Nonprofit Accounting Glossary for Leaders and Boards

501(c)(3)

A section of the Internal Revenue Code covering organizations formed and operated for qualifying charitable, educational, religious, scientific, and other exempt purposes. Organizations recognized under Section 501(c)(3) are subject to rules governing private benefit, political activity, reporting, and other areas.

Why it matters: Tax-exempt status brings both benefits and ongoing responsibilities.

Authoritative resource: IRS information for charitable organizations

Accounts Payable

Money an organization owes to vendors or service providers for goods and services it has already received.

Example: An unpaid invoice from a software provider appears in accounts payable until the organization pays it.

Why it matters: An incomplete accounts payable balance can make available cash appear stronger than it really is.

Accounts Receivable

Money owed to the organization for services, reimbursements, grants, pledges, or other amounts that have been recorded but not yet collected.

Example: A government contract may allow a nonprofit to record a receivable after eligible services are provided but before reimbursement arrives.

Why it matters: A growing receivable balance can create cash pressure even when reported revenue looks healthy.

Accrual Basis Accounting

An accounting method that records revenue when it is earned or recognizable and expenses when they are incurred, regardless of when cash moves.

Why it matters: Accrual reporting gives leadership a more complete picture of obligations, receivables, and financial performance than bank balances alone.

Related term: Cash basis accounting

Allocation

The process of assigning revenue or expenses to the appropriate program, grant, department, location, funding source, or functional category.

Example: Shared rent may be allocated among programs, management and general activities, and fundraising using a reasonable, consistently applied method.

Why it matters: Weak allocations can distort program costs, grant reporting, and functional expense reporting.

Allowable Costs

Expenses that may be charged to a grant, contract, or other funding source under its terms and applicable requirements.

Allowable costs are commonly evaluated based on whether they are reasonable, properly allocated, consistently treated, adequately documented, and permitted by the award.

Why it matters: An expense can support the mission without being chargeable to a particular grant.

Question for leadership: Can we show why this expense belongs to this award and provide the documentation supporting it?

Assets

Resources the organization owns or controls that are expected to provide future value. Examples include cash, receivables, prepaid expenses, equipment, and property.

Current assets are expected to be used or converted to cash within the organization’s operating cycle, generally within one year.

Fixed assets are long-term resources such as buildings, vehicles, furniture, and equipment.

Audit

An independent examination of financial statements and related evidence performed by a qualified external auditor. A financial statement audit provides an opinion on whether the statements are presented fairly in accordance with the applicable reporting framework.

Why it matters: An audit is an assurance engagement. It is different from preparing the books or helping the organization become audit-ready.

Accountix’s role: Accountix can help organize records, strengthen processes, and prepare schedules for an independent audit. The independent auditor remains separate.

Audit Readiness

The condition of having accurate records, completed reconciliations, organized documentation, supporting schedules, and responsible staff prepared for an independent audit.

Why it matters: Audit readiness reduces last-minute disruption and allows the auditor to spend less time waiting for records or investigating preventable inconsistencies.

Important distinction: Being audit-ready does not guarantee an unmodified audit opinion. It means the organization is prepared to support its financial statements and respond to audit requests.

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Bank Reconciliation

The process of comparing the organization’s accounting records with a bank statement and investigating any differences.

Common reconciling items include outstanding checks, deposits in transit, bank fees, duplicate transactions, and recording errors.

Why it matters: Timely reconciliations help identify missing transactions, errors, and unusual activity.

Bookkeeping

The day-to-day recording and organization of financial transactions. Bookkeeping commonly includes transaction entry, invoice processing, bill payment support, reconciliations, payroll coordination, and maintaining accurate financial records.

Why it matters: Reliable reporting starts with complete and timely bookkeeping.

Explore nonprofit bookkeeping services

Budget

A financial plan estimating expected revenue, expenses, and other financial activity over a defined period.

Nonprofits may prepare organization-wide operating budgets as well as separate budgets for grants, programs, capital projects, and fundraising initiatives.

Why it matters: A useful budget connects financial resources to organizational priorities and provides a baseline for monitoring results.

Budget-to-Actual Report

A report comparing actual revenue and expenses with the amounts approved in the budget.

A useful budget-to-actual report shows:

• The original or current budget
• Actual results for the reporting period
• Dollar variances
• Percentage variances
• Year-to-date results
• Explanations for significant differences
• Updated expectations when appropriate

Why it matters: The report helps leaders identify emerging problems, changing assumptions, and opportunities requiring action.

Question for leadership: Which variances require a decision, and which simply reflect timing?

Cash Basis Accounting

An accounting method that generally records revenue when cash is received and expenses when cash is paid.

Why it matters: Cash-basis records may be easier to maintain, but they can leave out unpaid bills, receivables, and other obligations that leaders need to understand.

Related term: Accrual basis accounting

Chart of Accounts

The organized list of accounts used to classify an organization’s assets, liabilities, net assets, revenue, and expenses.

A nonprofit chart of accounts may also work with classes, departments, locations, programs, customers, projects, or other tracking dimensions.

Why it matters: A chart of accounts should support clear reporting without becoming so complicated that transactions are coded inconsistently.

Compilation

A service in which an accountant presents financial information in financial statement form without providing assurance on that information.

Why it matters: A compilation is different from a review or audit. Leaders should understand what level of assurance a funder, lender, regulator, or board is requesting.

Contribution

A voluntary, nonreciprocal transfer of cash or other assets to an organization, or a settlement of its liabilities, in which the donor does not receive commensurate value in return.

A contribution may be conditional or unconditional and may carry donor restrictions.

Controller

A financial professional responsible for accounting operations, reporting quality, close processes, policies, controls, and other parts of the organization’s financial infrastructure.

Why it matters: A controller typically focuses on reliable historical reporting and accounting execution. A fractional CFO focuses more heavily on forecasting, strategy, and forward-looking decisions.

Cost Allocation Plan

A documented method for assigning shared expenses across programs, grants, departments, locations, and functional categories.

A cost allocation plan may address expenses such as:

• Rent and occupancy
• Technology
• Insurance
• Finance and human resources
• Executive leadership
• Shared equipment
• Administrative support

Why it matters: A consistent allocation plan helps the organization understand full program costs and support grant and functional expense reporting.

Common mistake: Changing allocation methods solely to produce a preferred result.

Days Cash on Hand

An estimate of how many days an organization could continue covering normal cash operating expenses using available cash.

The calculation generally compares qualifying available cash with average daily cash operating expenses. Organizations may define the components differently.

Why it matters: Days cash on hand translates liquidity into a measure that boards can understand and monitor.

Question for leadership: How long could we maintain normal operations if incoming cash slowed unexpectedly?

Measurement note: The organization should document whether restricted cash, board-designated reserves, investments, depreciation, and other items are included or excluded.

Related term: Liquidity

Deferred Revenue

An amount received before the organization has earned it under an exchange arrangement. Until the organization performs the related service or satisfies its obligation, the amount is generally recorded as a liability.

Example: A nonprofit receives payment in December for a training program that will be delivered in February.

Important distinction: Contribution accounting follows different recognition rules. Not every advance payment or grant should automatically be classified as deferred revenue.

Donor Restriction

A donor-imposed limitation specifying how, when, or for what purpose contributed resources may be used.

Restrictions may relate to a program, a future time period, an asset purchase, an endowment, or another stated purpose.

Why it matters: Donor restrictions affect classification, tracking, reporting, and when amounts may be released from restriction.

Donor-Advised Fund

A charitable giving account maintained by a sponsoring organization. A donor contributes assets to the sponsoring organization and may recommend future grants to eligible charities.

Why it matters: The sponsoring organization generally has legal control over contributed assets, even though the donor retains advisory privileges.

Endowment

A fund established to provide long-term support to an organization. Depending on the gift terms and applicable law, some or all of the original gift may need to be maintained while investment returns support the organization or a designated purpose.

An endowment may be donor-restricted. A board may also create a board-designated endowment, sometimes called a quasi-endowment.

Exchange Transaction

A reciprocal transaction in which each party receives and gives something of approximately equal value.

Example: A nonprofit charges a market-based fee for a professional training program.

Why it matters: Exchange transactions and contributions follow different revenue recognition models.

Financial Policies

Board-approved or management-approved rules describing how the organization handles important financial activities.

Financial policies may address:

• Budget approval
• Purchasing and payment authorization
• Expense reimbursement
• Credit card use
• Reserve funds
• Gift acceptance
• Conflicts of interest
• Investment oversight
• Capitalization
• Document retention
• Fraud reporting
• Delegated authority

Why it matters: Written policies create consistency, clarify responsibility, and reduce dependence on informal institutional knowledge.

Related capability: Internal controls

Fiscal Year

The twelve-month reporting period an organization uses for accounting and financial statements.

A fiscal year may follow the calendar year or end in another month selected by the organization.

Fractional CFO

A part-time or outsourced financial leader who provides CFO-level planning and decision support without serving as a full-time internal CFO.

Responsibilities may include forecasting, cash flow modeling, budgeting, program economics, scenario planning, board reporting, KPI development, and strategic financial guidance.

Explore nonprofit fractional CFO services

Full Program Cost

The complete cost of operating a program, including direct expenses and an appropriate share of indirect and organization-wide support costs.

Why it matters: Looking only at direct program expenses can understate the resources required to deliver and sustain the program.

Example: A youth program’s full cost may include program staff, supplies, facilities, insurance, technology, finance support, human resources, and executive oversight.

Question for leadership: Does the program’s funding cover the resources genuinely required to operate it?

Related support: Nonprofit fractional CFO services

General Ledger

The complete accounting record containing the organization’s accounts and recorded transactions.

Why it matters: Financial statements are produced from the general ledger. Errors or incomplete information in the ledger flow into the reports leadership receives.

Generally Accepted Accounting Principles

Commonly called GAAP, these are accounting principles and standards used to prepare consistent and comparable financial statements in the United States.

Nonprofit GAAP addresses areas such as accrual accounting, contribution recognition, donor restrictions, functional expenses, leases, liquidity disclosures, and financial statement presentation.

Read the Accountix guide to nonprofit GAAP

Grant

Funding provided by a government agency, foundation, corporation, or other organization for a stated purpose.

A grant may be a contribution, an exchange transaction, conditional, unconditional, restricted, cost-reimbursement based, or structured in another way.

Why it matters: The word “grant” alone does not determine the correct accounting treatment.

Grant Compliance

The policies, documentation, spending requirements, deadlines, reporting obligations, and other conditions connected to a grant award.

Why it matters: Grant compliance requires coordination across programs, finance, development, operations, and leadership. It is not solely an accounting responsibility.

Grant Receivable

An amount due to the organization under a grant that has been recognized but not yet collected.

A grant receivable may arise from an unconditional award, eligible reimbursable expenses, or another arrangement under which the organization has earned or become entitled to payment.

Why it matters: Grant revenue and grant cash do not always arrive at the same time. A growing receivable balance can create operating cash pressure.

Question for leadership: When do we expect to collect this balance, and what must be submitted before payment is released?

In-Kind Contribution

A noncash contribution of goods, services, use of facilities, or other assets.

Examples may include donated equipment, professional services, supplies, or space.

Why it matters: Whether and how an in-kind contribution is recorded depends on the nature of the contribution and applicable accounting requirements.

Indirect Cost Rate

A rate used to allocate qualifying shared or administrative costs to programs, grants, contracts, or other activities.

The rate may be based on salaries, direct costs, employee time, or another reasonable allocation base. Depending on the award, an organization may use a negotiated rate, an applicable federal option, or another funder-approved method.

Why it matters: An appropriate indirect cost rate helps funding requests reflect the organizational infrastructure required to deliver a program.

Common mistake: Assuming every funder permits the same rate or applying a rate without reviewing the award terms.

Related term: Cost allocation plan

Indirect Costs

Costs that support more than one program, grant, or organizational function and cannot be assigned easily to a single activity.

Examples may include rent, utilities, insurance, technology, finance, human resources, and executive leadership.

Why it matters: A documented allocation method helps the organization understand full program costs and support grant reimbursement.

Journal Entry

A record used to enter or adjust financial activity in the general ledger.

Journal entries may record accruals, depreciation, allocations, releases from restriction, corrections, and other activity not captured through routine transaction workflows.

Why it matters: Entries should include clear explanations, support, appropriate review, and consistent approval practices.

Liabilities

Amounts the organization owes or obligations it must satisfy.

Examples include accounts payable, accrued payroll, loans, deferred revenue, and other commitments.

Why it matters: Cash is not fully available if it must cover unpaid liabilities.

Management Letter

A communication from an independent auditor describing internal control observations, operational issues, or recommended improvements identified during an engagement.

Why it matters: Management letter comments should be assigned to responsible owners, addressed through a documented plan, and monitored by leadership or the board.

Material Weakness

A deficiency, or combination of deficiencies, in internal control that creates a reasonable possibility that a material misstatement will not be prevented or detected and corrected on time.

Why it matters: A material weakness is more serious than a significant deficiency and should receive prompt attention from leadership and governance.

Month-End Close

The recurring process of completing, reviewing, and finalizing the accounting records for a month.

A close may include reconciliations, accruals, allocations, receivable review, payable review, restriction activity, financial statement preparation, and management review.

Why it matters: A defined close calendar produces more timely and dependable reports.

Explore nonprofit outsourced accounting

Net Assets

The difference between an organization’s total assets and total liabilities.

For nonprofit financial reporting, net assets are generally presented in two classes:

• Net assets with donor restrictions
• Net assets without donor restrictions

Net Assets Without Donor Restrictions

The portion of net assets not subject to donor-imposed restrictions.

These resources may still be affected by board designations, contractual limitations, laws, liquidity constraints, or operational commitments.

Why it matters: “Without donor restrictions” does not always mean immediately available as cash.

Pledge or Promise to Give

A donor’s commitment to contribute cash or other assets to an organization in the future.

A promise may be conditional or unconditional. That distinction affects whether and when the organization recognizes contribution revenue and a receivable.

Program Expenses

Costs associated with activities that directly advance the organization’s mission and deliver its programs or services.

Why it matters: Program expenses should be identified using reasonable, supportable methods rather than assumptions designed to produce a preferred ratio.

Reconciliation

The process of comparing two sets of records and resolving differences.

Common examples include bank reconciliations, credit card reconciliations, donor-system-to-ledger reconciliations, payroll reconciliations, receivable reconciliations, and grant balance reconciliations.

Reimbursement-Based Grant

A grant arrangement in which the organization incurs and pays eligible costs before requesting reimbursement from the funder.

Why it matters: A reimbursement-based grant can be fully funded and still create significant cash pressure.

Example: A nonprofit spends $80,000 on an approved program during the quarter but must wait 45 days after submitting its report to receive reimbursement.

Question for leadership: How much working capital is needed to carry the program between spending and reimbursement?

Related terms: Grant receivable and cash flow forecast

Release From Restriction

The reclassification of net assets from with donor restrictions to without donor restrictions when the donor’s purpose or time requirement has been satisfied.

Example: A grant restricted to a particular program may be released as qualifying program expenses are incurred.

Restricted Cash

Cash subject to a donor, contractual, legal, or other external limitation affecting how or when it may be used.

Why it matters: Restricted cash is not necessarily available to cover general operating needs.

Revenue Recognition

The process of determining when and how revenue should be recorded.

For nonprofits, the appropriate treatment depends on factors such as whether the transaction is reciprocal or nonreciprocal, conditional or unconditional, and with or without donor restrictions.

Why it matters: Cash receipt, signed agreement, invoicing, and revenue recognition do not always occur at the same time.

Review of Financial Statements

An assurance engagement performed by an independent accountant using inquiry and analytical procedures to provide limited assurance on the financial statements.

A review provides less assurance than an audit and more than a compilation.

Schedule of Expenditures of Federal Awards

Commonly called the SEFA, this is a schedule identifying the federal awards an organization expended during its fiscal year.

The schedule generally includes information about federal programs, assistance listing numbers, pass-through entities, amounts expended, and amounts provided to subrecipients when applicable.

Why it matters: The SEFA is a central part of determining and supporting Single Audit requirements.

Question for leadership: Can our accounting records identify federal expenditures by award and reconcile them to the general ledger?

Authoritative resource: 2 CFR Part 200, Subpart F

Significant Deficiency

An internal control deficiency, or combination of deficiencies, that is less severe than a material weakness but important enough to deserve attention from those responsible for governance.

Single Audit

An audit covering an organization’s financial statements and its compliance with federal award requirements when the organization meets the applicable federal expenditure threshold and other requirements.

Why it matters: Single Audit requirements involve detailed federal award tracking, documentation, internal controls, and a Schedule of Expenditures of Federal Awards.

Authoritative resource: 2 CFR Part 200, Subpart F

Statement of Activities

A nonprofit financial statement showing revenue, expenses, gains, losses, and changes in net assets over a period.

It is similar in purpose to an income statement but reflects nonprofit reporting and net asset classifications.

Statement of Cash Flows

A financial statement showing cash inflows and outflows from operating, investing, and financing activities.

Why it matters: It helps explain why cash changed even when reported revenue and expenses tell a different story.

Statement of Financial Position

A nonprofit financial statement showing assets, liabilities, and net assets at a specific date.

It is similar in purpose to a balance sheet.

Statement of Functional Expenses

A financial statement or schedule presenting expenses by both natural classification and functional classification.

Natural classifications may include salaries, occupancy, professional services, and supplies. Functional classifications generally include program services, management and general activities, and fundraising.

Subrecipient Versus Contractor

A classification used to determine whether another organization receiving federal award funds is carrying out part of the federal program or providing goods and services for the recipient’s own use.

A subrecipient generally carries out a portion of the federal award and is responsible for applicable program requirements.

A contractor generally provides goods or services through a procurement relationship.

Why it matters: The classification affects agreements, procurement, monitoring, reporting, and compliance responsibilities.

Common mistake: Classifying the relationship based only on the agreement’s title. The substance of the relationship matters.

Authoritative resource: 2 CFR 200.331, Subrecipient and contractor determinations

Temporarily Restricted and Permanently Restricted Net Assets

Legacy terms previously used to classify nonprofit net assets.

Current nonprofit financial statement presentation generally uses:

• Net assets with donor restrictions
• Net assets without donor restrictions

Older agreements, reports, accounting records, and conversations may still use “temporarily restricted,” “permanently restricted,” or “unrestricted” terminology.

Why it matters: Leadership should understand the older language while using current reporting terminology.

Authoritative resource: FASB Accounting Standards Update 2016-14

Treasurer

A board officer commonly responsible for supporting financial oversight, presenting financial information to the board, and helping governance leaders fulfill their fiduciary responsibilities.

Important distinction: The treasurer provides governance oversight. The role should not automatically replace the organization’s bookkeeping, accounting, or financial leadership functions.

Unconditional Contribution

A contribution for which the donor’s promise does not depend on the organization overcoming a substantive barrier.

An unconditional contribution may still carry a purpose or time restriction.

Why it matters: Conditions and restrictions answer different accounting questions and should not be treated as the same thing.

Unrelated Business Income Tax

Commonly called UBIT, this is a tax that may apply when a tax-exempt organization regularly conducts a trade or business that is not substantially related to its exempt purpose, subject to applicable rules and exceptions.

Why it matters: Tax-exempt status does not automatically make every source of income exempt from tax.

Authoritative resource: IRS unrelated business income tax guidance

Variance Analysis

The process of comparing actual financial results with a budget, forecast, prior period, or other expectation and explaining the differences.

A useful variance analysis identifies:

• What changed
• Why it changed
• Whether the change is temporary or ongoing
• What action leadership should consider

Why it matters: A variance report becomes more useful when it supports a decision rather than merely listing differences.

Working Capital

A measure of short-term financial capacity commonly calculated as current assets minus current liabilities.

Why it matters: Positive working capital can help an organization manage timing differences between incoming cash and upcoming obligations.

Important limitation: Current assets may include receivables or restricted resources that are not immediately available for general use. Working capital should be considered alongside liquidity and cash flow.