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Financial accounting and the IRS information return are related but distinct: the books are the organization’s ongoing record; Form 990, Form 990-EZ, or Form 990-N is a federal filing route determined by the organization’s facts and applicable exceptions. This guide covers U.S. organizations generally. It is not individualized accounting, tax, legal, or audit advice.
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What does nonprofit accounting involve?
Nonprofit accounting is the process of recording and organizing financial activity so the organization can understand its resources, meet reporting obligations, and demonstrate how it used funds. It includes more than preparing a tax return. A sound process connects source documents and transaction records to reconciled books, financial statements, and the organization’s applicable federal and state reporting.
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Repair common Windows errors and clear accumulated junk for a smoother, more stable PC - no reinstall needed.Free scan · no reinstallThe accounting system should let staff and oversight bodies answer practical questions: What money came in? Was a gift restricted by its donor? What has been spent on programs versus management or fundraising? What remains available, and what obligations are outstanding? The answers depend on consistent records, sensible account categories, and review—not on nonprofit status alone.
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What accounting records should a nonprofit keep?
Keep source documents that substantiate transactions, such as bank and payment-platform statements, receipts, invoices, grant agreements, donor correspondence, payroll records, and approval documentation. Retain records in a way that lets someone trace a reported amount back to the underlying activity.
- Set up a usable chart of accounts. Create consistent categories for revenue, expenses, assets, and liabilities. Include tracking dimensions that help distinguish programs and supporting functions without making routine entry impractical.
- Record transactions consistently. Enter deposits, disbursements, payroll, reimbursements, and other activity with dates, descriptions, payees or sources, and supporting documentation.
- Document gifts and grants. Preserve the donor or grantor’s terms, including restrictions, reporting requirements, and any conditions affecting when or how funds may be used.
- Reconcile accounts. Compare accounting records with bank, credit-card, payroll, and payment-platform statements regularly; investigate and resolve differences rather than carrying unexplained balances forward.
- Track expenses by program and function. Use a consistent allocation approach for costs shared across programs, management, or fundraising, and keep support for the method used.
- Review financial reports. Have an appropriate staff member or board-level reviewer examine reconciliations, budgets, unusual transactions, and financial statements on a regular schedule.
These are practical bookkeeping steps, not a software prescription or a claim that the IRS requires a particular setup. The system should be proportionate to the organization’s size and complexity while still supporting reliable reporting and oversight.
What is the difference between restricted and unrestricted funds?
Under FASB Accounting Standards Codification (ASC) 958, net assets are reported in two classes: with donor restrictions and without donor restrictions. The Financial Accounting Standards Board describes its Codification as “the single official source of authoritative, nongovernmental U.S. generally accepted accounting principles” in its Standards resource.
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- Purpose restriction: A donor gives money to be used for a named program. The organization should track the gift and its use so it can show whether the donor’s purpose has been met.
- Time restriction: A donor makes a gift available only after a specified future date. The timing term affects when the organization may treat the funds as available for the specified use.
- Endowment restriction: A donor may require preservation of principal, with only amounts permitted under the gift terms and applicable law available for spending. Endowment reporting can be affected by state law, including the Uniform Prudent Management of Institutional Funds Act (UPMIFA).
The IRS’s 2025 Form 990 instructions explain that donor restrictions may require resources to be used after a specified date, for a specified purpose, or both. A board can also designate funds without donor restrictions for a reserve or another internal purpose. That board action does not, by itself, create a donor restriction or move the funds into the “with donor restrictions” class.
ASC 958 provides external financial-statement standards for certain nonprofit organizations; the IRS does not require use of ASC 958 for Form 990. A return prepared using its terminology and presentation is acceptable, but applicable state rules and other reporting obligations may differ.
What accounting method should a nonprofit use?
There is no universally correct choice between cash and accrual accounting for every nonprofit. Understand the method used for the organization’s books, apply it consistently, and check whether grants, audits, state rules, or other reporting obligations impose additional requirements.
The IRS generally expects a Form 990 filer to use the accounting method regularly used to keep its books and records, subject to the form instructions and applicable rules. The IRS also notes that tax-exempt organizations may adopt methods for certain tax items. If the presentation in the books differs from the federal return or a state filing, keep a clear reconciliation showing the adjustments and their basis.
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State and grant requirements can matter as much as the federal return: the IRS instructions note that many states require accrual reporting. Choose and maintain a method with the organization’s full reporting picture in mind, rather than assuming that a federal filing threshold settles the question.
Does every nonprofit have to file Form 990?
Many organizations exempt under section 501(a) must file an annual federal return or notice, but the filing route depends on gross receipts, year-end assets, organization type, and exceptions. A nonprofit label or an assumption that a small organization is exempt from filing is not enough to determine the obligation.
The following general thresholds come from the IRS 2025 Instructions for Form 990. They are specific to those instructions and subject to exceptions; check the instructions for the tax year being filed.
| General situation in the 2025 instructions | Potential federal filing route |
|---|---|
| Gross receipts of at least $200,000, or year-end assets of at least $500,000 | Generally, Form 990 is required, subject to exceptions. |
| Gross receipts below $200,000 and year-end assets below $500,000 | An eligible organization may choose Form 990-EZ, subject to exceptions. |
| Normally at or below $50,000 in gross receipts | An eligible organization that does not file a return may generally submit Form 990-N, subject to exceptions. |
These are not universal exemptions or a substitute for checking eligibility. Special organization categories, filing exceptions, and other circumstances can change the required route. Use the IRS instructions and forms for the applicable year to decide what the organization must file.
What does Form 990 report, and who can see it?
Form 990 is an annual information return, not the organization’s bookkeeping system. It reports information about exempt and other activities, finances, governance, compliance, and certain compensation. Required schedules vary with the organization’s type and activities; use the applicable form instructions to identify them.
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The completed return is generally available for public inspection. Review entries and attachments carefully before filing, and do not include Social Security numbers in public filing materials. Financial accounting supports the return, but the return’s categories and questions do not replace the underlying records.
What state and local requirements should a nonprofit check?
A federal filing alone may not satisfy state charity registration, financial reporting, or other local obligations. State and local rules can call for supplementary statements, audit reports, different deadlines, or accrual-basis reporting. Requirements vary by jurisdiction and may also depend on the organization’s activities, size, grants, or audit status.
- Check the charity regulator and tax agency for every state or locality where the organization operates, solicits contributions, or otherwise has a filing obligation.
- Review grant agreements, loan terms, and the organization’s audit requirements for additional accounting or reporting conditions.
- Confirm whether state rules prescribe financial-statement standards or audit-and-accounting guidance. The IRS 2025 instructions reference the 2018 edition of the AICPA Audit and Accounting Guide, Not-for-Profit Entities, for some state requirements; verify the applicable rule and current guidance rather than assuming that reference governs every organization.
- Maintain a reconciliation when federal and state reporting presentations differ, and track each jurisdiction’s deadline separately.
How should a nonprofit turn its books into a dependable reporting process?
Build a recurring close-and-review routine around the organization’s actual filing calendar. Assign responsibility for transaction entry, reconciliations, review, and approval; keep documentation accessible; and investigate errors while the relevant records are easy to retrieve. Financial statements should help leadership and the board understand financial position and activity, while the underlying records should support the federal return, state filings, and grant reporting as applicable.
For any filing year, verify thresholds and exceptions against the current IRS forms and instructions, then check state-specific regulator guidance and the organization’s own grant and audit obligations. A well-maintained set of books makes that compliance work more traceable; it does not by itself determine which filings are required.
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