Nonprofit bookkeeping 101: Everything you need to know in 2025

Nonprofit bookkeeping is crucial for the success of nonprofit organizations. It ensures their finances are managed responsibly, maintains compliance with regulations, and provides insights to make informed decisions. This guide will equip you with everything you need to know about nonprofit bookkeeping to ensure your books are accurate and give you the financial information needed to effectively manage day-to-day operations and set your organization up for future success.

Nonprofit bookkeeping basics

Nonprofit bookkeeping best practices

The difference between nonprofit and for-profit

Nonprofit bookkeeping challenges

Finding the right bookkeeper for your nonprofit

Nonprofit bookkeeping basics

Bookkeeping involves systematically recording and organizing all financial transactions for an organization to ensure accurate financial management and compliance. Nonprofit organizations have unique bookkeeping requirements that differ from those of for-profit companies.

Key distinctions of nonprofit bookkeeping

What distinguishes nonprofit bookkeeping from for-profit bookkeeping? Some key differences include:

• Mission-driven focus: Nonprofits prioritize their mission over profits. Their financial reports emphasize financial stability and how funds support their cause.
• Fund accounting: Nonprofits track restricted funds (which must be used for specific purposes) and unrestricted funds (which can be used for general operations) separately to ensure they use the money as intended.
• Regulatory compliance: To maintain their tax-exempt status, nonprofits must follow strict regulations, including filing annual reports like IRS Form 990 and adhering to accounting standards set by organizations like the Financial Accounting Standards Board (FASB).
• Transparency and accountability: Nonprofits must disclose details about donor-imposed restrictions, board-designated funds, and how they manage money to build trust with donors, stakeholders, and regulatory bodies.

Essential nonprofit bookkeeping tasks

A bookkeeper for nonprofit organizations manages detailed financial transactions and reporting, ensuring regulatory compliance and financial accuracy. Your nonprofit must do these key tasks to stay compliant and financially healthy:

• Record and categorize transactions: Keep accurate records of all financial transactions, including income, expenses, grants, and donations. You should also categorize all transactions properly, even non-monetary contributions (e.g., food, clothing, and other donated items).
• Financial reporting: Prepare and maintain key financial statements like the statement of financial position, statement of activities, and statement of cash flows, which are vital for understanding your organization's finances and making informed decisions.
• Fund tracking: Ensure that restricted funds are only used for their designated purpose. You should also maintain detailed records of incoming funds to meet reporting requirements and sustain donor confidence.
• Process payroll: Handle compensation for employees and stipends for volunteers, while staying compliant with relevant labor laws and regulations.

Managing nonprofit finances can get complicated, especially if you have a tight budget and limited staff. However, using nonprofit accounting software like Quickbooks streamlines the process. It helps track expenses, create financial reports, and make accepting donations easier—all while saving time and minimizing errors.

Why is bookkeeping important for nonprofit organizations?

Every nonprofit, no matter its size or sector, requires dedicated bookkeeping processes to ensure financial health, legal compliance, and maintain trust with donors. Integrating accurate bookkeeping software for nonprofit organizations and implementing standard nonprofit bookkeeping principles streamlines financial management. It’s also critical for avoiding financial oversight or regulatory missteps so that the organization’s mission can succeed.

Nonprofit bookkeeping best practices

Effective nonprofit bookkeeping is dependent on meticulous record-keeping, leveraging tailored software, and understanding unique nonprofit financial regulations. When starting bookkeeping for a nonprofit, it’s essential to know the best practices to ensure compliance and financial integrity:

1. Track income and expenses

Systematically tracking income and expenses ensures accurate reporting and effective budget planning, enabling nonprofits to make informed decisions. Through diligent record-keeping, organizations maintain transparency with donors and uphold compliance with regulations.

2. Record and classify payments and bank transfers

Bookkeeping for nonprofit organizations mandates diligent recording of all payments and bank transfers to ensure every dollar's journey aligns with your mission. Nonprofit bookkeeping software is invaluable for efficiently and accurately tracking each payment and transfer.

3. Organize and maintain receipts

Organizing and maintaining receipts is essential for transparent and accurate financial reporting and ensures you're audit-ready. Adopting bookkeeping software for nonprofit organizations can significantly simplify this task, allowing for the digital tracking and categorization of receipts, which aids in avoiding the pitfalls of manual errors and oversights.

4. Create invoices for goods, services, and donations

Creating invoices for goods, services, and donations ensures compliance and that each transaction aligns with nonprofit bookkeeping standards.

5. Enter bills and vendor invoices

Bills and vendor invoices need to be categorized and recorded upon receipt. This ensures payments are processed promptly and your financial reporting remains precise.

6. Prepare bank reconciliations

Bank reconciliations are done by gathering your latest bank statements and bookkeeping records. You compare each transaction in your nonprofit bookkeeping software against the bank's records, identifying any discrepancies. Adjustments may be necessary for bank fees, direct deposits, or unrecognized transactions. This critical process ensures the accuracy of your books.

7. Manage payroll

Nonprofit organizations face unique challenges in managing payroll, particularly when integrating volunteer efforts with paid staff compensation. Bookkeeping needs to account for these distinct elements to ensure accurate financial reporting and compliance.

8. Execute data entry to keep the general ledger current

Timely data entry into the general ledger, a comprehensive record of all financial transactions, ensures accurate financial tracking and reporting for nonprofit organizations, which is crucial for maintaining transparency and accountability.

9. Allocate revenue and expenses to restricted fund accounts

Restricted fund accounting in nonprofit bookkeeping involves tracking both the revenue and expenses associated with specific, donor-designated purposes to ensure the funds are used appropriately. The precise allocation of funds requires a solid understanding of donor restrictions and aligning them with your project budgets.

10. Prepare reports for accountants to review and analyze

Financial reports provide a snapshot of an organization's financial health. Bookkeepers record and classify transactions and reconcile accounts to ensure the information in these financial reports is accurate and then prepare the reports. These reports help accountants understand financial situations and prepare financial statements.

In addition to these nonprofit bookkeeping best practices, there are various forms that are crucial for maintaining your nonprofit's compliance and financial integrity. These documents include annual tax filings specific to nonprofit entities, regular financial reports to donors and boards, and internal tracking forms for donations received.

Another distinct aspect of nonprofit bookkeeping is the method of fund accounting. Fund accounting is a system used by nonprofit organizations and government entities to manage and track funds separately according to their specific purposes or restrictions. Resources are divided into various funds, each representing a separate entity or activity with its own set of accounts. This helps ensure that money designated for specific projects, programs, or objectives is used only for those intended purposes, providing transparency and accountability.

How are donations recorded for a nonprofit?

When recording donations for a nonprofit, there must be a distinction between unrestricted and restricted funds. This ensures compliance and transparency in nonprofit bookkeeping. Accurate documentation distinguishes between these categories, guiding how each donation can be used to support your organization's mission.

The difference between nonprofit and for-profit bookkeeping

Nonprofit bookkeeping emphasizes accountability and transparency, guided by mission rather than profit. In contrast, for-profit bookkeeping prioritizes revenue generation and financial growth.

For this reason, some of their primary financial statements are different. While nonprofit organizations use a Statement of Financial Position and Statement of Activities, for-profit organizations use a Balance Sheet and Income Statement.

Additionally, nonprofit organizations are tax-exempt (if approved for this tax status by the IRS) while for-profits are subject to income taxes.

Nonprofit bookkeeping challenges

Maintaining accurate and compliant nonprofit bookkeeping presents several challenges. Common challenges include navigating fund restrictions and ensuring accurate donor reporting, among others. Investing in specialized nonprofit bookkeeping software and regular training to keep staff up to date can help overcome these challenges.

Grant tracking

Grant tracking is a process of monitoring and managing funds received from grants. It involves the following steps:

Setting up separate accounts

When a grant is received, bookkeepers set up a separate account or fund in the accounting system to track the grant money. This keeps the funds distinct from other revenue sources.

Recording and categorizing expenses

All expenses related to the grant are recorded and categorized under the specific grant account. This ensures spending is in alignment with the grant's purpose and budget.

Monitoring compliance

Bookkeepers and grant managers regularly review expenses and progress to ensure compliance with the grant's terms, including spending deadlines and reporting requirements.

Generating reports

Periodic reports are created to provide updates on how the grant funds are being used.

Making adjustments and reallocations

If necessary, adjustments are made to reallocate funds within the grant budget to align with changing project needs, always in accordance with the grantor's guidelines.

The purpose of grant tracking is to ensure that grant funds are properly managed, used according to the grantor's specific conditions and requirements, and reported accurately.

Find the right bookkeeper for your nonprofit

When selecting the right bookkeeper for your nonprofit, you’ll need to decide between hiring an in-house bookkeeper or outsourcing to a virtual service. Each option has its unique advantages for your nonprofit's financial management. When making this decision, be sure to carefully consider your mission's needs and resources.

For both options, it’s important to prioritize candidates with a profound understanding of nonprofit bookkeeping, familiarity with nonprofit bookkeeping software, and a track record in managing bookkeeping for nonprofit organizations. Finding someone who harmonizes with your mission and values also plays a critical role. They should exhibit proficiency in generating accurate financial reports and demonstrate a commitment to maintaining transparency and integrity.