Accounting for nonprofits is very different than for-profit organizations. There are different tax requirements, accounting guidelines, and terms.

Why the differences? Because nonprofits don’t report on revenue, instead using funds to organize and create accountability for their dollars.

Below we go through how accounting in nonprofit organizations work and provide some helpful resources and tips as you get started.

how does nonprofit accounting work

How Nonprofit Accounting Works

Nonprofit accounting uses funds to organize and create accountability for their dollars. This is typically called fund accounting.

What is fund accounting?

Fund accounting is how nonprofits track and separate their expenses and revenues. Each program has a ‘fund’ that it uses to track and report on, as well as fund for administrative, overhead, and other general departments. They also have a unique code they use within the fund, allowing accounting and finance departments to run and create reports on the various funds.

Why do nonprofits use funds?

Nonprofits use funds because it allows them to see how they are spending donor money. It’s quite easy for accountants, program directors, etc. to run reports on their funds and see how things are going.

As your organization spends donor money, you’ll be able to see how much of it is restricted vs unrestricted.

Restricted funds are those that have been donated and the donor limits how your organization can use the funds. Unrestricted funds are those that have been donated but not limited by the donor.

It’s important to understand restricted vs unrestricted funds because they have to be entered a certain way in your accounting software – and should be tracked so you can easily see how much you have left of a particular restricted account.

Helpful Nonprofit Accounting Links and Resources

133 Nonprofit Accounting Terms You Need to Know – The Ultimate Nonprofit Accounting Glossary

Biggest Accounting Issues for Nonprofits + How to Solve

Fund Accounting for Nonprofits: What is it and How Does it Work

How to Do Bookkeeping for a Nonprofit

If you’re new to nonprofit accounting, feel free to check out the resources above and our blog for tips and advice on fund accounting and software.