Nonprofit Bookkeeping: Fund Accounting, Grants & Form 990

Nonprofit bookkeeping answers a different question than for-profit bookkeeping. A business asks “did we make money?” A nonprofit asks “did we use every dollar the way we said we would?” That shift — from profit to accountability — changes how the books are structured, how expenses are reported, and which statements you produce.

This guide covers the essentials of nonprofit bookkeeping — fund accounting, restricted vs unrestricted funds, functional expenses, grants, and Form 990 — whether you keep the books for an organization or serve nonprofits as a bookkeeper.

Why nonprofit bookkeeping is different

• Fund accounting. Money is tracked by purpose and restriction, not just by account.
• Donor restrictions matter. You must be able to prove restricted gifts were spent as intended.
• Expenses are reported by function, not only by type.
• Different statements. Nonprofits produce a statement of activities and statement of financial position, not a P&L and balance sheet.
• Compliance is public. The annual Form 990 is publicly available, so accuracy affects donor trust.

Fund accounting and net asset classes

Fund accounting groups money by its intended use. Under current standards, net assets fall into two classes:

• Without donor restrictions — general funds the board can direct to any purpose.
• With donor restrictions — gifts a donor designated for a specific program, project, or time period.

Your bookkeeping must keep these separate so you can show, at any time, how much restricted money remains and what it’s earmarked for. In QuickBooks Online or Xero this is typically done with classes or locations representing funds or programs.

Releasing restricted funds

When you spend restricted money on its intended purpose (or the time restriction passes), you release it — moving it from “with donor restrictions” to “without donor restrictions.” Recording these releases correctly is one of the most important and most commonly botched parts of nonprofit bookkeeping. Track each restricted grant or gift from receipt through to full release.

Functional expense allocation

Nonprofits report expenses by function:

• Program services — the mission work itself
• Management and administration — the cost of running the organization
• Fundraising — the cost of raising money

Shared costs like rent, utilities, and staff salaries are allocated across these categories using a reasonable, consistent method (for example, by headcount or square footage). The result is the statement of functional expenses, which funders scrutinize and the Form 990 requires. Donors often look at the ratio of program to overhead spending, so accuracy here directly affects fundraising.

Grant tracking

Restricted grants come with strings: a budget, allowable costs, and reporting deadlines. Good nonprofit bookkeeping tracks each grant as its own fund so you can:

• Report spending against the grant budget
• Prove costs were allowable and within the grant period
• Produce the financial reports funders require

Missing a grant report or overspending a category can jeopardize future funding, so this tracking is mission-critical, not just tidy.

In-kind donations and board reporting

• In-kind donations — Donated goods and services are recorded at fair value as both revenue and a corresponding expense or asset. Skipping them understates the true scale of the organization.
• Board reporting — Boards and finance committees expect regular, readable reports: budget vs actual by program, cash position, and restricted fund balances. Clean books make these routine.

Form 990 and compliance

Most tax-exempt organizations must file an annual Form 990 (or 990-EZ / 990-N depending on size) with the IRS. It pulls directly from functional expenses and program data, so if your bookkeeping tracks funds and functions all year, 990 season is calm rather than chaotic.

Software for nonprofit bookkeeping

• Core ledger: QuickBooks Online (with classes for funds) or Xero (with tracking categories)
• Nonprofit-specific: Aplos or Sage Intacct for fund accounting at larger organizations
• Donor management: a dedicated CRM (donations feed the books but are managed separately)
• Receipts/docs: Dext or Hubdoc — see free tools for bookkeepers and accountants

Pricing nonprofit bookkeeping

Fund accounting, functional expense allocation, and grant reporting take more time than standard bookkeeping, and board-ready reporting is part of the deliverable. Price on the number of funds and grants and the reporting cadence. See how to price bookkeeping services for benchmarks.

Frequently asked questions

How is nonprofit bookkeeping different from for-profit?

Nonprofits use fund accounting to show accountability rather than profit. Money is tracked by donor restriction (with or without restrictions), expenses are reported by function (program, administrative, fundraising), and the financial statements use different names — statement of activities and statement of financial position instead of income statement and balance sheet.

What are restricted and unrestricted funds?

Funds without donor restrictions can be used for any purpose. Funds with donor restrictions must be spent on a specific program or time period the donor specified. Nonprofit bookkeeping must track these separately so the organization can prove restricted money was used as intended.

What is functional expense allocation?

Nonprofits report expenses by their function — program services, management and administration, and fundraising — not just by type. Shared costs like rent and salaries are allocated across these categories, and the result appears in the statement of functional expenses, which funders and the IRS Form 990 rely on.

Do nonprofits have to file a Form 990?

Most tax-exempt organizations must file an annual Form 990, 990-EZ, or 990-N with the IRS depending on their size. Clean fund accounting and functional expense records throughout the year make 990 preparation straightforward instead of a scramble.

Related guides

• Choosing a profitable accounting firm niche
• How to start a bookkeeping business
• Other industry guides: construction, ecommerce, real estate, restaurant, and law firm bookkeeping.