Nonprofit Bookkeeping and Financial Statements
A nonprofit’s books have to answer questions a business’s books do not: Which gifts came with restrictions? What did each program cost? How much was spent on administration and fundraising? The Form 990 asks all of these, and so do funders. This page explains the basics. It describes general accounting practice for nonprofits; your own requirements depend on your funders, state and size.
What the financial statements show
- Statement of financial position: assets, liabilities and net assets.
- Statement of activities: revenue, gains and expenses, and the change in net assets.
- Statement of cash flows.
- Statement of functional expenses: expenses split by program services, management and general, and fundraising. This matches Part IX of the Form 990.
Net assets: with and without donor restrictions
Nonprofit financial statements report net assets in two classes: with donor restrictions (a gift for a specific purpose or period) and without donor restrictions. The books must track a gift’s restriction from the day it arrives until it is released by spending it as the donor asked. Many problems start when restricted gifts are spent on something else and nobody noticed.
Practical habits
| Habit | Why it matters |
|---|---|
| Set up the chart of accounts by program, management and fundraising | Functional expenses come straight from the books instead of a year-end scramble. |
| Use classes or funds for each grant and restricted gift | Funders ask for spending reports; the board needs to see restricted balances. |
| Record pledges and in-kind gifts correctly | They affect revenue, the balance sheet and donor receipts. |
| Split duties: one person approves, another pays, another reconciles | The most common nonprofit losses come from a single trusted person with all the access. Small organizations can use the treasurer or a board member for review. |
| Reconcile monthly and show the board a budget-to-actual report | Problems appear early, and the board can show it exercised oversight. |
| Keep payroll and contractor records separate | Employees get Forms W-2; many independent contractors get Forms 1099-NEC. |
Governance and the Form 990
Part VI of the Form 990 asks about governance, management and disclosure, for example whether the organization has a conflict-of-interest policy, how it handles compensation decisions and whether the board reviews the return. The return is public, so the answers should be true and the practices real. We can help the board put simple policies in place before the return is prepared.
Audits and reviews
Some funders, lenders and states require audited or reviewed financial statements (see the Illinois thresholds). They are performed by independent CPAs. Clean books and clear support make them faster and less costly, whoever performs them.
General educational information. Filing rules, thresholds, penalties and state requirements depend on individual facts and change over time. Confirm them on irs.gov and with your state regulators, and consult a qualified professional before filing a return or an application. This site is an independent guide and is not affiliated with the IRS.