Non-profit accounting: How to manage your charity finances

Published Friday 5 December 2025

Table of contents

• What is non-profit accounting?
• How non-profit accounting differs from for-profit accounting
• Types of non-profit organizations
• Is your business really non-profit?
• 6 steps to get started as a non-profit
• Record all revenues
• Non-profit chart of accounts
• Think like a regular business
• Choose good accounting software to keep an eye on the numbers
• Make the most of your non-profit status
• Managing your non-profit accounting effectively
• FAQs on non-profit accounting

Key takeaways

• Implement fund accounting by separating restricted funds (money designated for specific purposes) from unrestricted funds in your chart of accounts to ensure proper tracking and compliance with donor requirements.

• Record all revenue sources including pledges, donations, volunteer time at market value, membership dues, grants, and investment income with detailed documentation to maintain transparency and meet regulatory reporting standards.

• Utilize specialized non-profit accounting software with fund accounting capabilities, donor management tools, and automated reporting features to streamline financial management and reduce manual data entry by up to 75%.

• Reinvest surplus funds back into your mission rather than distributing profits, while tracking program effectiveness to demonstrate to donors and regulators how efficiently each pound supports your charitable purpose.

What is non-profit accounting?

Mission over profit: Non-profits focus on serving their purpose rather than generating returns for owners. Revenue comes from donations, grants, membership fees, and fundraising rather than traditional sales.

Legal accountability: Non-profits must follow stricter reporting requirements to maintain their tax-exempt status, with the UK's Taxes Acts setting out 4 conditions for a charity to be recognized for tax purposes. You'll need to demonstrate how funds support your mission through detailed financial records.

Similar operations, different focus: Like any business, non-profits handle payroll, expenses, and daily operations. The key difference is tracking restricted funds (money designated for specific purposes) separately from general operating funds.

How non-profit accounting differs from for-profit accounting

While both types of accounting track money, their goals are different. For-profit accounting measures profitability for owners and shareholders. Non-profit accounting, on the other hand, focuses on accountability.

Key differences include:

• Goal: mission-driven versus profit-driven
• Reporting: non-profits often use specific reports like the Statement of Financial Position and Statement of Activities to show how resources are managed
• Income sources: non-profits handle diverse income like grants, donations and membership fees, which may have restrictions on how they can be used

Types of non-profit organizations

In the UK, non-profits come in various forms, each with its own structure and rules. The most common types include:

• Charities: These are organisations set up for charitable purposes, such as relieving poverty or advancing education. They must register with the Charity Commission if their income is over £5,000 per year.
• Social enterprises: These are businesses that trade to tackle social problems, improve communities, or help the environment. They aim to make a profit, but reinvest it back into their social mission.
• Community amateur sports clubs (CASCs): These are local sports clubs open to the whole community. They can benefit from tax reliefs similar to charities.

Is your business really non-profit?

Non-profit qualification depends on your organisation’s purpose and funding sources. Ask yourself these key questions:

Purpose and mission:

• Charitable services: Helping vulnerable populations or advancing public benefit
• Educational goals: Providing training, research, or knowledge sharing
• Community support: Running clubs, societies, or member-based organizations
• Religious activities: Supporting faith-based community services

Revenue sources:

• Donations: Individual or corporate charitable giving
• Grants: Government or foundation funding
• Membership fees: Regular payments from members for services
• Fundraising events: Activities designed to raise money for your cause
• Investment income: Returns from invested reserves (limited amounts)

6 steps to get started as a non-profit

involves six essential steps that establish legal compliance and tax benefits:

1. Recruit trustees: Find at least three responsible individuals to oversee your organisation’s governance and ensure legal compliance.
2. Define charitable purpose: Establish clear public benefit goals that qualify for charitable status under UK law.
3. Choose organization name: Select a unique name that reflects your mission and meets regulatory requirements.
4. Select legal structure: Decide between charitable incorporated organization (CIO), charitable company, or unincorporated association based on your needs.
5. Create governing document: Draft constitution or memorandum of association that outlines how your organisation operates.
6. Register with authorities: Submit your application to the Charity Commission if annual income exceeds £5,000, then apply to HMRC for tax relief recognition; note that as of March 2023, charities based in the EU, Iceland, Liechtenstein, or Norway can no longer apply for this relief.

Regional variations:Scotland and Northern Ireland have different registration processes, so check local requirements before starting.

You might need some assistance with all of this, so consider hiring an accountant to help you.

Record all revenues

Non-profit revenue tracking requires recording all income sources with specific documentation requirements:

• Pledges: Promises to donate that may have conditions attached. Record the pledge amount, donor details, and any matching requirements or deadlines.
• Donations: All charitable gifts regardless of source or method. Document donor information, amount, date, and purpose restriction (if any).
• Volunteer time: Professional services provided free of charge. Calculate and record the market value of skilled work like accounting, legal advice, or specialized consulting.
• Membership dues: Regular payments for access to services or facilities. Track member details, payment dates, and any service entitlements.
• Fundraising events: Income from ticket sales, auctions, or sponsored activities. Separate event revenue from associated expenses for accurate profit calculation.
• Investment income: Returns from invested reserves including dividends, interest, or property rental. Follow charity investment regulations for your jurisdiction.
• Grants: Funding from government bodies, foundations, or corporations. Record grant terms, reporting requirements, and any spending restrictions.

Non-profit chart of accounts

A chart of accounts is a list of all the financial accounts in your general ledger. For a non-profit, it's tailored to track funds and report on your mission. Instead of focusing on owner's equity, it includes categories for net assets, which are often split into two types:

• Without donor restrictions: Funds that can be used for any purpose to support your mission.
• With donor restrictions: Funds that must be used for a specific purpose designated by the donor.

Setting up a clear chart of accounts from the start makes reporting easier and helps you stay compliant.

Think like a regular business

When you run a non-profit, you can still aim to build a successful, well-run organisation. The more efficiently you run your organisation, the better the service you'll be able to provide to the people who need it. Here are some ideas:

Hire the right employees

A non-profit organisation doesn't technically have an owner. But it does still have people in positions of responsibility, such as the secretary or treasurer. It's important that these people fulfill their roles to the best of their abilities. Read our guide to hiring employees.

Strive to earn more than you spend

Your goal isn’t to pay profits to owners, but if you bring in more money than you spend, you can reinvest the surplus in your mission. In fact, analysis shows that the overall tax contributions from charities outweigh the tax reliefs they claim, highlighting their significant economic input.

Look for business opportunities

Network with business owners, talk to advisors and your peers. Learn about opportunities to raise money for your non-profit business or improve the services you offer.

Talk to your 'customers'

The people receiving your business's services can be considered as 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

Non-profit accounting software streamlines financial management and ensures compliance through specialized features designed for charitable organizations.

Essential software capabilities:

• Non-profit specific features: Fund accounting that separates restricted and unrestricted money, donor management tools, and charity-specific reporting templates that meet regulatory requirements.
• Comprehensive reporting: Real-time dashboards showing cash flow, donor trends, and program expenses. Generate required reports like Statement of Financial Position and Statement of Activities automatically.
• Cloud-based collaboration:Access your accounts from anywhere, allowing remote volunteers and board members to review finances. Multiple users can work simultaneously without version control issues.
• Scalable growth tools: Start with basic features and add modules for grant management, volunteer tracking, or event management as your organization expands.
• Process automation: Automatically categorize donations, send donor receipts, and reconcile bank transactions. Reduce manual data entry by 75% through smart integrations.

Non-profit advantages provide significant operational and financial benefits when properly managed:

• Simplified reporting: Reduced filing requirements for smaller charities, with exemptions from some corporate reporting obligations if annual income stays below £25,000.
• Access to funding: Eligibility for grants, charitable donations, and volunteer support that for-profit businesses cannot access.
• Reinvest surplus funds: Channel any excess revenue back into programs that advance your charitable purpose rather than distributing to owners.
• Track program effectiveness: Monitor how much of each pound goes directly to beneficiaries versus administrative costs to demonstrate efficiency to donors and regulators.
• Maintain transparency: Regular financial reporting builds trust with supporters and ensures continued access to charitable funding sources.

Managing your non-profit accounting effectively

Following best practices and carefully monitoring your finances will help you serve your community well and make a real difference. By keeping your books organised, you can provide clear reports to your board, donors, and regulators, building trust and ensuring your organisation's long-term success.

With the right tools, you can simplify your accounting and focus more on your mission. See how Xero can help you manage your non-profit's finances with confidence. Try Xero for free.

FAQs on non-profit accounting

Here are some common questions about non-profit accounting.

How do you do accounting for a non-profit?

Start by setting up a chart of accounts that tracks restricted and unrestricted funds. Record all income and expenses, create regular financial reports like the Statement of Activities, and ensure you comply with all legal reporting requirements for your type of organisation.

What accounting method do most non-profits use?

Many non-profits start with cash-basis accounting because it's simpler. However, as they grow, most switch to accrual-basis accounting. This method provides a more accurate picture of financial health by recording income and expenses when they are earned or incurred, not just when money changes hands.

What accounting system do non-profits use?

You need accounting software that can handle your specific needs, such as fund accounting, grant tracking and donor management. Cloud-based software like Xero is popular because it allows for remote collaboration and integrates with other apps to automate tasks.

Do non-profits need different financial reports?

Yes, non-profits produce specific reports that focus on accountability rather than profit, guided by standards like the Statement of Recommended Practice (SORP) for charities in the UK and Ireland. Key reports include the Statement of Financial Position (similar to a balance sheet), the Statement of Activities (showing revenue and expenses), and the Statement of Cash Flows.