Accounting for non-profit organisations explained | Xero

Published Monday 30 March 2026

Table of contents

• What is non-profit accounting?
• How non-profit accounting differs from for-profit accounting
• Is your business really non-profit?
• Accounting methods for non-profits
• Financial statements for non-profits
• Setting up your non-profit accounting system
• Record all revenues
• Compliance and reporting requirements
• Choosing accounting software for your non-profit
• Make your non-profit accounting work for your mission
• FAQs on non-profit accounting

Key takeaways

• Choose accrual accounting over cash basis for your non-profit to get a clearer financial picture, track pledges before cash arrives, and meet audit and compliance requirements that most organisations face.
• Implement fund accounting to track restricted and unrestricted donations separately, which helps demonstrate to donors and regulators that you're using funds exactly as promised.
• Use the non-profit accounting formula Assets = Liabilities + Net Assets instead of owner's equity, and produce statements of financial position and activities rather than traditional balance sheets and income statements.
• Select cloud-based accounting software designed for non-profits that includes fund tracking, donor management, and compliance reporting features to simplify your financial management and support remote team collaboration.

What is non-profit accounting?

Non-profit accounting is the process of recording, tracking, and reporting financial activities for organisations that operate for a mission rather than profit. It helps charities, clubs, and other non-profit entities manage donations, grants, and expenses while meeting legal requirements.

Non-profit accounting differs from standard business accounting in several ways:

• Focus on accountability: tracks how funds are used to fulfil the organisation's mission
• Fund-based structure: separates money by purpose or donor restrictions
• Different financial statements: uses statements of financial position and activities instead of traditional balance sheets and income statements

Like any organisation, non-profits must account for money coming in and going out. Staff get paid, bills need settling, and day-to-day operations require tracking. Non-profit accounting ensures all of this happens accurately and legally.

How non-profit accounting differs from for-profit accounting

Non-profit and for-profit accounting follow different rules because they serve different purposes. Understanding these differences helps you set up the right systems from the start, especially since a lack of international standards has created inconsistent practices across 92% of countries.

Here are the key distinctions:

• Primary goal: for-profit businesses aim to generate returns for owners, while non-profits focus on fulfilling a charitable or social mission
• Ownership structure: for-profits have shareholders or owners who receive profits, while non-profits have no owners and reinvest surplus funds into the mission
• Net assets vs. equity: non-profits track net assets (the difference between what you own and what you owe) instead of owner's equity
• Revenue sources: for-profits earn revenue from sales, while non-profits typically receive donations, grants, and membership fees
• Tax treatment: qualifying non-profits are exempt from income tax on mission-related activities
• Financial statements: non-profits use a statement of financial position instead of a balance sheet, and a statement of activities instead of an income statement

These differences affect how you record transactions, categorise funds, and report to stakeholders. The sections below explain each concept in more detail.

Is your business really non-profit?

Not every organisation qualifies for non-profit status. See our guide on starting a non-profit for more details. Before setting up your accounting systems, confirm that your organisation meets the criteria.

Ask yourself these questions:

• What's your purpose? If your primary aim is providing charitable services or running a social or sports club, you likely qualify as a non-profit
• Where does your revenue come from? Non-profits typically receive income from donations, membership fees, fundraising events, grants, and investment returns
• Do similar non-profits exist? Having other non-profit organisations with a comparable structure can support your application for non-profit status

Regulations vary by location, so check your local laws for specific requirements before proceeding.

Accounting methods for non-profits

Choosing the right accounting method affects how you record transactions and report your finances. Most non-profits use accrual accounting, though smaller organisations may start with cash basis.

Accrual vs. cash basis accounting

Accrual accounting records revenue when earned and expenses when incurred, regardless of when cash changes hands. Cash basis accounting records transactions only when money is received or paid.

Here's how they compare:

• Accrual accounting: provides a more accurate picture of financial health, required for organisations with complex funding or external audits
• Cash basis accounting: simpler to manage, suitable for very small non-profits with straightforward finances

Most non-profits should use accrual accounting because it:

• matches expenses to the periods they relate to
• tracks pledges and grants before cash arrives
• meets audit and compliance requirements
• gives a clearer view of financial obligations

Non-profits also need to understand how to track funds by their intended purpose.

Understanding fund accounting

Fund accounting is a system that tracks money based on its intended purpose or donor restrictions. It's an accounting policy choice that helps non-profits demonstrate they're using funds as promised.

With fund accounting, you create separate funds to track:

• Unrestricted funds: money you can use for any purpose
• Temporarily restricted funds: donations earmarked for specific projects or time periods
• Permanently restricted funds: endowments where only the investment income can be spent

Fund accounting isn't required for all non-profits, but it's essential if you receive grants or donations with specific conditions attached.

Financial statements for non-profits

Non-profits produce different financial statements than for-profit businesses. These reports show how your organisation manages resources and fulfils its mission.

The three main financial statements are:

Statement of financial position

The statement of financial position is the non-profit equivalent of a balance sheet. It shows what your organisation owns, what it owes, and what remains.

The formula for non-profit accounting is:

Assets = Liabilities + Net Assets

This differs from for-profit accounting, which uses owner's equity instead of net assets. Net assets represent the organisation's accumulated resources available for its mission.

Net assets are typically divided into:

• Without donor restrictions: funds available for general use
• With donor restrictions: funds that must be used for specific purposes

The second key statement shows how your organisation's resources changed over time.

Statement of activities

The statement of activities replaces the income statement. It shows how net assets changed during a reporting period by following official standards that clarify the guidance for contributions received and made. See the Financial Accounting Standards Board (FASB) accounting standard updates for details. The statement tracks:

• revenue from donations, grants, and other sources
• expenses by program and administrative function
• changes in restricted and unrestricted net assets

This statement helps donors and board members see how funds were used to advance the mission.

The third statement focuses on actual cash movement.

Statement of cash flows

The statement of cash flows tracks actual cash moving in and out of your organisation. It shows:

• cash from operating activities (day-to-day operations)
• cash from investing activities (buying or selling assets)
• cash from financing activities (loans or long-term obligations)

This statement helps you understand your organisation's liquidity and ability to meet short-term obligations.

Setting up your non-profit accounting system

A well-organised accounting system helps you track funds accurately, meet compliance requirements, and demonstrate accountability to donors. Follow these steps to establish your non-profit's financial foundation.

Consider working with an accountant experienced in non-profit accounting to ensure your systems meet regulatory requirements. Learn more about what an accountant does.

Record all revenues

Non-profit organisations receive income from many sources. Each type requires proper recording to maintain accurate accounts and meet compliance requirements.

If you're using accrual accounting, record revenue when it's earned or pledged, not just when cash arrives. Here are the main revenue types to track:

• Pledges: promises to give money, which may be conditional on future events like matching donations
• Donations: contributions from street collections, postal campaigns, online giving, or direct transfers
• Volunteer time: skilled services donated to your organisation, recorded at fair market value when they meet specific criteria. The Financial Accounting Standards Board (FASB) provides specific guidance on these contributed nonfinancial assets.
• Membership dues: fees collected in exchange for access to facilities, services, or benefits
• Event income: entrance fees, ticket sales, and other revenue from fundraising events
• Investment returns: interest, dividends, or gains from shares, property, or other investments
• Grants: funding from government bodies, foundations, or private organisations for specific purposes or general operations

Track restricted and unrestricted revenue separately. Grants and donations often come with conditions that require you to use funds for specific purposes or within certain timeframes.

Compliance and reporting requirements

Non-profit organisations must meet specific legal and regulatory obligations to maintain their status and keep donors' trust. Learn how Xero supports non-profit organisations. To address global inconsistencies, a major initiative is underway to create the first internationally applicable financial reporting guidance for the non-profit sector. Learn more about making international financial reporting work for non-profit organisations. This helps organisations avoid penalties and demonstrate accountability.

Key compliance areas include:

• Annual reporting: most non-profits must file annual returns with government regulators, detailing income, expenses, and activities
• Tax filings: while non-profits are often exempt from income tax, you may still need to file informational returns
• Audit requirements: larger non-profits or those receiving significant grants may require independent financial audits
• Record retention: keep financial records, meeting minutes, and supporting documents for the period required by local regulations
• Donor reporting: provide receipts and acknowledgements to donors, and report how restricted funds were used

Compliance requirements vary by location and organisation size. Check with your local charity regulator or tax authority for specific obligations.

Staying compliant protects your non-profit status and builds confidence with donors, grantmakers, and the community you serve.

Choosing accounting software for your non-profit

The right accounting software simplifies financial management and helps you meet non-profit-specific requirements. Look for features that support fund tracking, donor management, and compliance reporting.

Features non-profits need

When evaluating accounting software, prioritise these capabilities:

• Fund accounting: track restricted and unrestricted funds separately to demonstrate proper use of donations and grants
• Donor management: record donor information and giving history to support relationship building and reporting
• Grant tracking: monitor grant requirements, spending, and reporting deadlines
• Compliance reporting: generate financial statements that meet non-profit standards and regulatory requirements
• Multi-user access: allow board members, staff, and accountants to view relevant financial information
• Integration options: connect with fundraising platforms, payment processors, and other tools your organisation uses

Where your team works also affects your software choice.

Cloud-based solutions for remote teams

Many non-profits operate with limited office space and distributed teams. Cloud-based accounting software offers several advantages:

• Access from anywhere: update records and view reports from any location with internet access
• Real-time collaboration: multiple users can work in the system simultaneously
• Automatic backups: protect your financial data without manual backup procedures
• Scalability: add users and features as your organisation grows
• Reduced IT costs: avoid maintaining servers and installing software updates

Cloud-based platforms like Xero provide these benefits while offering non-profit-friendly features and pricing.

Make your non-profit accounting work for your mission

Good accounting practices help your non-profit operate effectively and maintain the trust of donors, members, and regulators. By tracking funds accurately and meeting compliance requirements, you can focus more energy on the people and causes you serve.

Key principles to remember:

• Choose the right method: accrual accounting gives you a clearer financial picture and meets most compliance requirements
• Track funds by purpose: separate restricted and unrestricted resources to demonstrate accountability
• Produce accurate statements: regular financial reports help you make informed decisions and satisfy stakeholders
• Stay compliant: meet filing deadlines and maintain proper records to protect your non-profit status
• Use the right tools: accounting software designed for non-profits simplifies fund tracking and reporting

Xero's accounting software supports non-profit organisations with features that simplify fund tracking, reporting, and compliance. Get one month free and see how it can help your organisation make a bigger impact.

FAQs on non-profit accounting

Here are answers to common questions about non-profit accounting.

What is the best accounting method for non-profit organisations?

Accrual accounting is the standard for most non-profits, particularly those managing complex funding sources or requiring external audits. This method records revenue when earned and expenses when incurred, giving you a more accurate picture of your financial position.

What are the methods of accounting for non-profit organisations?

Non-profits can choose between cash basis and accrual accounting, and may also adopt fund accounting. Fund accounting tracks contributions by restriction level and helps demonstrate that donations are used as donors intended.

What is the formula for non-profit accounting?

The basic accounting equation for non-profits is: Assets = Liabilities + Net Assets. This replaces owner's equity with net assets, reflecting that non-profits have no owners and reinvest surplus funds into their mission.

What's the difference between restricted and unrestricted funds?

Unrestricted funds can be used for any purpose that supports your mission. Restricted funds must be spent according to donor specifications, such as for a particular program or within a certain timeframe.

Do I need special accounting software for my non-profit?

Standard accounting software can work for very small non-profits with simple finances. However, organisations receiving grants or restricted donations benefit from software with fund accounting features, donor tracking, and non-profit-specific reporting capabilities.