Nonprofit Accounting Explained: Net Assets, Fund Accounting & Reporting

Nonprofit accounting explained: how it works, the key concepts, and how to specialise

By Vicky Sarin — CA (ICAI), INSEAD alumnus & founder, Eduyush · Authorised AICPA & CIMA channel partner · Last updated June 2026

Nonprofit accounting follows the same double-entry foundations as any other accounting, but it answers a different question: not "did we make a profit?" but "did we use resources the way we were meant to?" That shift changes how funds are tracked, what the statements are called, and how the balance sheet's equity section works.

This guide explains the concepts that trip people up — net assets, fund accounting, cash vs accrual — what statements nonprofits actually prepare, how it differs from government accounting, the mistakes newcomers make, and the AICPA certificate path if you want to specialise.

What is nonprofit accounting?

Nonprofit accounting is the system tax-exempt organisations use to record, report and demonstrate how they steward the resources entrusted to them — donations, grants and program revenue — rather than to measure profit for owners.

It follows US GAAP under FASB ASC 958 (Not-for-Profit Entities), with rules tailored to contributions, donor restrictions and accountability to funders and the public.

What are net assets in nonprofit accounting?

Net assets are a nonprofit's equivalent of equity — assets minus liabilities — and under FASB ASC 958 they're reported in two categories: net assets without donor restrictions and net assets with donor restrictions.

This two-category model came in with FASB's ASU 2016-14 (effective for fiscal years beginning after 15 December 2017), which simplified the previous three classes. The mapping:

"With donor restrictions" covers funds a donor has earmarked for a purpose or time period (or as a permanent endowment); "without donor restrictions" is everything the organisation can use freely for its mission.

What is fund accounting?

Fund accounting is the method of separating resources into "funds" based on their purpose or restriction, so an organisation can show that money was spent the way it was intended.

In practice, a nonprofit's books are organised into distinct funds rather than one pooled set of accounts. A general operating fund holds the unrestricted money that runs the organisation day to day; restricted project or program funds hold grants and donations tied to a specific purpose; and an endowment fund holds gifts meant to be preserved, with typically only the income available to spend. Keeping these separate is what lets the organisation prove, fund by fund, that money went where it was meant to — and it's the same principle that underpins government accounting.

Do nonprofits use cash or accrual accounting?

GAAP financial statements require the accrual basis. Many small nonprofits keep day-to-day books on a cash or modified-cash basis, but audited, GAAP-compliant statements must be on accrual.

Accrual recognises revenue when earned or pledged and expenses when incurred, which is essential for showing donor restrictions and obligations accurately. If your organisation is audited or applies for major grants, accrual is effectively the standard.

What financial statements do nonprofits prepare?

Three primary GAAP statements, plus a functional view of expenses and the Form 990 tax filing.

• Statement of Financial Position — the nonprofit balance sheet (assets, liabilities, net assets).
• Statement of Activities — the nonprofit income statement (revenue, expenses, change in net assets).
• Statement of Cash Flows — sources and uses of cash.
• Functional expense analysis — expenses presented by both nature and function (program, management, fundraising), required under ASC 958.
• Form 990 — the IRS information return; not a GAAP statement, but central to nonprofit reporting and public transparency.

Nonprofit vs government accounting: what's the difference?

Both use fund accounting, but nonprofits follow FASB (ASC 958) while state and local governments follow GASB standards, with budget-driven reporting and a modified-accrual basis.

If your work is in the public sector rather than charities, that's a distinct specialism — covered by the governmental accounting path below rather than the not-for-profit certificates.

Common mistakes accountants make moving into nonprofit accounting

The errors almost always come from applying for-profit instincts to a restriction-driven model.

• Treating restricted funds as available cash. A healthy-looking balance can be largely locked to specific purposes — what matters is the unrestricted portion.
• Confusing net assets with retained earnings. Net assets are not accumulated profit; they reflect resources and the restrictions attached to them.
• Ignoring donor restrictions. Spending restricted money outside its purpose is a compliance failure, not just a bookkeeping slip.
• Treating Form 990 like a tax return. It's a public information return read by donors, grantmakers and regulators — not a profit-tax filing.
• Forgetting functional expense reporting. ASC 958 requires expenses by both nature and function (program, management, fundraising).

Nonprofit accounting career path

Nonprofit finance has its own ladder, and each rung leans on the concepts above.

The controller and CFO rungs follow the same broad progression as any finance leadership track — see how to become a CFO or financial controller — with nonprofit specialism layered on top.

How to specialise in nonprofit accounting

Learn the fundamentals, earn a foundation certificate, then advance or specialise based on your role.

1. Learn the fundamentals. Net assets, fund accounting, the nonprofit statements and Form 990 — the concepts on this page.
2. Earn a foundation certificate. The AICPA Not-for-Profit Certificate I builds the full base across accounting, reporting, tax and governance (40 CPE).
3. Advance or specialise. Move to Certificate II for intermediate depth, or target the financial-reporting or tax-compliance tracks; choose the governmental path for the public sector.

The AICPA not-for-profit certificate path

A foundation certificate, an intermediate one, and focused tracks — pick the layer your role needs.

Each carries CPE and a digital badge, and all are available through Eduyush at India, UAE and Mauritius regional pricing.

Not-for-Profit Certificate I vs II: which one?

Which certificate should you choose?

Browse everything in the Government & Nonprofit Accounting collection.

Related accounting specialisations

Frequently asked questions

Accounting standards are set by FASB (nonprofits) and GASB (government); CPE values follow the official AICPA & CIMA listings. Confirm current standards, pricing and CPE before enrolling.