Nonprofit Accounting 101: Compliance, Grants, and Best Practices

Running a nonprofit is about making an impact—but without solid financial management, even the most passionate organizations can stumble. Nonprofit accounting isn’t just about balancing the books; it’s about transparency, compliance, and stewardship of donor funds.

At Spyglass Accounting, we specialize in helping nonprofits navigate unique financial challenges—from grant tracking to IRS Form 990 preparation. In this guide, we’ll break down the essentials of nonprofit accounting, best practices, and how to avoid common pitfalls.

What Makes Nonprofit Accounting Different?

Unlike for-profit businesses, nonprofits must prioritize accountability over profitability. Here’s what sets nonprofit accounting apart:

1. Fund Accounting

Nonprofits categorize funds based on restrictions (unrestricted, temporarily restricted, permanently restricted) to ensure donor intent is honored. Example: A grant for a youth program can’t be used for office supplies.

2. Compliance-Driven Reporting

• Form 990 – Required for tax-exempt status (IRS guidelines).
• GAAP Compliance – Ensures transparency for donors and regulators.

3. Emphasis on Transparency

Donors and grantmakers demand clear financial reporting. A single error can damage trust—and funding.

Key Nonprofit Accounting Documents

1. Statement of Financial Position (Balance Sheet)

Shows assets, liabilities, and net assets at a point in time.
Example:

• Assets: Cash, grants receivable, property
• Liabilities: Accounts payable, loans
• Net Assets: Unrestricted vs. restricted funds

2. Statement of Activities (Income Statement for Nonprofits)

Tracks revenue and expenses over time. Critical for answering:

• Are we spending within budget?
• Which programs are underfunded?

3. Statement of Functional Expenses

Breaks costs into:

• Program expenses (mission-related)
• Administrative costs (overhead)
• Fundraising expenses

Pro Tip: Over 35% spent on overhead? You may need to justify ratios to donors (Jitasa’s nonprofit accounting guide).

4. Cash Flow Statement

Predicts liquidity—vital for nonprofits with seasonal funding (e.g., year-end donations).

Top Nonprofit Accounting Challenges (And Solutions)

Challenge 1: Managing Restricted Funds

Problem: Misusing restricted grants can lead to legal penalties and lost trust.
Solution:

• Use separate accounts for restricted funds.
• Implement software like QuickBooks Nonprofit to track designations.

Challenge 2: Grant Compliance

Problem: Missing reporting deadlines or misallocating funds risks grant clawbacks.
Solution:

• Assign a grant manager to track:
  • Spending deadlines
  • Documentation requirements
• Spyglass grant tracking templates ensure nothing falls through the cracks.

Challenge 3: Preparing Form 990

Problem: Errors trigger IRS audits.
Solution:

• Work with a nonprofit-savvy CPA (like Spyglass).
• Automate data collection with cloud accounting tools.

Nonprofit Accounting Best Practices

1. Adopt Nonprofit-Specific Software

• QuickBooks Nonprofit or Aplos for fund tracking.
• Expensify for receipt management (see Expensify’s guide).

2. Reconcile Monthly

Compare bank statements to books to catch fraud or errors early.

3. Train Staff on Compliance

Even volunteers should understand:

• Donation receipt rules
• Expense approval workflows

4. Outsource Complex Tasks

Example: Spyglass handles:
✔ Payroll & benefits
✔ Annual audit prep
✔ Form 990 filing

How Spyglass Accounting Supports Nonprofits

We go beyond bookkeeping to provide:
🔹 Customized Fund Accounting – Track grants, endowments, and donor restrictions.
🔹 Form 990 Preparation – Avoid penalties with error-free filing.
🔹 Financial Forecasting – Plan for sustainability with cash flow projections.

“Nonprofit bookkeeping is a nonnegotiable task—it just has to be done.” – Foundation Group

Let us handle the numbers while you focus on your mission.

Need Help With Nonprofit Accounting?

Don’t risk compliance errors or missed grants. Spyglass Accounting specializes in nonprofit financial management.

📊 Explore Our Nonprofit Services
📞 Schedule a Free Consultation

Final Thoughts

Nonprofit accounting is the backbone of transparency and trust. By implementing best practices and leveraging expert support, your organization can:

• Secure more grants
• Retain donor confidence
• Focus on impact—not spreadsheets

Ready to streamline your finances? Contact Spyglass today! 🚀