Bookkeeping vs accounting
They're related but not the same. Bookkeeping is the daily recording — entering income and expenses, categorizing transactions, reconciling the bank account every month so your records match reality. Accounting sits on top: it turns those records into financial statements, applies the right standards, and supports decisions, the budget, and compliance. Many small nonprofits handle bookkeeping in-house and bring in an accountant or CPA periodically for the higher-level work.
Whoever does it, the non-negotiable is a monthly bank reconciliation. If your books don't tie out to the bank statement, every report built on them is suspect.
Fund accounting and restricted funds
Nonprofits don't treat all money as one pool. Fund accounting tracks money by purpose and donor restriction so you can prove that a gift given for a specific program was spent on that program. The two broad buckets are:
| Net asset class | What it means |
|---|---|
| Without donor restrictions | Unrestricted money you can use for any mission purpose — the most flexible and valuable money you have. |
| With donor restrictions | Gifts a donor designated for a specific program, project, or time period. You must track and spend them only as directed. |
Mismanaging restricted funds — spending a restricted gift on general operations — is one of the fastest ways to lose donor trust and fail an audit. This is also why unrestricted income is so prized: it's the only money that can cover overhead, reserves, and emergencies.
The financial statements that matter
Three statements tell you almost everything about financial health. You don't need to prepare them by hand, but you should be able to read them.
- Statement of Activities — the nonprofit income statement. Revenue minus expenses over a period, showing whether you ran a surplus or deficit and how money split across program, admin and fundraising.
- Statement of Financial Position — the nonprofit balance sheet. Assets minus liabilities equals net assets, split into restricted and unrestricted. This is where reserves show up.
- Statement of Cash Flows — how cash actually moved, which can differ sharply from the surplus on paper.
These same numbers flow into your annual Form 990, the public return that funders and donors read to judge your health.
Internal controls
Internal controls are simple rules that make fraud and error hard — and they matter most at small organizations, where one trusted person often touches everything. The core principle is separation of duties: the person who writes checks shouldn't also reconcile the bank account.
Baseline controls for a small nonprofit
- Two signatures (or board sign-off) on payments above a set threshold
- The person reconciling the bank account isn't the one writing checks
- A board member or treasurer reviews monthly statements
- Documented approval for new vendors and reimbursements
- Restricted funds tracked separately and reviewed regularly
Audits, reviews and compilations
An independent audit is the highest level of assurance — and the most expensive. Lighter options exist: a review offers limited assurance, and a compilation simply presents your numbers in proper form. Which (if any) you need depends on your state, your revenue size, and your funders' requirements. As of 2026, verify your specific thresholds and grant requirements with a professional — many states set audit triggers by revenue, and some grants require one regardless of size. Build the cost into your budget if it applies.
Grow your unrestricted net assets
Restricted grants can't cover overhead, controls, or an audit — only unrestricted money can. Good Circles builds that base: supporters pick your cause once, then a share of their everyday local spending funds you automatically — about $72 per active supporter per year (≈ $36,000/year from 500 supporters), recurring and unrestricted, free to join. It lands squarely in "net assets without donor restrictions," exactly where a healthy organization needs room.
Claim a Founding Nonprofit spot →Sources & tools
Free first
- National Council of Nonprofits — Administration & Financial Management — Plain-language hub covering internal controls, financial policies, audits, and the core financial-management practices every nonprofit needs.
- Propel Nonprofits — Nonprofit Finance: 12 Golden Rules — Concise, expert checklist of the foundational financial-health principles for nonprofit staff and boards.
- Propel Nonprofits — Financial Policy Guidelines and Example — Free template and guidance for writing the financial policies that define roles, authority, and controls.
- National Council of Nonprofits — Financial Literacy for Nonprofit Boards — Explains the financial statements and ratios board members must understand to meet their fiduciary duty.
- IRS — Compliance Guide for 501(c)(3) Public Charities (Pub 4221-PC) — Official IRS guide to recordkeeping, substantiation, and the filing obligations underpinning sound nonprofit finances.
Paid — optional labor-savers
- QuickBooks Online (nonprofit edition via TechSoup) — Widely used accounting software with fund/class tracking and nonprofit reporting; discounted through TechSoup. Worth it when Worth it when spreadsheets no longer give you reliable fund tracking, grant reporting, or audit-ready books.
- Gusto — Payroll & Benefits — Automated payroll, tax filings, and benefits administration with a nonprofit discount. Worth it when Worth it once you have paid staff and want payroll-tax compliance handled automatically instead of manually.
Last verified 2026-06-16. Figures and rules change — verify at the source before you act.
FAQ
What is the difference between bookkeeping and accounting?
Bookkeeping is the day-to-day recording of transactions — entering income and expenses, reconciling the bank account. Accounting sits on top: it interprets those records into financial statements, ensures the right standards are followed, and supports decisions and compliance.
What is fund accounting?
Fund accounting is the nonprofit practice of tracking money by purpose and donor restriction rather than as one pool. It lets you show that restricted gifts were spent only on their intended purpose, which is essential for donor trust and audits.
Does a small nonprofit need an audit?
Not always. Audit requirements depend on your state, your funders, and your revenue size, and a review or compilation is a lighter alternative. As of 2026, confirm your specific thresholds with your accountant and check grant agreements — verify requirements with a professional.