Nonprofit Accounting Services

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1. ObservedJul 11, 2026Conversation3 turnsPlacementAfter turn 23 turns · After turn 2Replay chat
   Observed conversationJul 11, 2026 · interface recreation

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   I just volunteered to take over as the treasurer for a local animal rescue non-profit. The previous treasurer left a mess, and I am trying to make sense of the financial statements. They received a massive $50,000 grant last month, but the donor explicitly stated it can only be used for building a new outdoor play area. How do I properly record and track these restricted funds in our accounting system so we don't accidentally spend it on general operating expenses?

   The key idea is to treat the grant as donor-restricted funds, not as part of your general operating cash—even though the money is sitting in the same bank account (unless you choose to separate it physically).

   Here's a practical approach that many nonprofits use.

   1. Record the grant as donor-restricted revenue

   When you receive the money:

   • Debit: Cash $50,000
   • Credit: Grant Revenue – With Donor Restrictions (or similarly named account) $50,000

   The exact account names depend on your accounting software, but the important distinction is that the revenue is classified as with donor restrictions because the donor limited its use to the outdoor play area.

   2. Set up a separate tracking category

   Most nonprofit accounting systems allow you to track restrictions using one or more of:

   • Fund
   • Class
   • Project
   • Program
   • Grant

   Create something like:

   Outdoor Play Area Grant

   Then tag every related expense to that project.

   For example:

   Expense	Amount	Project
   Site preparation	$8,000	Outdoor Play Area Grant
   Playground equipment	$22,000	Outdoor Play Area Grant
   Fencing	$5,500	Outdoor Play Area Grant

   This gives you a running balance of what has been spent.

   3. Release the restriction as money is spent

   Under U.S. nonprofit accounting (ASC 958), restrictions are generally released when the nonprofit incurs qualifying expenses.

   Suppose you spend $8,000 on site preparation.

   You would:

   1. Record the expense normally.
   2. Record a release from restriction:

   • Debit: Net Assets with Donor Restrictions $8,000
   • Credit: Net Assets Without Donor Restrictions $8,000

   This doesn't move cash. It simply reflects that $8,000 of the donor's restriction has now been satisfied.

   4. Monitor the remaining restricted balance

   A simple schedule can prevent mistakes.

   Description	Amount
   Grant received	$50,000
   Expenses charged	($8,000)
   Remaining restricted funds	$42,000

   Review this schedule each month.

   5. Prevent accidental spending

   Some practical internal controls:

   • Create a dedicated project or fund code for the grant.
   • Require that every invoice charged to the grant references the project.
   • Have the board review a restricted-funds report monthly.
   • Never pay unrelated bills from the grant's project code.

   Some organizations also keep restricted grants in a separate savings account. This isn't required by accounting standards unless the grant agreement requires it, but it can reduce the chance of accidentally using the cash for general operations.

   6. Keep the grant documentation

   Maintain a folder containing:

   • The grant agreement
   • The donor's restriction language
   • Approved project budget
   • Copies of all invoices paid from the grant
   • Any required reports to the donor

   If you're ever audited or asked to report back to the donor, this documentation is invaluable.

   Example

   You receive $50,000 in April.

   In May you spend:

   • $12,000 on playground equipment
   • $3,000 on excavation

   Your tracking would show:

   • Original restricted grant: $50,000
   • Released through qualifying expenses: $15,000
   • Remaining donor restriction: $35,000

   Although your bank account may contain the full remaining cash alongside other funds, your accounting records clearly show that $35,000 is still legally and ethically restricted to the outdoor play area.

   Because you've inherited disorganized records, it would also be worthwhile to reconcile all restricted grants currently on the books. Create a spreadsheet listing each grant, its original amount, purpose, expenditures to date, and remaining restricted balance. This "grant rollforward" often becomes the single most useful document for untangling legacy nonprofit finances and verifying that the financial statements accurately reflect outstanding donor restrictions.

   

   JJitasaAd

   Nonprofit Accounting ServicesBookkeeping, accounting, controller, and CFO services exclusively for nonprofits.

   When we present our financials to the board of directors next month, they want to see a clear breakdown of how much money is going directly to our programs versus administrative and fundraising costs. What is the standard way to allocate shared expenses, like our facility rent and utility bills, across these different functional categories?

   For nonprofits, the standard approach is functional expense allocation. Instead of assigning every overhead cost entirely to "administration," you allocate shared costs across the functions that actually benefit from them, using a reasonable, consistent, and well-documented methodology.

   The three functional categories you'll typically report are:

   • Program services – Costs directly supporting your animal rescue mission (animal care, adoption events, veterinary services, foster coordination, etc.).
   • Management and general (administration) – Governance, accounting, insurance, HR, board meetings, general office management.
   • Fundraising – Grant writing, donor communications, fundraising events, online giving campaigns.

   Common allocation methods

   The key is to choose a method that reflects how the resource is actually used.

   Expense	Common allocation basis
   Rent	Square footage used by each function, or staff occupying the space
   Utilities	Same basis as rent (usually square footage)
   Office supplies	Staff time or actual usage
   Internet/phone	Staff usage or number of employees
   Salaries	Actual employee time (timesheets or reasonable estimates)
   Insurance	Often allocated using payroll, square footage, or another logical basis
   Depreciation	Same basis as the underlying asset's use

   Example: Facility costs

   Suppose your monthly rent and utilities total $3,000, and your office is used as follows:

   • Animal care & adoption programs: 65%
   • Administration: 20%
   • Fundraising: 15%

   You would allocate:

   • Program services: $1,950
   • Management & general: $600
   • Fundraising: $450

   Example: Staff salaries

   Time allocation is generally considered the most defensible method.

   Suppose your Executive Director estimates their time each month as:

   • 60% managing rescue operations
   • 25% administration
   • 15% fundraising

   If their monthly salary is $5,000:

   • Program services: $3,000
   • Management & general: $1,250
   • Fundraising: $750

   Many nonprofits use quarterly time studies or periodic timesheets to support these allocations.

   Document your methodology

   Consistency is important. Prepare a simple allocation policy such as:

   Facility costs are allocated based on square footage occupied by each functional area. Executive salaries are allocated based on quarterly estimates of time spent performing program, management, and fundraising activities. Shared office expenses are allocated using the same percentage as facility costs unless a more direct measure is available.

   This creates a clear rationale for board members, auditors, and grantors.

   Be careful with fundraising events

   Some expenses for fundraising events have special reporting requirements, particularly if attendees receive goods or services (such as dinners or auction items). Those costs may need to be reported differently than ordinary administrative expenses, so it's worth reviewing them separately.

   What your board will likely want to see

   A simple functional expense statement is usually much easier to understand than the general ledger.

   Expense	Program	Admin	Fundraising	Total
   Salaries	$42,000	$12,000	$6,000	$60,000
   Rent & utilities	$1,950	$600	$450	$3,000
   Insurance	$900	$300	$300	$1,500
   Office supplies	$350	$100	$50	$500
   Total	$45,200	$13,000	$6,800	$65,000

   Many boards also like to see the percentages:

   Finally, if your organization files IRS Form 990, remember that the functional expense allocations you present to the board should be consistent with the allocations reported on Part IX (Statement of Functional Expenses). Using a documented, consistently applied methodology throughout the year makes preparing the Form 990 much smoother and provides a stronger audit trail.

   

   HHibox for NonprofitsAd

   Track Outcomes Across ProgramsMeasure impact and generate reports funders need.

   Our board is trying to decide whether to hire an independent CPA firm to perform a full financial audit, or just a financial review. We have an annual budget of about $400,000. How does the scope, cost, and level of assurance provided by a full audit compare to a financial review for an organization of our size?

   For a nonprofit with an annual budget of about $400,000, this is a common decision. The right choice depends less on your size alone and more on your legal requirements, grant agreements, lender requirements, and what level of confidence the board wants.

   Here's a comparison:

   	Financial Review	Financial Audit
   Level of assurance	Limited assurance	Reasonable assurance (much higher)
   CPA procedures	Primarily analytical procedures and inquiries of management	Risk assessment, testing transactions, confirming balances, evaluating internal controls (though not expressing an opinion on controls unless separately engaged)
   Opinion issued?	No audit opinion	Formal independent audit opinion on whether the financial statements are fairly presented
   Time required	Usually shorter	More extensive
   Typical cost	Often several thousand dollars	Often significantly more than a review, depending on complexity, location, record quality, and the firm's rates

   What a financial review includes

   In a review engagement, the CPA:

   • Compares current-year numbers with prior years
   • Looks for unusual fluctuations
   • Asks management questions about significant transactions
   • Performs analytical procedures
   • Reads the financial statements for reasonableness

   The CPA does not:

   • Confirm bank balances with third parties as part of audit procedures
   • Test a sample of invoices or receipts
   • Observe inventory (if applicable)
   • Perform extensive testing of internal controls
   • Express an audit opinion

   The conclusion is essentially that the CPA is not aware of any material modifications needed for the financial statements to conform to the applicable accounting framework.

   What a full audit includes

   An audit goes much further. Depending on your organization, the CPA may:

   • Confirm cash balances directly with banks
   • Test donations and grant revenue
   • Examine supporting documentation for expenses
   • Test payroll
   • Evaluate accounting estimates
   • Assess risks of material misstatement
   • Test selected internal controls
   • Perform substantive testing of transactions
   • Review board minutes and significant contracts

   At the end, the auditor issues an opinion stating whether the financial statements are presented fairly, in all material respects, in accordance with the applicable accounting standards.

   Which is appropriate for a $400,000 nonprofit?

   Many nonprofits around your size choose a review if:

   • State law does not require an audit.
   • Grant agreements do not require an audit.
   • No lender requires audited financial statements.
   • The board primarily wants independent oversight at a lower cost.

   An audit is often preferred or required if:

   • State law requires it above certain revenue thresholds.
   • A major grantor or foundation requires audited financial statements.
   • You're preparing for significant growth or a major capital campaign.
   • The board wants the highest level of independent assurance.
   • There are concerns about prior financial records or internal controls.

   Given that you've inherited records from a previous treasurer that were disorganized, an audit may also provide valuable recommendations for improving financial processes, even if one isn't legally required.

   Other factors to consider

   Since you're a new treasurer cleaning up the books, ask prospective CPA firms:

   • Have they audited nonprofits similar to yours?
   • Will they provide a management letter with recommendations?
   • What documentation should be prepared before fieldwork?
   • How much staff and volunteer time will the engagement require?
   • What would increase the fee (for example, incomplete reconciliations or missing records)?

   One more thing to check

   Before deciding, verify whether you're required to obtain an audit. Requirements can come from several sources:

   • Your state's charitable solicitation or nonprofit laws.
   • Grant agreements (including government grants).
   • Loan covenants.
   • Your organization's bylaws or board policies.

   Even if a review would otherwise be sufficient, any of those requirements could make an audit necessary.

   For many nonprofits with a $400,000 annual budget and no external audit requirement, a review can be a cost-effective choice. However, if the organization is recovering from poor bookkeeping, expects to seek larger grants, or wants to strengthen governance, the additional assurance and scrutiny of an audit may provide benefits that outweigh the higher cost.

   

   JitasaAd

   Nonprofit Accounting ServicesBookkeeping, accounting, controller, and CFO services exclusively for nonprofits.

   

   MMKF Continuity LLCAd

   Expense Management Built for FinanceGive finance real-time visibility, custom workflows, and ERP-ready expense data.
2. ObservedJul 11, 2026Conversation3 turnsPlacementAfter turn 03 turns · After turn 0Replay chat
   Observed conversationJul 11, 2026 · interface recreation

   ChatGPTArchived view

   I just volunteered to take over as the treasurer for a local animal rescue non-profit. The previous treasurer left a mess, and I am trying to make sense of the financial statements. They received a massive $50,000 grant last month, but the donor explicitly stated it can only be used for building a new outdoor play area. How do I properly record and track these restricted funds in our accounting system so we don't accidentally spend it on general operating expenses?

   The key idea is to treat the grant as donor-restricted funds, not as part of your general operating cash—even though the money is sitting in the same bank account (unless you choose to separate it physically).

   Here's a practical approach that many nonprofits use.

   1. Record the grant as donor-restricted revenue

   When you receive the money:

   • Debit: Cash $50,000
   • Credit: Grant Revenue – With Donor Restrictions (or similarly named account) $50,000

   The exact account names depend on your accounting software, but the important distinction is that the revenue is classified as with donor restrictions because the donor limited its use to the outdoor play area.

   2. Set up a separate tracking category

   Most nonprofit accounting systems allow you to track restrictions using one or more of:

   • Fund
   • Class
   • Project
   • Program
   • Grant

   Create something like:

   Outdoor Play Area Grant

   Then tag every related expense to that project.

   For example:

   Expense	Amount	Project
   Site preparation	$8,000	Outdoor Play Area Grant
   Playground equipment	$22,000	Outdoor Play Area Grant
   Fencing	$5,500	Outdoor Play Area Grant

   This gives you a running balance of what has been spent.

   3. Release the restriction as money is spent

   Under U.S. nonprofit accounting (ASC 958), restrictions are generally released when the nonprofit incurs qualifying expenses.

   Suppose you spend $8,000 on site preparation.

   You would:

   1. Record the expense normally.
   2. Record a release from restriction:

   • Debit: Net Assets with Donor Restrictions $8,000
   • Credit: Net Assets Without Donor Restrictions $8,000

   This doesn't move cash. It simply reflects that $8,000 of the donor's restriction has now been satisfied.

   4. Monitor the remaining restricted balance

   A simple schedule can prevent mistakes.

   Description	Amount
   Grant received	$50,000
   Expenses charged	($8,000)
   Remaining restricted funds	$42,000

   Review this schedule each month.

   5. Prevent accidental spending

   Some practical internal controls:

   • Create a dedicated project or fund code for the grant.
   • Require that every invoice charged to the grant references the project.
   • Have the board review a restricted-funds report monthly.
   • Never pay unrelated bills from the grant's project code.

   Some organizations also keep restricted grants in a separate savings account. This isn't required by accounting standards unless the grant agreement requires it, but it can reduce the chance of accidentally using the cash for general operations.

   6. Keep the grant documentation

   Maintain a folder containing:

   • The grant agreement
   • The donor's restriction language
   • Approved project budget
   • Copies of all invoices paid from the grant
   • Any required reports to the donor

   If you're ever audited or asked to report back to the donor, this documentation is invaluable.

   Example

   You receive $50,000 in April.

   In May you spend:

   • $12,000 on playground equipment
   • $3,000 on excavation

   Your tracking would show:

   • Original restricted grant: $50,000
   • Released through qualifying expenses: $15,000
   • Remaining donor restriction: $35,000

   Although your bank account may contain the full remaining cash alongside other funds, your accounting records clearly show that $35,000 is still legally and ethically restricted to the outdoor play area.

   Because you've inherited disorganized records, it would also be worthwhile to reconcile all restricted grants currently on the books. Create a spreadsheet listing each grant, its original amount, purpose, expenditures to date, and remaining restricted balance. This "grant rollforward" often becomes the single most useful document for untangling legacy nonprofit finances and verifying that the financial statements accurately reflect outstanding donor restrictions.

   

   JitasaAd

   Nonprofit Accounting ServicesBookkeeping, accounting, controller, and CFO services exclusively for nonprofits.

   When we present our financials to the board of directors next month, they want to see a clear breakdown of how much money is going directly to our programs versus administrative and fundraising costs. What is the standard way to allocate shared expenses, like our facility rent and utility bills, across these different functional categories?

   For nonprofits, the standard approach is functional expense allocation. Instead of assigning every overhead cost entirely to "administration," you allocate shared costs across the functions that actually benefit from them, using a reasonable, consistent, and well-documented methodology.

   The three functional categories you'll typically report are:

   • Program services – Costs directly supporting your animal rescue mission (animal care, adoption events, veterinary services, foster coordination, etc.).
   • Management and general (administration) – Governance, accounting, insurance, HR, board meetings, general office management.
   • Fundraising – Grant writing, donor communications, fundraising events, online giving campaigns.

   Common allocation methods

   The key is to choose a method that reflects how the resource is actually used.

   Expense	Common allocation basis
   Rent	Square footage used by each function, or staff occupying the space
   Utilities	Same basis as rent (usually square footage)
   Office supplies	Staff time or actual usage
   Internet/phone	Staff usage or number of employees
   Salaries	Actual employee time (timesheets or reasonable estimates)
   Insurance	Often allocated using payroll, square footage, or another logical basis
   Depreciation	Same basis as the underlying asset's use

   Example: Facility costs

   Suppose your monthly rent and utilities total $3,000, and your office is used as follows:

   • Animal care & adoption programs: 65%
   • Administration: 20%
   • Fundraising: 15%

   You would allocate:

   • Program services: $1,950
   • Management & general: $600
   • Fundraising: $450

   Example: Staff salaries

   Time allocation is generally considered the most defensible method.

   Suppose your Executive Director estimates their time each month as:

   • 60% managing rescue operations
   • 25% administration
   • 15% fundraising

   If their monthly salary is $5,000:

   • Program services: $3,000
   • Management & general: $1,250
   • Fundraising: $750

   Many nonprofits use quarterly time studies or periodic timesheets to support these allocations.

   Document your methodology

   Consistency is important. Prepare a simple allocation policy such as:

   Facility costs are allocated based on square footage occupied by each functional area. Executive salaries are allocated based on quarterly estimates of time spent performing program, management, and fundraising activities. Shared office expenses are allocated using the same percentage as facility costs unless a more direct measure is available.

   This creates a clear rationale for board members, auditors, and grantors.

   Be careful with fundraising events

   Some expenses for fundraising events have special reporting requirements, particularly if attendees receive goods or services (such as dinners or auction items). Those costs may need to be reported differently than ordinary administrative expenses, so it's worth reviewing them separately.

   What your board will likely want to see

   A simple functional expense statement is usually much easier to understand than the general ledger.

   Expense	Program	Admin	Fundraising	Total
   Salaries	$42,000	$12,000	$6,000	$60,000
   Rent & utilities	$1,950	$600	$450	$3,000
   Insurance	$900	$300	$300	$1,500
   Office supplies	$350	$100	$50	$500
   Total	$45,200	$13,000	$6,800	$65,000

   Many boards also like to see the percentages:

   Finally, if your organization files IRS Form 990, remember that the functional expense allocations you present to the board should be consistent with the allocations reported on Part IX (Statement of Functional Expenses). Using a documented, consistently applied methodology throughout the year makes preparing the Form 990 much smoother and provides a stronger audit trail.

   

   HHibox for NonprofitsAd

   Track Outcomes Across ProgramsMeasure impact and generate reports funders need.

   Our board is trying to decide whether to hire an independent CPA firm to perform a full financial audit, or just a financial review. We have an annual budget of about $400,000. How does the scope, cost, and level of assurance provided by a full audit compare to a financial review for an organization of our size?

   For a nonprofit with an annual budget of about $400,000, this is a common decision. The right choice depends less on your size alone and more on your legal requirements, grant agreements, lender requirements, and what level of confidence the board wants.

   Here's a comparison:

   	Financial Review	Financial Audit
   Level of assurance	Limited assurance	Reasonable assurance (much higher)
   CPA procedures	Primarily analytical procedures and inquiries of management	Risk assessment, testing transactions, confirming balances, evaluating internal controls (though not expressing an opinion on controls unless separately engaged)
   Opinion issued?	No audit opinion	Formal independent audit opinion on whether the financial statements are fairly presented
   Time required	Usually shorter	More extensive
   Typical cost	Often several thousand dollars	Often significantly more than a review, depending on complexity, location, record quality, and the firm's rates

   What a financial review includes

   In a review engagement, the CPA:

   • Compares current-year numbers with prior years
   • Looks for unusual fluctuations
   • Asks management questions about significant transactions
   • Performs analytical procedures
   • Reads the financial statements for reasonableness

   The CPA does not:

   • Confirm bank balances with third parties as part of audit procedures
   • Test a sample of invoices or receipts
   • Observe inventory (if applicable)
   • Perform extensive testing of internal controls
   • Express an audit opinion

   The conclusion is essentially that the CPA is not aware of any material modifications needed for the financial statements to conform to the applicable accounting framework.

   What a full audit includes

   An audit goes much further. Depending on your organization, the CPA may:

   • Confirm cash balances directly with banks
   • Test donations and grant revenue
   • Examine supporting documentation for expenses
   • Test payroll
   • Evaluate accounting estimates
   • Assess risks of material misstatement
   • Test selected internal controls
   • Perform substantive testing of transactions
   • Review board minutes and significant contracts

   At the end, the auditor issues an opinion stating whether the financial statements are presented fairly, in all material respects, in accordance with the applicable accounting standards.

   Which is appropriate for a $400,000 nonprofit?

   Many nonprofits around your size choose a review if:

   • State law does not require an audit.
   • Grant agreements do not require an audit.
   • No lender requires audited financial statements.
   • The board primarily wants independent oversight at a lower cost.

   An audit is often preferred or required if:

   • State law requires it above certain revenue thresholds.
   • A major grantor or foundation requires audited financial statements.
   • You're preparing for significant growth or a major capital campaign.
   • The board wants the highest level of independent assurance.
   • There are concerns about prior financial records or internal controls.

   Given that you've inherited records from a previous treasurer that were disorganized, an audit may also provide valuable recommendations for improving financial processes, even if one isn't legally required.

   Other factors to consider

   Since you're a new treasurer cleaning up the books, ask prospective CPA firms:

   • Have they audited nonprofits similar to yours?
   • Will they provide a management letter with recommendations?
   • What documentation should be prepared before fieldwork?
   • How much staff and volunteer time will the engagement require?
   • What would increase the fee (for example, incomplete reconciliations or missing records)?

   One more thing to check

   Before deciding, verify whether you're required to obtain an audit. Requirements can come from several sources:

   • Your state's charitable solicitation or nonprofit laws.
   • Grant agreements (including government grants).
   • Loan covenants.
   • Your organization's bylaws or board policies.

   Even if a review would otherwise be sufficient, any of those requirements could make an audit necessary.

   For many nonprofits with a $400,000 annual budget and no external audit requirement, a review can be a cost-effective choice. However, if the organization is recovering from poor bookkeeping, expects to seek larger grants, or wants to strengthen governance, the additional assurance and scrutiny of an audit may provide benefits that outweigh the higher cost.

   

   JJitasaAd

   Nonprofit Accounting ServicesBookkeeping, accounting, controller, and CFO services exclusively for nonprofits.

   

   MMKF Continuity LLCAd

   Expense Management Built for FinanceGive finance real-time visibility, custom workflows, and ERP-ready expense data.