What Is Fund Accounting? A Guide for Nonprofits
Understand the difference between fund accounting and regular bookkeeping — and why it matters for your organization's legal and financial health.
Read guide →Guides, glossaries, and answers written for the people doing this work on nights and weekends.
Understand the difference between fund accounting and regular bookkeeping — and why it matters for your organization's legal and financial health.
Read guide →A clear walkthrough of the Statement of Financial Position, Statement of Activities, and what your board and auditors are looking for in each.
Read guide →How to structure your nonprofit's chart of accounts: the account types you need, a sample structure, and naming conventions that scale.
Read guide →The distinction that trips up most new treasurers — and how to track it correctly so you're never in an awkward conversation with a donor or grantor.
Coming soon →What the IRS needs, what your accountant needs, and how to keep your books in shape all year so 990 season isn't a scramble.
Coming soon →A practical guide to migrating your nonprofit's books from Excel or Google Sheets — what to export, how to set up your new system, and what to watch out for.
Coming soon →If you've come from the business world — or even from personal finance — nonprofit accounting can feel like it's operating by a different set of rules. In a lot of ways, it is. The core difference comes down to one concept: fund accounting.
In regular bookkeeping, money is money. You track what comes in, what goes out, and what's left. In nonprofit accounting, it's not enough to know how much money you have — you need to know what each dollar is for. That's what fund accounting does. It organizes your money into distinct buckets, called funds, each with its own balance, its own transactions, and its own purpose.
Nonprofits often receive money from donors, grantors, and government sources with specific instructions about how it must be used. A foundation grant may specify that its funds can only be spent on direct program expenses — not overhead. A major donor might make a contribution restricted to a building project. An endowment might require that only the investment returns, not the principal, be spent each year.
Using those funds for anything other than their intended purpose is a breach of trust — and potentially illegal. Fund accounting gives you the structure to prevent that from happening, and to prove to any auditor, board member, or donor that you've honored their restrictions.
In a for-profit business, the chart of accounts tracks revenue and expenses by category, and the goal is to calculate profit. In fund accounting, every revenue and expense transaction is also tagged to a fund. The same expense category — say, "salaries" — might have transactions from multiple funds if employees work across programs. Your financial reports show not just what you spent, but what you spent from each fund.
This is why spreadsheet-based accounting eventually breaks down for nonprofits. You can simulate fund tracking in a spreadsheet, but as your organization grows and funds multiply, maintaining that structure manually becomes error-prone. A single misallocated entry can throw off a grant report.
Start simple. Most small nonprofits need only two or three funds to start: a general operating fund, and one fund per active restricted grant or designated reserve. You can add more as your organization grows. The important thing is to be consistent — every transaction in or out should be assigned to a fund, every time.
GoodBooks is built around this structure from day one. Every transaction is tagged to a fund, every report can be filtered by fund, and your dashboard shows fund balances at a glance — no special setup required.
One of the most common questions new nonprofit treasurers ask is: "What reports does my board actually need?" The answer is almost always the same two statements — but they're different from what for-profit businesses produce, and understanding what's in them will make your board meetings significantly less awkward.
The Statement of Financial Position (SFP) is the nonprofit equivalent of a balance sheet. It shows a snapshot of your organization's finances at a specific point in time — usually the last day of your fiscal year or the end of a quarter. It has three sections:
The fundamental equation is the same as a balance sheet: Assets = Liabilities + Net Assets. If your SFP doesn't balance, something's wrong.
The Statement of Activities (SOA) is the nonprofit equivalent of an income statement. It shows your revenues and expenses over a period of time — usually a fiscal year or quarter. Unlike a for-profit income statement, the SOA is organized by net asset class:
Auditors and sophisticated board members will pay particular attention to the functional expense breakdown. Funders sometimes have opinions about your ratio of program expenses to overhead — which is why tracking expenses by function (not just by category) matters.
Board members, even non-financial ones, typically want to know three things: Is the organization financially healthy? Are we spending money in line with the budget? Is restricted money being used appropriately? The SFP and SOA answer these questions — but only if your books are accurate and up to date.
Auditors look for the same things, with more scrutiny. They'll trace large transactions to source documents, test your fund segregation, and verify that your chart of accounts is structured correctly. Clean, consistent books make this process faster and cheaper.
Most small nonprofits also produce a budget vs. actual report — a comparison of what was budgeted for each line item vs. what was actually spent or received. This isn't a formal GAAP statement, but it's often the report boards find most useful. It answers the question: are we on track? GoodBooks generates this automatically once you've entered your annual budget.
Your chart of accounts (COA) is the backbone of your accounting system. It's a structured list of every account you use to categorize financial activity — think of it as the filing system for all of your organization's money. Before you record a single transaction, you need a COA. And building one correctly from the start will save you significant pain later.
Every account in your COA belongs to one of five categories:
Here's a starting point for a small nonprofit. You'll customize this to match your organization:
A few rules that will save you headaches as your COA grows:
Getting your COA right before you start entering data is worth the investment of an hour. Restructuring a COA after two years of transactions is a painful project. Start organized, stay organized.
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The distinction that trips up most new treasurers — and how to track it correctly so you're never in an awkward conversation with a donor or grantor. Step-by-step guidance with real examples.
Notify me when published →What the IRS needs, what your accountant needs, and how to keep your books in shape all year so 990 season isn't a scramble. Includes a prep checklist and common pitfalls to avoid.
Notify me when published →A practical guide to migrating your nonprofit's books — what to export, how to set up your new system, what to watch for, and how to handle the transition mid-year without losing your mind.
Notify me when published →The terms you'll encounter — explained without the accounting textbook language.
If yours isn't here, email us at hello@dogoodbooks.org.
Fund accounting is a method of bookkeeping that tracks money by purpose rather than by profit. Nonprofits use it because they receive money for specific purposes — a grant for youth programs, a donation restricted to building maintenance, an endowment — and are legally and ethically required to use those funds as directed. Fund accounting ensures you can always prove that restricted money was spent appropriately.
Under GAAP (FASB ASC 958), nonprofits produce three core financial statements: the Statement of Financial Position (equivalent to a balance sheet), the Statement of Activities (showing revenues and expenses over a period), and the Statement of Cash Flows. Many small nonprofits also prepare a budget vs. actual report for internal board use.
Form 990 is the annual information return filed by tax-exempt organizations with the IRS. Good accounting software makes 990 preparation faster and more accurate by keeping your books in the correct format throughout the year — so when your accountant sits down to file, the numbers are already organized the way the form requires them.
Yes, if you want accurate, GAAP-compliant financial statements. Double-entry bookkeeping records every transaction in two accounts — a debit and a credit — which keeps your books in balance and makes errors detectable. Spreadsheets don't enforce this, which is why nonprofit auditors often find errors in organizations that rely on them.
A chart of accounts is the structured list of every account your organization uses to categorize financial activity — assets, liabilities, net assets, revenue, expenses. A budget is a forward-looking plan that assigns expected dollar amounts to some of those accounts for a given period. Your chart of accounts is the permanent structure; your budget is an annual plan layered on top of it.
Create a separate fund for each restricted grant. Record the grant revenue directly to that fund when received. When you spend money covered by the grant, record those expenses against the same fund. The fund balance tells you exactly how much remains unspent. When the fund reaches zero, the grant is fully expended. Keep supporting documentation connected to each expenditure in case of a grantor audit.
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