional Expenses, has four columns: Total, Program Services, Management and General, and Fundraising. The instructions say section 501(c)(3) and 501(c)(4) organizations must complete the three split columns.

Some costs fall squarely into one column: a program coordinator's salary is program, the audit fee is management and general, a gala venue is fundraising. Shared costs need an allocation method you can defend and apply every year:

Write the method down in a short policy and keep the timesheets or floor plans behind it. Whoever prepares the 990 will ask.

Which Form 990 does your organization file?

The IRS page on which forms exempt organizations file sets the thresholds:

Two more rules matter. Churches and certain church-related organizations are not required to file (see the IRS list of who must file); our church accounting spreadsheet guide covers their books. And the IRS states that organizations that do not file for three consecutive years automatically lose their tax-exempt status. A small group that only owes the e-Postcard still has to send it.

Larger returns also ask for a Schedule B listing contributors who gave $5,000 or more, so donor records need names, dates and amounts that tie to the bank deposits.

What does a nonprofit accounting service handle, and what stays with the treasurer?

The split varies by contract, but this is a common arrangement for an organization with one or two staff and a volunteer board:

Keep approval and recording in different hands where you can. Separation of duties is the cheapest fraud control a small nonprofit has. For how outsourced bookkeepers price their work in general, see what bookkeeping services cost; look for one who can show you a nonprofit client's report format, not just a for-profit P&L.

A nonprofit bookkeeping template for groups not ready to hire

Before an organization pays for a service, a single workbook with five tabs covers the essentials:

• Ledger. Date, payee or donor, description, amount (negative for money out), fund, function (program, management, fundraising), grant code. One row per bank or card transaction.
• Funds. One row per fund with restriction type and purpose; a SUMIFS on the Ledger by fund gives each running balance.
• Grants. Award amount, dates, report due dates, and a SUMIFS of spending by grant code against the budget.
• Donations. Donor, date, amount, restricted or not, acknowledgment sent (yes/no). The last column shows at a glance who is still waiting for a thank-you letter or receipt; our donation tracking guide explains matching gifts to deposits.
• Reconciliation. Statement ending balance, ledger balance, outstanding items, difference. The bank statement reconciliation guide walks through the monthly routine.

The Ledger tab fills fastest from the bank's own data. If the bank provides only PDF statements, QuickBankConvert converts them into rows you can paste in and then tag by fund and function. The tagging is the part no tool does for you: someone who knows what each payment was for has to assign it.

When the workbook starts needing three people to maintain it, or a funder asks for an audit, that is the point to move to accounting software with class tracking and bring in a service.

Related guides

• Church accounting spreadsheet
• Bookkeeping services for small business: cost and choice
• Tracking charitable donations from bank statements