A nonprofit's books look like a business's books at first glance — a bank account, expenses, a monthly report — but the questions they have to answer are different. Nobody asks whether a nonprofit made a profit. Board members, grantors, and the IRS ask whether money given for a specific purpose was spent on that purpose, and how much of the budget went to programs versus overhead.
Books set up like a small business's cannot answer those questions. Here is what has to be tracked differently.
Restricted and unrestricted money
Nonprofits report net assets in two categories: without donor restrictions, which the board can spend on anything within the mission, and with donor restrictions, which can only be used for a purpose or time period the donor specified. A $20,000 gift for a new van stays restricted until the van is bought. When it is, that amount is released from restriction and the spending is reported against it.
In practice, every restricted gift and grant needs to be tracked individually from the day it arrives — usually with classes or tags in the accounting software — so you can show at any point how much of each restricted fund has been spent and how much remains. Pooling everything into one income account is the most common nonprofit bookkeeping problem, and it is painful to untangle once a grantor asks for a spending report.
Grants need a closer read than donations. A grant that is only earned if you clear a barrier — raising matching funds, hitting a service milestone — is a conditional contribution, and it is not recorded as revenue until the condition is met, even if the cash arrived early.
Donor receipts and in-kind gifts
A donor cannot deduct a single contribution of $250 or more without a written acknowledgment from your organization. It should state the amount of cash, describe any non-cash property given, and say whether the donor received any goods or services in return. If a payment over $75 is partly a gift and partly a purchase — a gala dinner ticket, for example — you must give the donor a written statement of the value of what they received, since only the excess is deductible.
Donated goods are recorded as revenue at fair value, along with the matching expense or asset. General volunteer time usually is not recorded, but specialized professional services you would otherwise have paid for, such as donated legal or accounting work, generally are. Confirm with your accountant how a specific in-kind gift should be valued.
Functional expenses and the Form 990
Most tax-exempt organizations file an annual Form 990, 990-EZ, or 990-N, due by the 15th day of the fifth month after year-end — May 15 for a calendar-year organization. Which version applies depends on gross receipts and total assets. An organization that fails to file for three consecutive years automatically loses its tax-exempt status, which is a serious and entirely avoidable outcome.
The full Form 990 reports expenses by function: program services, management and general, and fundraising. If the books only record expenses by type — rent, salaries, supplies — someone has to allocate them by function after the fact. Setting up the allocation from the start, with a reasonable basis for splitting shared costs like rent and staff time, makes the return faster and easier to defend.
Keeping the books board-ready
A nonprofit board should be able to see each month what came in, what went out, how much of each restricted fund remains, and whether spending is on budget. That requires every account reconciled, every restricted gift tracked, and expenses coded consistently by program. Your CPA still prepares the 990 and any required audit or review; clean books are what make that work straightforward.
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