It also helps you identify how much of your organization’s money is going towards mission-based activities versus fundraising or administrative expenses. When you mail out a book, the postage on that shipment is considered a program expense because it is directly related to your mission. But when you mail a fundraising appeal to your donor list, postage suddenly becomes a fundraising expense instead. And when you mail a check for your electric bill, it’s considered a general/administrative expense. https://nerdbot.com/2025/06/10/the-key-benefits-of-accounting-services-for-nonprofit-organizations/ In this way, the same “natural” expense – postage – can be split between three different “functional” categories, depending on its intended purpose. Below are some tips to help you feel confident and run effective nonprofit accounting practices.
Nonprofit accounting is the process of recording, managing, and preparing compliant financial statements for 501(c)(3) organizations. This includes tracking income and expenses, preparing tax returns, and creating financial reports. Government and nonprofit organizations aren’t interested in making money so they use an accounting system called fund accounting. They’ll often use specialized accounting software that’s designed to meet their financial reporting obligations.
For example, nonprofits must file annual taxes as part of their federal tax filing requirements. You will also get practical tips to make your reports clear, trustworthy, and easy to read. It summarizes your revenues and expenses for a specific period and allows both your organization and stakeholders to understand how you’re managing your resources. The nonprofit Statement of Financial Position, also known as a balance sheet, provides information as of a specific date about your organization’s financial health. This statement offers financial insights through your organization’s liquidity and financial flexibility—represented as assets and liabilities. There are some parallels between nonprofits’ financial statements and those of for-profit organizations—systematic reporting is an important part of complying with the Generally Accepted Accounting Principles (GAAP).
To be clear, reading nonprofit financial statements is not just about numbers. Finding insights that help us understand the nonprofit’s financial health is essential. Remember, with practice and understanding, these financial statements can provide valuable guidance for strategic decision-making and future planning.
To consider an asset available, it must generally be flexible—in this case, classified without donor restriction. Adding to the confusion, this year nonprofits went from three categories of net assets to two. This means that, on top of categorizing restricted assets, nonprofit organizations also have to report on net assets both with and without donor restrictions. There is a difference between a Statement of 5 Main Benefits of Accounting Services for Nonprofit Organizations Activities and an income statement. A nonprofit’s statement of financial position can tell you how well the organization is performing financially at a given moment in time. Generally, a healthy nonprofit will have assets that are greater than their liabilities, and their net assets will have a large surplus that can be used to achieve its future goals.
These funds may not be flexible and could not be included in a table that narrowly defines assets as “available for general expenditure,” but they are certainly spendable. Most nonprofits are likely to use additional assets throughout the coming year to accomplish their ongoing program work, even though those assets are not technically available and flexible. To communicate their story better, nonprofits should proactively decide and follow liquidity strategies throughout the year.
Some budgets are designed to be flexible budgets, while others are static budgets. Liabilities also include amounts received in advance for a future sale or for a future service to be performed. Since nonprofits do not have owners, there is no owner’s equity or stockholders’ equity and there cannot be distributions to owners.