Nonprofit accounting: basics, methods and reporting

Published Friday 6 November 2026

Table of contents

• What is nonprofit accounting?
• How nonprofit accounting differs from for-profit accounting
• Is your organisation really nonprofit?
• Accounting methods for nonprofits: cash vs accrual
• Understanding fund accounting and restricted funds
• How to set up your nonprofit accounting
• Recording nonprofit revenues and donations
• Essential financial statements for nonprofits
• Nonprofit reporting and compliance requirements in South Africa
• Choosing accounting software for your nonprofit
• Xero simplifies nonprofit accounting
• FAQs on nonprofit accounting

Key takeaways

• Use fund accounting to track restricted and unrestricted funds separately, so you spend donations exactly as donors intended
• Agree a reporting framework, such as International Financial Reporting Standards for SMEs (IFRS for SMEs), with your accounting officer or auditor
• Keep accurate records for your annual Department of Social Development (DSD), South African Revenue Service (SARS) and company filings
• Choose accounting software that tracks each fund and produces the financial statements your board and donors expect

What is nonprofit accounting?

Nonprofit accounting is how you record and report the finances of a tax-exempt organisation, such as a charity or community group. For-profit businesses aim to generate returns for owners, while nonprofits exist to serve a mission. Any surplus goes back into that mission instead of being paid out as profit.

Nonprofits still need to track money in and out and run day-to-day operations. The law requires you to account for all of it properly. This guide covers what you need to set up nonprofit accounting and keep your organisation compliant in South Africa.

How nonprofit accounting differs from for-profit accounting

Nonprofit and for-profit organisations both track money, but their accounting has different goals. For-profit accounting focuses on profitability and returns for owners, while nonprofit accounting focuses on accountability and mission success.

The main differences are the financial statements you prepare and the terminology you use. For example, nonprofits report on accumulated funds instead of owners' equity, and often track funds based on donor-imposed restrictions. This focus helps you meet legal requirements and keep your supporters' trust.

Is your organisation really nonprofit?

Nonprofit status suits organisations built around a mission. Ask yourself these questions to check whether yours fits.

• Purpose: does your organisation exist to do charitable work or serve a community need, instead of making a profit for owners?
• Revenue sources: will most of your income come from donations, membership fees, fundraising events, grants or investments, instead of product sales?
• Surplus: will you put any surplus back into your mission instead of paying it out to members or office bearers?
• Similar organisations: do nonprofits with a similar structure already exist, which can help show a precedent when you register?

Requirements depend on the legal structure you choose, so check them before you apply. You'll find the registration steps in this guide to starting a nonprofit.

Accounting methods for nonprofits: cash vs accrual

Accrual accounting gives a more accurate picture of your financial health than cash accounting. For your annual financial statements, agree a reporting framework, such as IFRS for SMEs, with your accounting officer or auditor.

Here's how the two methods differ. Understanding them helps you choose the right approach for your organisation.

• Cash accounting: records income when it arrives and expenses when you pay them. It's simpler but leaves out money owed to you and unpaid bills.
• Accrual accounting: records income when you earn it and expenses when you incur them. It gives a complete picture of your financial position.

Smaller nonprofits with simple finances may keep cash records day to day. Your annual DSD submission still includes an accounting officer's report, as the compliance section below explains. If you receive grants or need an audit, ask your accounting officer or auditor whether accrual accounting suits you.

Understanding fund accounting and restricted funds

Fund accounting tracks money based on restrictions set by donors or grantmakers. For-profit accounting looks at overall profitability, while fund accounting makes sure you use donated money exactly as intended.

Nonprofits typically manage two types of funds. Each one needs its own records.

• Unrestricted funds: money you can use for any purpose that supports your mission, such as salaries and overheads.
• Restricted funds: money set aside for specific programmes or time periods, which you track separately and spend only as the donor specified.

For example, a donor might give a soup kitchen cash on condition that it serves 500 meals to low-income families. That gift sits in a restricted fund until you've spent it on those meals.

Fund accounting matters for two main reasons. Here's why it's essential for your nonprofit.

• Donor and board confidence: donors and your board can see exactly how you use each fund.
• Compliance: misusing restricted funds can put donor relationships and your compliance standing at risk.

Your accounting software should support fund tracking. That way, you can report balances and activity for each fund separately.

How to set up your nonprofit accounting

Setting up nonprofit accounting correctly from the start helps you stay compliant and track your finances accurately. Follow these steps to build your accounting system.

1. Choose your method: pick cash or accrual accounting and agree a framework, such as IFRS for SMEs, with your accounting officer or auditor.
2. Set up your chart of accounts: create account categories that track restricted and unrestricted funds separately. This supports accurate fund accounting and donor reporting.
3. Select accounting software: choose software that tracks funds by donor restriction and produces your financial statements.
4. Create your budget: allocate funds across programmes, administration and fundraising. Use your accounting software to model different scenarios.
5. Set financial policies: document how you approve expenses and record donations. Clear policies reduce errors and support compliance.
6. Get professional support:work with an accountant who knows nonprofit requirements to review your setup and give ongoing guidance.

Recording nonprofit revenues and donations

Nonprofits receive income from many sources, and you need to record each type accurately for compliance and reporting. Here are the main revenue types to track.

• Pledges: record promises to give, noting any conditions such as matching requirements or future event triggers.
• Donations: track every donation, whatever the source or payment method, including cash, bank transfers, card and online payments.
• In-kind contributions: record donated goods and services, including skilled volunteer time, when they have a measurable value.
• Membership dues: account for fees members pay for access to facilities or member benefits.
• Event revenue: record ticket sales and other income from fundraising events.
• Investment income: track returns from investments such as shares or property, following the applicable tax rules.
• Grants: record grant funding from government and private funders, noting any restrictions on use.

Essential financial statements for nonprofits

These four main financial statements report your financial position and activities, and your reporting framework confirms which ones you need. They help you show accountability and transparency.

• Statement of financial position: it's your nonprofit's balance sheet at a set date, showing assets, liabilities and accumulated funds split into restricted and unrestricted.
• Statement of activities: reports income and expenses over a period, showing whether you ran a surplus or deficit.
• Statement of cash flows: tracks cash moving in and out from operating, investing and financing activities. It shows your actual cash position.
• Statement of functional expenses: splits expenses across programmes, management and fundraising. This voluntary extra shows donors how much goes directly to your mission.

Together, these statements give your board and donors a complete picture of your organisation's financial health. Your accounting software should produce them from your transaction data.

Nonprofit reporting and compliance requirements in South Africa

South African nonprofits must meet reporting requirements to keep their registrations and tax-exempt status. Which ones apply depends on how your organisation is registered.

• DSD annual reports: registered nonprofit organisations (NPOs) must submit annual reports to the DSD within nine months of year-end.
• SARS income tax return: all tax-exempt organisations, including public benefit organisations (PBOs), must submit an annual IT12EI return.
• IT12EI deadlines: companies have 12 months after year-end, while trusts and other entities file by the dates SARS announces each year.
• Section 18A receipts: only section 18A-approved organisations can issue receipts that let donors claim an income tax deduction.
• IT3(d) data: approved entities report all 18A receipts to SARS, or file a null declaration if they issued none, and record totals in the IT12EI.
• CIPC annual returns: nonprofit companies (NPCs) file an annual return with the Companies and Intellectual Property Commission (CIPC), plus a beneficial ownership declaration.
• Audits: NPCs that must be audited under the Companies Act file audited statements with CIPC; others file a Financial Accountability Supplement or financial statements.

Your DSD annual report combines a narrative report, annual financial statements and an accounting officer's report. It also needs to cover any changes to your constitution, address or office bearers. CIPC charges penalties for late filing, so diarise each deadline.

Staying compliant protects your organisation in two important ways. Here's why it matters.

• NPO registration: filing DSD reports on time keeps your NPO registration in good standing.
• Donor and funder confidence: transparent reporting builds trust, and a clean compliance record strengthens your grant applications.

An accounting officer or auditor who knows nonprofit rules can help you meet every deadline. They'll also check that you keep the right supporting documents.

Choosing accounting software for your nonprofit

The right accounting software makes nonprofit financial management straightforward. Look for these features when you compare options.

Fund tracking and nonprofit-specific features

Choose software that handles nonprofit needs such as restricted funds and donor records. Key capabilities include the following.

• Fund accounting support: track restricted and unrestricted funds separately.
• Donation management: record contributions and issue section 18A receipts where you're approved.
• Grant tracking: monitor grant spending against restrictions and deadlines.
• Budget tracking: compare actual spending with the budget for each programme.

Reporting and financial statements

Your software should produce the reports nonprofits need. Look for these reporting capabilities.

• Statement of financial position: see what you own and owe at any date.
• Statement of activities: track income and expenses by programme.
• Statement of cash flows: follow cash moving in and out of your organisation.
• Custom dashboards:monitor cash flow and receivables in real time.

Cloud access and collaboration

Cloud-based software lets your team work from anywhere. Here are the main benefits of cloud access.

• Remote access: update your accounts without being in the office.
• Multi-user support: give your accountant and board members the right level of access.
• Secure backups: protect your financial data with cloud storage.
• Connected apps: link donation or payroll apps to your accounts.

Automation and time savings

Built-in automation cuts manual work. These features save you time.

• Bank feeds: import bank transactions straight into your accounts.
• Bank reconciliation: match transactions with less manual checking.
• Recurring entries: set up regular donations and expenses once.
• Invoicing: create and send invoices directly from your software.

Xero simplifies nonprofit accounting

Nonprofit accounting has its own requirements, such as fund tracking and annual DSD and SARS filings. With the right setup and tools, you can manage your finances confidently and keep your focus on your mission.

Xero's cloud-based accounting software helps you track restricted and unrestricted funds and produce the reports your board and donors expect. You can also learn how to record accounting transactions so your books stay accurate from day one.

Get one month free and see how Xero helps your nonprofit stay organised and compliant.

FAQs on nonprofit accounting

Here are answers to common questions about nonprofit accounting in South Africa.

Which accounting method should a nonprofit use?

Accrual accounting suits nonprofits whose grants and pledges span more than one period, because it matches income to the period you earn it. Confirm your method and reporting framework, such as IFRS for SMEs, with your accounting officer or auditor.

What are the main financial statements nonprofits need to prepare?

Your statements may include a statement of financial position, a statement of activities and a statement of cash flows. Your accounting officer or auditor will confirm which statements and notes your chosen framework requires.

Can you use restricted funds to cover overheads?

You can when the donor or grant agreement allows it, so check the terms before you spend. If you need flexibility, ask the donor to approve a portion for running costs in writing.

Do I need specialised software for nonprofit accounting?

General accounting software works well for many nonprofits when you set up tracking for each fund and programme. Look for fund reporting and donor records that make your DSD and SARS filings easier.

How often should nonprofits prepare financial reports?

Prepare financial statements at least quarterly for board review and annually for your regulatory filings. Monthly reports help you monitor cash flow and catch issues early.