A beginner's guide for nonprofit organizations navigating accounting

With an estimated 10 million+ NGOs operating worldwide, the nonprofit sector has become one of the most influential forces shaping social progress. If NGOs were a country, they would collectively represent the fifth largest economy in the world, powered by millions of donors, volunteers, and professionals who support causes ranging from healthcare access to environmental protection. Countries like the United States alone are home to over 2 million NGOs, employing around 12.8 million people, while India has more than 3.3 million, roughly one organization for every 400 people. As the sector continues to grow, with global charitable giving expected to surpass 2.5 billion donors by 2030.

Unlike profit-driven establishments, nonprofit organizations contribute to the betterment of society without the need for monetary gain. However, they still have to manage their finances well to operate effectively. Accounting comes with its own set of complexities and when you apply that to nonprofit organizations, there are an added set of rules to adhere to. Nonprofit organizations face unique financial, legal, and accountability demands especially when it comes to fund management and reporting requirements.

The goal is to equip your organization with the tools to stay accountable, maintain trust, and continue advocating for communities whose voices often go unheard. This guide offers a quick overview of the policies nonprofits are required to comply with and a list of key resources to learn more about nonprofit accounting in various geographies.

How accounting differs for nonprofit organizations

Financial statements required

Nonprofit organizations follow a different reporting structure from for-profit companies since their goal is mission impact rather than profit generation. They use a Statement of Activities rather than an Income Statement. This statement breaks down revenue and expenses into donor-restricted and non-restricted funds. Their balance sheet equivalent, called a Statement of Financial Position, outlines assets and liabilities by how soon they will be converted to cash or settled. Instead of equity or shareholder capital, nonprofits report net assets, which represent the organization’s remaining resources dedicated to its mission. They also produce fund-level reports, grant/program reports, donor reports, and regulatory filings (for example, IRS Form 990 in the US or Charities SORP reports in the UK).

Tax status

One of the defining features of nonprofits is their eligibility for tax-exempt status. In many countries, organizations that meet specific regulatory standards, typically centered on charitable, educational, scientific, or social welfare missions, can apply for exemption from income tax.

For example, in the US, churches, schools, and Red Cross chapters offer both tax-exempt status and charitable tax deductions for their donors. However, many other tax-exempt entities, including social clubs, chambers of commerce, and employee groups, do not provide donors with charitable deductions, though some contributions may qualify as business expenses. Failure to meet compliance or reporting standards can jeopardize tax-exempt status, making diligent accounting essential.

Funding and donor restrictions

Nonprofits typically use fund accounting. Here, resources are tracked by fund (for example, unrestricted operating, temporarily restricted program fund) to show stewardship of donor-imposed restrictions. On the other hand, for-profit businesses focus on consolidated profit and loss and shareholder equity.

• Restricted funds: Allocated for specific programs, projects, or time periods

• Unrestricted funds: Available for general operations

• Temporarily restricted funds: Usable after certain conditions are met

Annual reporting forms

Nonprofits are required to file specialized annual reports that differ from corporate tax returns. These reports, such as Form 990 in the United States, Charity Commission filings in the UK, CSR-related reporting in India, ACNC Annual Information Statement in Australia or equivalent filings in other countries, serve multiple purposes:

• Demonstrating financial health

• Providing public transparency

• Listing board members and governance practices

• Disclosing salaries of key employees

• Outlining program achievements

Annual filings are public documents, meaning donors, regulators, and the general public can review them. This level of transparency reinforces the need for accurate, ethical accounting.

Accountants

Accountants play a central role in ensuring that nonprofit organizations remain financially transparent, compliant, and accountable to donors, regulators, and the communities they serve. Nonprofit accounting often involves navigating complex reporting frameworks, strict donor restrictions, fund-based accounting, and ever-changing regulatory requirements. As a result, skilled accountants who specialize in the nonprofit sector are essential but difficult to find.

Many NGOs struggle to access skilled nonprofit accountants due to the niche expertise required. Having knowledgeable accountants not only improves financial accuracy but also builds greater trust with donors, enhances funding opportunities, and supports long-term organizational sustainability.

Key resources to learn more

• USA - Guidestar (for publicly available information on NPOs)

• India - ICAI's Technical Guide on Accounting for Not-for-Profit Organisations (NPOs)

• UK - ACCA's Companion Guide for Not-for-profits to the IFRS fro SMEs

• UK - The Charities Statement of Recommended Practice (SORP)

• Australia - ACNC (Australian Charities and Not-for-profits Commission)

• Global - Directory of Association of Non-profit Accountants & Finance Professionals

Conclusion

Nonprofits that invest time in establishing clear financial processes are better positioned to meet regulatory expectations, secure funding, and plan strategically for future needs. While challenges such as limited resources or access to skilled accountants can create obstacles, modern accounting systems and niche-focused professionals can help bridge these gaps efficiently.

As non-profits evolve, having systems that support these unique requirements becomes increasingly important. While no single tool fits every organization, accounting software built to handle non-profit needs, like Zoho Books, can help simplify financial management, making it easier for organizations to stay organized, compliant, and focused on their mission.

Ultimately, understanding the financial framework of nonprofits equips organizations to manage resources responsibly and stay focused on their mission. Strong accounting strengthens credibility, enables sustainable growth, and ensures every donation or grant directly supports the communities and causes that rely on the organization’s work. With a solid grounding in these basics, nonprofits can confidently navigate financial complexities and drive meaningful change.