The different question
Commercial accounting answers whether the business made money. Nonprofit accounting answers whether the organisation used each dollar the way the donor or grantor required.
That single difference drives everything else: the chart of accounts, the reports, and why a nonprofit can hold a healthy bank balance and still be unable to pay rent.
The board conversation this prevents
A board member sees $400,000 in the bank and asks why the organisation is worried about payroll. The answer is that $340,000 of it is restricted to a program that has not started. Reporting that shows restricted and unrestricted separately makes that conversation take thirty seconds instead of a meeting.
Two classes, not many funds
Current US GAAP recognises two net asset classes: without donor restrictions and with donor restrictions. Older guidance used three, and a lot of boards and legacy charts of accounts still speak in the old language.
Within the restricted class you still track individual grants and purposes, but those are tracking dimensions rather than reporting classes. Getting this right matters because your audited statements have to present the two classes, and a chart of accounts built around the old three-way split makes that a manual exercise every year.
- Purpose restriction: the donor specified a program or use
- Time restriction: the gift is for a future period
- Both: multi-year grants commonly carry each year purpose and period
- Board designation is not a donor restriction. Designated funds stay unrestricted and the board can undesignate them.
Set the chart of accounts up once, properly
The most common nonprofit accounting problem is a chart of accounts that encodes programs as accounts. It works until you have eleven programs and four grants, at which point every report is a manual rebuild.
- Accounts describe the nature of the transaction: salaries, rent, supplies
- A class or program dimension describes which program it served
- A grant or project dimension describes which funding source paid for it
- A functional dimension separates program, management and general, and fundraising
Functional expense allocation
Nonprofits must report expenses by both nature and function, which in practice means every shared cost needs an allocation basis: the executive director salary, rent, insurance, the accounting fee.
Pick a defensible basis, document it, and apply it consistently. Square footage for occupancy, time studies or headcount for salaries. Auditors do not require a perfect basis. They require a reasonable one you actually follow, and a change you can explain.
Grant compliance is an accounting job
- Track the grant budget line by line against actual spend, not just the total
- Know each grant reporting deadline and match your close calendar to it
- Watch allowable cost rules, especially indirect cost rates on federal awards
- Recognise conditional grants when the condition is met, not when the award letter arrives
- Keep the documentation an audit or single audit will ask for as you go, not at year end
The three reports a board should see
- Statement of activities, with restricted and unrestricted shown separately
- Statement of financial position, with liquidity disclosed: how much is actually available within twelve months
- Budget versus actual by program, which is where a board can genuinely help