Accounting for not-for-profit organisations: Simple guide to get started

Published Tuesday 23 December 2025

Table of contents

• Is your business really nonprofit?
• Nonprofit financial statements explained
• 6 steps to get started as a nonprofit
• Record all revenues
• Tips for nonprofit success
• Choose good accounting software to keep an eye on the numbers
• Simplify your nonprofit accounting with Xero
• FAQs on nonprofit accounting

Key takeaways

• Implement fund accounting systems that separate restricted and unrestricted donations to maintain donor transparency and meet regulatory compliance requirements.

• Record all revenue sources including pledges, donations, volunteer time, membership dues, special events, investments, and grants with proper categorisation for complete financial accountability.

• Choose nonprofit-specific accounting software that handles donor restrictions, grant tracking, and compliance reporting rather than standard business software that lacks these essential capabilities.

• Apply business principles like hiring qualified staff, maintaining financial surplus for mission reinvestment, and focusing on operational efficiency to maximise your charitable impact.

Is your business really nonprofit?

Nonprofit eligibility depends on your organisation's purpose and funding structure. Your business qualifies if it serves a charitable, educational, religious, or community benefit purpose—such as being one of the ATO's eligible health organisations, cultural, or sporting groups—rather than generating profit for owners.

Ask yourself these key questions:

• clarify your motive – are you setting up to provide charitable services or manage a social or sports club?
• identify where revenue will come from – for example, donations, membership fees, fundraising events, grants or investment income
• check whether there are similar nonprofits – this can help when you apply for nonprofit status

The regulations vary depending on where you set up your business, so check local laws for guidance.

Nonprofit financial statements explained

Unlike for-profit businesses, nonprofits have a unique set of financial reports designed to provide transparency about their operations, with standards continually evolving—for example, the AASB’s Tier 3 standard for private sector NFP entities is expected in mid-2026. The four main statements you'll need to know are:

• Statement of financial position: similar to a balance sheet, showing your assets, liabilities and net assets at a point in time
• Statement of activities: like an income statement, showing revenue and expenses over a period, and separating funds with and without donor restrictions
• Statement of cash flows: showing how cash moves through operating, investing and financing activities so you can see your liquidity
• Statement of functional expenses: breaking down costs into program services, administration and fundraising to show how much you spend on your mission versus overhead

6 steps to get started as a nonprofit

Setting up nonprofit accounting requires completing six essential legal and financial steps that establish your tax-exempt status and operational framework:

1. Incorporate your business
2. Apply for tax exemptions
3. Create a business plan
4. Plan your fundraising
5. Look into financing
6. Structure your outgoings

1. Incorporate your business: File paperwork with government agencies to establish legal nonprofit status and avoid tax penalties.

2. Apply for tax exemptions: Secure tax-exempt status early to maximise benefits. Remember that employees still pay personal income tax.

3. Create a business plan: Use nonprofit accounting software to model different financial scenarios and identify the most sustainable approach.

4. Plan your fundraising: Develop strategies for generating revenue through donations, grants, and fundraising events since you won't have traditional product sales.

5. Look into financing: Research government and private sector grants available to nonprofits in your field.

6. Structure your outgoings: Budget carefully to ensure expenses don't exceed income, using accounting software to track spending against your charitable mission.

Record all revenues

Revenue tracking is crucial for nonprofits because donors and regulators require complete transparency about how funds are received and used. Every income source must be properly recorded and categorised:

• Pledges: A pledge is a promise to give money. Some pledges might be conditional on a future event (such as the same amount being matched by another donor), so record these carefully.
• Donations: These might come as a result of street collections, postal campaigns, cold-calling, web advertising or email marketing. All donations must be recorded, whether cash, cheque, money transfer or internet payment.
• Volunteer time: Time is money, and must be accounted for as such. That's especially true if it adds value to your organisation, or if the person concerned has a special skill such as bookkeeping.
• Membership dues: These are collected by social clubs and societies in return for access to facilities or services.
• Special events: If you collect entrance fees for a fundraiser or other event, this is revenue to be recorded.
• Investments: Larger non-profit organisations might buy investments such as shares or land. There are rules about this, so check your tax office for details.
• Grants and other lump sums: There may be grants available for non-profit businesses, from central and local government and also from the private sector. All the money you receive in this way must be recorded in your accounts.

Tips for nonprofit success

Nonprofit success means maximising your impact while maintaining financial sustainability. Efficient operations allow you to serve more people and achieve greater mission impact with the same resources. Apply these business principles:

Hire the right employees

Nonprofit governance relies on board members and key staff who are accountable to donors and regulators rather than private owners. Hire people who understand nonprofit compliance requirements and can maintain the financial transparency donors expect.

Strive to earn more than you spend

Financial surplus in nonprofits must be reinvested in your charitable mission rather than distributed to owners; under ASIC rules, for instance, companies limited by guarantee registered after June 2010 cannot pay dividends to members.

Look for business opportunities

Network with business owners, talk to advisers and your peers. Look for opportunities to raise money for your nonprofit or improve the services you offer.

Talk to your 'customers'

The people who use your services are your customers. Whether it's the members of the club you run or the recipients of your charitable services, talk to them. Find out what they really need from you, then tailor your organisation to match.

Choose good accounting software to keep an eye on the numbers

Nonprofit accounting software must handle donor restrictions, grant reporting, and tax-exempt compliance requirements that standard business software often can't manage, such as the ASIC rule that companies limited by guarantee with revenue of $1 million or more must have their report audited. Look for these essential features:

Ability to handle nonprofit organisations

Nonprofit-specific features include fund accounting, donor management, grant tracking, and compliance reporting. Standard business software often lacks these capabilities, making it difficult to manage restricted donations or generate required regulatory reports.

Full reporting

You might want to track accounts receivable, cash flow, and monthly income and spending trends. High-quality accounting software lets you see this on a clear dashboard so you can understand your numbers at a glance.

Collaborate from anywhere, at any time

Remote access capabilities allow nonprofit staff and volunteers to update financial records from anywhere, which is essential when operating on limited budgets without permanent office space. Cloud-based systems also ensure board members can access financial reports for governance oversight.

Tools for growth

Your business might stay small, or it might grow as you reinvest revenue to help people. Choose non-profit accounting software that can be scaled up for extra users, and extended with add-on apps to handle new features that you might need.

Automate those manual time-consuming tasks

If you're running a non-profit business in your spare time, you'll want software that can handle all the important tasks for you – in one place. That way you'll get more done in less time.

Simplify your nonprofit accounting with the right tools

Managing your nonprofit's finances shouldn't take time away from your mission. With the right tools, you can automate tasks, track funds with clarity, and generate the reports you need to maintain compliance and build trust with your supporters. Smart accounting software gives you the confidence to make better decisions and focus on what truly matters.

Ready to spend less time on your books and more time making a difference? Try Xero for free.

FAQs on nonprofit accounting

Here are answers to common questions about nonprofit accounting.

What accounting method do most nonprofits use?

Many small nonprofits start with cash accounting because it's simple – you record income and expenses when money actually changes hands. However, as an organisation grows or applies for grants, it often moves to accrual accounting. This method records transactions when they're earned or incurred, giving a more accurate picture of financial health.

What are the four basic financial statements for a nonprofit?

The four core financial statements are the Statement of Financial Position, the Statement of Activities, the Statement of Cash Flows, and the Statement of Functional Expenses. Together, they provide a comprehensive view of a nonprofit's financial standing and operational efficiency.