Sign inPreview my state
Menu

Nonprofit audit guide

What is nonprofit accounting?

What nonprofit accounting is: the two net asset classes, functional expense reporting, support services, and how the rules connect to the audit and Form 990.

  • Updated 2026-09-20
  • 4 official sources
  • 4 questions answered

22,398 nonprofit single audits were filed for audit year 2024.

6,728 audit firms observed in FAC filings, as of 2026-11-06.

Data as of 2026-09-20

In short: Nonprofit accounting is standard accrual accounting with two additions: net assets are split by donor restriction rather than shown as equity, and expenses are reported by function as well as by nature (FASB ASC 958). Both show up directly in the audit and on Form 990.

What is net assets in nonprofit accounting?

Net assets is what a for-profit would call equity: assets minus liabilities. The not-for-profit reporting standard requires them to be presented in two classes — net assets without donor restrictions and net assets with donor restrictions (FASB ASC 958). When a restriction is satisfied, the amount is released from restriction and moves between the classes, which is why the statement of activities has a release line rather than simply recognising the revenue twice.

Two classes
ClassWhat it holds
Without donor restrictionsAmounts the board may use for any purpose, including board-designated funds
With donor restrictionsAmounts a donor limited by purpose or by time, including endowments

Source: FASB Accounting Standards Codification · Last verified: 2026-09-20

  • Net assets

    Split by donor restriction rather than shown as equity.

  • Functional expenses

    Reported by function as well as by nature (FASB ASC 958).

  • It reaches the audit

    Both appear directly in the audited financial statements.

What are support services in nonprofit accounting?

Support services are the functions that keep the organization running rather than delivering its mission: management and general, and fundraising. Expenses are reported by function — program services and support services — and the statement of functional expenses shows how each natural expense such as salaries or rent is allocated across them (FASB ASC 958). Form 990 asks for the same split (IRS).

Allocation is where auditors spend time, because the basis has to be documented and applied consistently — and because federal awards pick up allocated costs.

Source: FASB Accounting Standards Codification · IRS, About Form 990 · Last verified: 2026-09-20

How does nonprofit accounting differ from for-profit?

The practical differences
TopicFor-profitNonprofit
Bottom lineNet incomeChange in net assets
Equity sectionOwners' equityNet assets, in two donor-restriction classes
Expense presentationBy nature or functionBy function and by nature, with a functional expense statement
RevenueSalesContributions, grants, program fees, membership, investment income
Annual filingCorporate tax returnForm 990 information return

Source: FASB Accounting Standards Codification · IRS, About Form 990 · Last verified: 2026-09-20

Directly. Donor restrictions and their release are a standing audit area; functional expense allocation feeds both the financial statements and the allowability of costs charged to federal awards; and the schedule of expenditures of federal awards is built from the same grant coding (2 CFR 200.510(b)). Organizations that keep restrictions and allocations straight through the year have shorter audits — the list is in our audit checklist.

Source: 2 CFR 200.510 · 2 CFR 200.514 · Last verified: 2026-09-20

Questions and answers

What is nonprofit accounting?

Accrual accounting with two differences: net assets are presented by donor restriction, and expenses are reported by function as well as by nature.

What is net assets in nonprofit accounting?

Assets minus liabilities, presented in two classes — with donor restrictions and without donor restrictions.

What are support services in nonprofit accounting?

Management and general plus fundraising: the functions that support the mission rather than deliver it, shown separately from program services.

How do you do accounting for nonprofits day to day?

Code every transaction to a program, a function and a funding source; track donor restrictions and releases; reconcile monthly; and keep grant expenditures coded by Assistance Listing number if you receive federal money.

Need a firm that knows fund accounting?

Start here

This is public-record information, not accounting or legal advice.

View all guides