Accounting Policies for Nonprofits: Complete Guide + Templates

Introduction: Why Accounting Policies Matter for Your Nonprofit

Nonprofit organizations operate under unique financial pressures and regulatory requirements that demand robust accounting policies. Unlike their for-profit counterparts, nonprofits must balance mission-driven goals with fiduciary responsibility to donors, grantmakers, and the public. A well-designed accounting policy framework isn't just a compliance checkbox—it's the foundation of organizational trust, financial transparency, and operational efficiency.

For nonprofit leaders, the stakes are high. A single accounting error or compliance misstep can jeopardize donor relationships, trigger audit findings, or even threaten your organization's tax-exempt status. Yet many nonprofits operate with fragmented financial systems, scattered spreadsheets, and unclear procedures that create avoidable risks.

The solution begins with clear, documented accounting policies. These policies establish the "rules of the road" for how your organization records, manages, and reports financial information. They create consistency, reduce errors, support staff training, and provide auditors with confidence in your financial governance.

This comprehensive guide walks nonprofit finance leaders, accountants, and board members through the essential accounting policies every organization should develop, complete with practical templates you can adapt immediately.

Understanding Nonprofit Accounting Policies: Definition and Scope

An accounting policy is a set of documented procedures and principles that guide how your nonprofit organization identifies, measures, records, and reports financial transactions. Unlike accounting standards (which are externally imposed rules), accounting policies are internal guidelines tailored to your organization's structure, mission, and operational complexity.

For nonprofits, accounting policies serve multiple critical functions:

Regulatory Compliance: Nonprofits must comply with Generally Accepted Accounting Principles (GAAP) as established by the Financial Accounting Standards Board (FASB). Policies ensure your organization consistently applies these standards across all financial reporting and tax filings, including Form 990 submissions to the Internal Revenue Service.

Internal Control: Strong accounting policies form the backbone of internal control systems, which are essential for fraud prevention, error detection, and operational accountability. The Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework emphasizes that effective internal control begins with a strong control environment where clear policies establish expectations for ethical behavior, accountability, and financial stewardship.

Stakeholder Confidence: Donors, grantmakers, and board members expect transparent, reliable financial reporting. Documented accounting policies signal that your organization takes financial management seriously and can be trusted with their donations and grants.

Operational Efficiency: Policies standardize financial processes, reducing manual work, minimizing version control errors, and enabling staff to complete month-end closing procedures more efficiently. This is especially critical for nonprofits with limited finance staff.

Fund Accounting and Grant Compliance: Many nonprofit accounting policies specifically address fund segmentation and grant tracking—essential for organizations managing multiple restricted funds or federal grants. These policies ensure donations and grants are used exactly as donors intended and that compliance documentation is complete for audits.

The Accounting Framework for Nonprofits: GAAP, FASB, and the Path Forward

Before developing specific policies, nonprofit finance leaders must understand the accounting standards that govern nonprofit financial reporting in the United States.

Generally Accepted Accounting Principles (GAAP)

GAAP is the universal set of accounting principles, standards, and procedures that U.S. nonprofits must follow when preparing financial statements. GAAP ensures consistency, comparability, and transparency across organizations, allowing donors, regulators, and the public to understand nonprofit financial performance on a level playing field.

Key GAAP principles relevant to nonprofits include:

The Matching Principle: Revenue and related expenses are recorded in the same accounting period. For nonprofits using accrual basis accounting, this means recognizing a grant as revenue when earned (often when deliverables are completed), not when the cash arrives.

The Going Concern Principle: Nonprofits are assumed to continue operating indefinitely unless there is evidence to the contrary. This principle affects how organizations value and depreciate long-term assets.

The Full Disclosure Principle: Financial statements must include all information necessary for users to make informed decisions. For nonprofits, this includes detailed notes about restricted funds, significant accounting policies, and any conditions affecting revenue recognition.

FASB Standards for Nonprofits

The Financial Accounting Standards Board (FASB) is responsible for setting accounting standards applicable to U.S. nonprofits. Two foundational FASB standards are critical for nonprofit accounting policy development:

FASB 116 (Accounting for Contributions Received and Contributions Made): This standard establishes how nonprofits recognize and measure donations and grants. Key elements include:

• Recognition timing: Unconditional contributions are recognized immediately when received, while conditional contributions are recognized only after the condition is met.

• Valuation: In-kind donations (such as donated equipment, supplies, or professional services) are recorded at fair market value.

• Variance power: If a donor grants the nonprofit power to redirect restricted funds to similar purposes, the contribution may be reported as unrestricted rather than restricted.

FASB 117 (Financial Statements of Not-for-Profit Organizations): This standard mandates the financial statements nonprofits must prepare and how to present net assets. The three required financial statements are:

• Statement of Financial Position (Balance Sheet): Reports assets, liabilities, and net assets segregated by restriction category (unrestricted, temporarily restricted, and permanently restricted).

• Statement of Activities (Income Statement): Reports revenues, expenses, and changes in net assets by restriction category.

• Statement of Cash Flows: Reports cash inflows and outflows from operating, investing, and financing activities.

Accrual vs. Cash Basis Accounting

Nonprofit accounting policies must explicitly define whether the organization uses accrual or cash basis accounting:

Accrual Basis Accounting: Revenue is recognized when earned (performance obligations are satisfied or conditions are met), and expenses are recognized when incurred, regardless of cash movement. For nonprofits, accrual accounting provides a truer picture of financial performance, is required by GAAP, and is expected by sophisticated donors and auditors. Organizations using accrual basis must implement policies for revenue recognition, expense accruals, and prepaid expense management.

Cash Basis Accounting: Revenue is recognized only when cash is received, and expenses are recognized only when paid. While simpler to implement, cash basis accounting is only permitted for very small nonprofits and does not comply with GAAP. Most organizations should avoid cash basis accounting unless absolutely required by their structure and size.

Core Accounting Policies Every Nonprofit Should Develop

1. Revenue Recognition Policy: The Foundation of Financial Accuracy

A revenue recognition policy is perhaps the most critical accounting policy for nonprofits. It establishes when and how the organization records revenue from its various sources—donations, grants, program service fees, and investment income.

Why It Matters: Improper revenue recognition is one of the most common audit findings in nonprofits. A clear, documented policy prevents this costly mistake and ensures financial statements accurately reflect when resources were earned or restricted.

Key Policy Elements:

• Contribution accounting: Define when unconditional contributions (donations) are recognized (typically immediately) versus conditional contributions (grants with restrictions or conditions), which are recognized when the condition is met.

• Exchange transactions: Describe when revenue from program services, membership fees, or ticketed events is recognized (typically when the service is delivered or the event occurs).

• Conditional grants: Establish procedures for determining whether a grant has conditions (obligations the nonprofit must fulfill before recognizing revenue) or restrictions (limitations on how funds are used). Conditions delay recognition; restrictions do not.

• Multi-year pledges: Define how pledges payable over multiple years are recorded and at what discount rate, if any.

• In-kind donations: Establish procedures for valuing and recognizing non-cash donations, including donated services, equipment, and facilities.

Revenue Recognition Policy Template:

REVENUE RECOGNITION POLICY

Purpose: To establish procedures for recognizing revenue from contributions, grants, program services, and other sources in accordance with GAAP and FASB standards.

Policy:

1. Contributions

   a. Unconditional contributions are recognized as revenue in the period received.

   b. Conditional contributions are recognized as revenue when the condition is substantially met.

   c. Pledges are recorded as accounts receivable when made, less appropriate allowance for uncollectibles.

2. Grant Revenue

   a. Federal and foundation grants are recognized when earned (performance obligations satisfied).

   b. Cost-reimbursement grants are recognized when allowable costs are incurred and documented.

   c. Time-restricted grants are recognized ratably over the restriction period.

3. Program Service Revenue

   a. Fee-for-service revenue is recognized when services are provided.

   b. Membership dues are recognized ratably over the membership period.

   c. Event revenue is recognized when the event occurs.

4. Investment Income

   a. Dividend and interest income is recognized when earned.

   b. Realized gains and losses on investment sales are recognized when the investment is sold.

   c. Unrealized gains and losses on investments are recognized annually based on fair value measurement.

5. In-Kind Contributions

   a. In-kind donations are valued at fair market value.

   b. Donations of services are valued based on the fair market rate for similar services.

   c. In-kind contributions are recorded only when they can be reliably measured and would be purchased otherwise.

Approval: [Board Approval Date]

Effective: [Date]

Review Schedule: Annually

2. Accounts Receivable and Allowance for Doubtful Accounts Policy

This policy manages nonprofit receivables—whether pledges from donors, grants pending receipt, or program service fees owed by clients or partner organizations.

Key Policy Elements:

• Receivable recognition: Define what types of commitments create accounts receivable (e.g., pledges, grant awards, fee-for-service arrangements).

• Collection procedures: Establish timelines and escalation procedures for following up on overdue amounts.

• Allowance for uncollectibles: Define the methodology for estimating which pledges or fees will not be collected (often based on historical collection rates or aging analysis).

• Write-off authority: Establish who has authority to write off uncollectible amounts and at what thresholds.

Template:

ACCOUNTS RECEIVABLE POLICY

1. Receivable Recognition

   Accounts receivable are recorded for:

   - Unconditional pledges from donors

   - Earned grant revenue not yet received

   - Program fees earned but not yet collected

   - Other amounts due to the organization

2. Valuation

   Receivables are recorded at the amount expected to be collected.

   Management establishes an allowance for doubtful accounts based on:

   - Historical collection rates (e.g., [X]% of pledges over [X] years uncollected)

   - Aging of receivables

   - Known customer/donor circumstances

3. Collection

   All receivables are monitored monthly.

   Overdue balances receive collection notices within [X] days.

   Write-offs require approval by [Executive Director/Finance Committee].

3. Accounts Payable and Expense Authorization Policy

This policy establishes procedures for recording liabilities, approving expenses, and maintaining an audit trail for all payments.

Key Policy Elements:

• Invoice processing: Define how invoices are received, logged, and matched to purchase orders and receiving reports (the three-way match).

• Expense approval authority: Establish approval thresholds and who has authority at each level (e.g., staff may approve expenses under $500, directors up to $5,000, executive director up to $25,000, board approval for amounts over $25,000).

• Segregation of duties: Ensure that different people authorize, record, and reconcile expenses to prevent fraud and detect errors.

• Payment timing: Define payment terms and when invoices should be paid (e.g., net 30 days, except for essential utilities paid immediately).

• Documentation retention: Require that all supporting documentation (invoices, receipts, purchase orders) be retained and filed systematically.

Template:

ACCOUNTS PAYABLE AND EXPENSE AUTHORIZATION POLICY

1. Vendor Management

   All vendors are evaluated for legitimacy before the first payment.

   Vendor information is recorded in [accounting system] including:

   - Legal name and tax ID (if applicable)

   - Contact information

   - Payment terms and conditions

2. Invoice Processing and Three-Way Match

   All invoices are matched to:

   - Purchase order (authorization to buy)

   - Receiving documentation (confirmation items were received)

   - Invoice (proof of amount owed)

   Only when all three match is the invoice approved for payment.

3. Expense Authorization Thresholds

   - Under $[X]: [Job title] approval required

   - $[X] to $[Y]: [Job title] approval required

   - Over $[Y]: [Committee/Executive Director] approval required

4. Segregation of Duties

   The following responsibilities are assigned to different individuals:

   - Purchase authorization

   - Invoice receipt and approval

   - Payment processing

   - Bank reconciliation and account review

5. Payment Processing

   Approved invoices are paid within [X] days of receipt.

   Payments are made by [check/ACH/credit card] and recorded in [accounting system].

   All checks require [X] authorized signatures.

4. Cash Management and Internal Controls Policy

This policy safeguards organizational cash by establishing procedures for receiving, holding, and spending money while creating an audit trail.

Key Policy Elements:

• Cash receipts: Procedures for receiving donations, grants, and fee revenue, including how checks are deposited and how online donations are processed.

• Cash disbursements: Controls over check payments, ACH transfers, and credit card spending.

• Bank account management: Which staff members have access to bank accounts and under what authorization levels.

• Reconciliation: Monthly bank reconciliation procedures and who is responsible.

• Fraud prevention: Procedures to prevent unauthorized spending, such as dual authorization on large checks, prohibition on blank or pre-signed checks, and regular review of transactions.

• Credit cards and debit cards: Policies for who can use organizational credit cards, spending limits, and reconciliation procedures.

Template:

CASH MANAGEMENT AND INTERNAL CONTROLS POLICY

1. Cash Receipts

   a. All donations and grants are recorded in [system] and deposited to the organization's bank account within [X] business days.

   b. A receipt (written confirmation) is provided to donors for all gifts.

   c. Donation records are maintained for IRS substantiation purposes.

   d. All cash and checks are stored in a locked safe/cabinet until deposited.

2. Cash Disbursements

   a. All payments are made from the organization's bank account, never from petty cash.

   b. Checks are issued only for approved, documented invoices.

   c. Checks require two authorized signatures for amounts over $[X].

   d. No blank, pre-signed, or counter-signed checks are permitted.

   e. Voided checks are retained and filed with supporting documentation.

3. Bank Reconciliation

   a. Bank statements are reconciled to accounting records by the [X] of each month.

   b. The person reconciling is NOT the person who signs checks or records transactions.

   c. Reconciliation includes:

      - Verification that all deposits match donor records

      - Verification that all outstanding checks have cleared

      - Investigation of any unusual transactions

      - Identification of errors or fraudulent activity

   d. The reconciliation is reviewed and approved by [management/board member].

4. Credit Card and Debit Card Controls

   a. Credit cards are issued only to [authorized positions].

   b. Each cardholder has a documented credit limit of $[X].

   c. All charges are reconciled to receipts monthly.

   d. Personal charges are prohibited.

   e. Cards are surrendered immediately upon employee departure.

5. Chart of Accounts and Account Coding Policy

The chart of accounts is the taxonomy of all financial accounts your nonprofit uses. A clear chart of accounts policy ensures that transactions are recorded consistently and that financial reporting is accurate and comparable over time.

Key Policy Elements:

• Account structure: Define how account numbers are organized (e.g., assets 1000-1999, liabilities 2000-2999, net assets 3000-3999, revenue 4000-4999, expenses 5000-9999).

• Account descriptions: Clearly define what transactions belong in each account to prevent misclassification.

• Functional expense reporting: Establish how expenses are categorized by function (program services, management and general, fundraising) as required for Form 990 reporting.

• Fund/grant coding: Define how transactions are coded to track restricted and unrestricted funds or specific grants.

• Account assignment: Establish who has authority to create new accounts and when existing accounts should be closed.

Template:

CHART OF ACCOUNTS POLICY

1. Account Structure

   1000-1999: Assets

   2000-2999: Liabilities  

   3000-3999: Net Assets (unrestricted, temporarily restricted, permanently restricted)

   4000-4999: Revenue

   5000-5999: Personnel Expenses (wages, payroll taxes, benefits)

   6000-6999: Program Expenses (materials, supplies, contracted services)

   7000-7999: Administrative Expenses (rent, utilities, office supplies, professional services)

   8000-8999: Fundraising Expenses (event costs, direct mail, development staff salaries)

   9000-9999: Other Expenses (depreciation, interest, bad debt)

2. Fund Coding

   Transactions are coded to identify the fund or grant:

   - 01: Unrestricted Fund (general operating funds)

   - 02-09: Restricted Funds/Grants (identified by number)

   Example: 6100-02 would represent Program Expense for Grant #02

3. Functional Expense Allocation

   Personnel and shared expenses are allocated among programs and administrative functions based on [time allocations/square footage/usage rates].

   Allocations are documented and reviewed annually.

4. New Account Creation

   New accounts may be created only with approval from [CFO/Finance Committee].

   Accounts that have had no activity for [X] years are evaluated for closure.

6. Month-End Closing Procedures and Financial Reporting Policy

This policy establishes the routine procedures for closing the books at month-end, preparing financial statements, and reporting to management and the board.

Key Policy Elements:

• Closing timeline: Define by what date each step must be completed (e.g., transactions recorded by the 5th, reconciliations completed by the 10th, statements to board by the 15th).

• Reconciliation procedures: Bank reconciliation, credit card reconciliation, investment account reconciliation, and loan balance verification.

• Accruals and adjusting entries: Procedures for recording month-end accruals (e.g., accrued salaries, utilities, interest).

• Review and approval: Who reviews financial statements before they are finalized and reported.

• Reporting: What financial statements are prepared (Statement of Financial Position, Statement of Activities, Statement of Cash Flows) and who receives them.

• Variance analysis: Procedures for comparing actual results to budget and explaining significant variances.

Template:

MONTH-END CLOSING PROCEDURES POLICY

Timeline: All steps below must be completed by [specific date each month].

Step 1: Transaction Recording (By [date])

- All invoices and receipts received must be recorded.

- Travel reimbursements and expense reports are submitted and recorded.

- Payroll is processed and recorded.

Step 2: Reconciliations (By [date])

a. Bank Reconciliation

   - Download bank statement

   - Reconcile to accounting system

   - Identify and investigate outstanding items

   - Resolve discrepancies

b. Credit Card Reconciliation

   - Reconcile credit card statement to receipts

   - Review for unauthorized charges

   - Submit for reimbursement if personal charges exist

   - Record organizational charges to appropriate expense accounts

c. Loan and Investment Account Reconciliation

   - Verify loan balances match lender statements

   - Verify investment balances and earnings

Step 3: Accruals (By [date])

Record accruals for:

- Wages earned but not yet paid

- Utilities used but not yet invoiced

- Interest accrued on loans

- Estimated bad debt on pledges

Step 4: Financial Reporting (By [date])

- Prepare trial balance

- Prepare Statement of Financial Position

- Prepare Statement of Activities

- Prepare Statement of Cash Flows

- Prepare variance analysis (actual vs. budget)

Step 5: Review and Approval (By [date])

- [Finance Committee/CFO] reviews and approves financial statements

- [Executive Director] reviews and approves

- Financial statements are presented to board (if required)

Step 6: Distribution (By [date])

Financial statements and management reports are distributed to:

- Board members

- Management team

- Grantmakers (if required by grant terms)

7. Depreciation and Asset Management Policy

This policy governs how fixed assets (buildings, equipment, vehicles) are recorded and depreciated over their useful lives. While depreciation is a non-cash expense, it is essential for accurate financial reporting and for planning future capital needs.

Key Policy Elements:

• Capitalization threshold: Define the minimum cost for an item to be capitalized (recorded as an asset) versus expensed immediately. For example, items costing less than $[X] are expensed; items costing $[X] or more are capitalized.

• Asset categories: Define categories of fixed assets (land, buildings, equipment, furniture, vehicles, leasehold improvements).

• Useful lives: Establish the depreciation period for each asset category (e.g., buildings 40 years, equipment 5-7 years, vehicles 5 years, furniture 7 years).

• Depreciation method: Define the method (straight-line is most common for nonprofits).

• Fixed asset register: Maintain a detailed register of all capitalized assets including description, date acquired, cost, and accumulated depreciation.

• Disposal and write-off: Establish procedures for removing fully depreciated assets and recording gains or losses on asset sales.

Template:

DEPRECIATION AND FIXED ASSET MANAGEMENT POLICY

1. Asset Capitalization

   Assets costing $[X] or more with a useful life of more than one year are capitalized.

   Assets costing less than $[X] are expensed immediately, except for:

   - Computer equipment (capitalized regardless of cost)

   - Vehicles (capitalized regardless of cost)

2. Useful Lives and Depreciation Method

   Straight-line depreciation is used for all fixed assets.

   Asset Category          Useful Life    Annual Depreciation Rate

   Land                    Not depreciated

   Buildings               40 years       2.5%

   Building improvements   15-20 years    5%-6.67%

   Equipment               5-7 years      14%-20%

   Vehicles                5 years        20%

   Furniture               7 years        14.3%

   Computer equipment      3-5 years      20%-33%

   Leasehold improvements  Lease term     [X]%

3. Fixed Asset Register

   The [Finance Manager] maintains a fixed asset register including:

   - Description and location of asset

   - Date acquired

   - Original cost

   - Accumulated depreciation

   - Current net book value

   - Expected disposal date

   The fixed asset register is reconciled to the general ledger quarterly.

4. Depreciation Recording

   Monthly depreciation expense is calculated and recorded:

   Debit: Depreciation Expense (Account [X])

   Credit: Accumulated Depreciation (Account [X])

5. Asset Disposal

   When an asset is disposed of:

   a. Remove the asset from the fixed asset register

   b. Remove the accumulated depreciation

   c. Record a gain or loss equal to the difference between the disposal proceeds and the book value

   d. Retain documentation of the disposal (sales receipt, donation letter, etc.)

6. Capital Reserves

   The organization sets aside funds equal to annual depreciation expense to prepare for future capital replacements.

   These funds are invested conservatively and reviewed annually for adequacy.

8. Accounts Receivable (Grant Receivables) and Cost-Reimbursement Grant Policy

For nonprofits managing federal or foundation grants, this policy establishes procedures for tracking and receiving grant reimbursements.

Key Policy Elements:

• Cost documentation: Procedures for documenting that costs incurred are allowable under the grant terms.

• Reimbursement requests: Timeline and procedures for submitting cost-reimbursement requests or invoices to grantmakers.

• Timing of revenue recognition: Whether revenue is recognized when costs are incurred or when reimbursement is requested.

• Matching fund documentation: Procedures for documenting that matching fund requirements are being met (if required).

• Audit trail: Systems for tracking which costs belong to which grants and ensuring compliance with grant terms.

Template:

GRANT RECEIVABLES AND COST-REIMBURSEMENT POLICY

1. Allowed and Unallowed Costs

   Only costs that are allowable under the grant agreement are submitted for reimbursement.

   [Specify which types of costs are allowable per each major grant program]

   Examples of potentially unallowed costs:

   - Lobbying and political activities

   - Entertainment and alcohol

   - Fines and penalties

   - Bad debt

   - Contributions and donations

2. Cost Documentation and Allocation

   All costs submitted for reimbursement are supported by:

   - Original invoices or receipts

   - Time records (for salary allocations)

   - Allocation formulas (for shared costs)

   For salary costs, timekeeping records document that employees spent the reported time on grant-funded activities.

3. Reimbursement Requests

   Reimbursement requests are submitted [monthly/quarterly] within [X] days of month-end.

   Requests include:

   - Summary of costs by category (salaries, equipment, supplies, etc.)

   - Supporting documentation

   - Cumulative costs to date

   - Budget variance explanation

   Requests are reviewed by [Program Manager] and approved by [Executive Director] before submission to the grantmaker.

4. Revenue Recognition

   For cost-reimbursement grants, revenue is recognized when:

   - Costs have been incurred and documented

   - Costs are allowable under the grant terms

   - Reimbursement request has been submitted

   If payment is uncertain, an allowance for uncollectible grants is recorded.

5. Matching Funds

   If the grant requires matching funds, the organization maintains documentation showing the source and timing of matching contributions.

9. Fund Accounting and Restriction Policy

Nonprofit fund accounting tracks restricted and unrestricted funds separately to ensure that donor restrictions are honored and reported accurately.

Key Policy Elements:

• Fund categories: Define unrestricted funds (no restrictions), temporarily restricted funds (time or purpose restrictions that will eventually be fulfilled), and permanently restricted funds (endowment).

• Tracking restrictions: Procedures for identifying when revenue is restricted and tracking when restrictions are satisfied.

• Releasing restrictions: Procedures for documenting when restrictions are satisfied and releasing funds from restricted to unrestricted.

• Reporting: How restricted and unrestricted funds are presented in financial statements.

Template:

FUND ACCOUNTING AND RESTRICTION POLICY

1. Fund Categories

a. Unrestricted Funds

   Funds that are not restricted by donors and may be used for any purpose consistent with the organization's mission.

b. Temporarily Restricted Funds

   Funds donated for a specific purpose or time period.

   Examples:

   - Grant for a specific program

   - Donation restricted to a future calendar year

   - Donation restricted to a specific need (e.g., equipment purchase)

   Once the restriction is satisfied, funds are reclassified to unrestricted.

c. Permanently Restricted Funds

   Funds that donors have permanently restricted, typically as endowment.

   The principal must be maintained in perpetuity.

   Only investment earnings may be spent (unless donor permits).

2. Identifying Restrictions

   All donations and grants are reviewed to determine restrictions:

   - Explicit restrictions are stated in the grant agreement or donation letter

   - Implicit restrictions may be inferred from the donor's intent

   - No restriction is assumed absent clear donor communication

3. Recording Restricted Revenue

   When restricted revenue is received:

   Debit: Cash

   Credit: Contribution Revenue - [Restricted Fund Name]

   Debit: Contribution Revenue - [Restricted Fund Name]

   Credit: Net Assets - Temporarily Restricted (or Permanently Restricted)

4. Releasing Restrictions

   When a restriction is satisfied, the organization documents the release 

   and reclassifies the funds:

   Debit: Net Assets - Temporarily Restricted

   Credit: Net Assets - Unrestricted

  Documentation of release (program completion, time period end, etc.) is retained.

5. Fund Balance Reporting

   Financial statements report the three fund balances:

   - Unrestricted net assets

   - Temporarily restricted net assets  

   - Permanently restricted net assets

10. Internal Control and Risk Assessment Policy

Based on the COSO framework, this policy establishes the organization's approach to identifying risks, implementing controls, and monitoring control effectiveness.

Key Policy Elements:

• Risk identification: Procedures for identifying organizational risks (fraud, noncompliance, operational disruption).

• Control activities: Specific controls (segregation of duties, approval requirements, reconciliations) designed to mitigate identified risks.

• Tone at the top: Management commitment to internal controls and ethical behavior.

• Monitoring: Regular review and testing of internal controls to ensure they are operating effectively.

• Deficiency remediation: Procedures for addressing control deficiencies identified by internal audit or external auditors.

Template:

INTERNAL CONTROL AND RISK ASSESSMENT POLICY

1. Control Environment: Tone at the Top

   a. Ethical Leadership

      Management demonstrates commitment to integrity and ethical values through:

      - Code of Conduct (provided to all staff annually)

      - Whistleblower policy with confidential reporting mechanism

      - Conflict of interest policy with annual certification

      - Zero-tolerance for fraud and misappropriation

   b. Board Oversight

      The [Audit Committee/Finance Committee] is responsible for:

      - Reviewing internal controls at least [X] times per year

      - Reviewing internal audit findings and management responses

      - Ensuring that control deficiencies are remedied promptly

      - Reporting on control effectiveness to the full board

2. Risk Assessment

   a. Risk Identification

      Risks are identified through:

      - Annual risk assessment workshop (facilitated by [staff member])

      - Departmental risk assessments

      - Audit findings and recommendations

      - Industry surveys and peer benchmarking

      - Regulatory changes

   b. Risk Evaluation

      Identified risks are evaluated for:

      - Likelihood of occurrence

      - Potential financial or operational impact

      - Mitigation strategies (controls in place)

      - Residual risk (risk remaining after controls)

   c. Risk Prioritization

      Risks are prioritized by severity and likelihood.

      Resources are allocated to mitigate high-priority risks.

3. Control Activities

   a. Segregation of Duties

      Key financial activities are separated among different individuals:

      - Authorization (approving transactions)

      - Execution (processing transactions)

      - Recording (documenting in accounting system)

      - Reconciliation (verifying accuracy)

   b. Approval Authority

      Spending authority is defined by position and dollar threshold:

      - [Position]: Up to $[X]

      - [Position]: Up to $[X]

      - [Committee]: Over $[X]

   c. Reconciliations

      Monthly reconciliations are performed for:

      - Bank accounts (cash)

      - Credit cards

      - Loans and other liabilities

      - Investment accounts

      - Grant receivables

   d. Documentation

      All transactions are supported by source documentation (invoices, receipts, grant agreements, donation letters) that is filed systematically.

4. Information and Communication

   a. Financial Reporting

      Accurate, timely financial statements are prepared monthly and reviewed by management.

  b. Policy Communication

      New policies and changes to policies are communicated to all staff.

      Annual training is provided on key financial policies.

   c. Incident Reporting

      Staff are trained to report suspected fraud or control breakdowns through the [Whistleblower policy/reporting mechanism].

5. Monitoring

   a. Internal Audit

      [Describe internal audit function: board member oversight, external auditor 

      as interim provider, or dedicated internal auditor]

      Internal audit reviews:

      - Effectiveness of key controls

      - Compliance with policies and procedures

      - Grant compliance

      - Data security

   b. Self-Assessment

      Department managers complete annual control self-assessment questionnaires.

   c. Audit Findings

      All audit findings (internal and external) are tracked and monitored 

      for timely remediation.

6. Deficiency Reporting and Remediation

   When control deficiencies are identified:

   a. The deficiency is documented (what went wrong, impact, cause)

   b. Root cause is analyzed

   c. Remediation is planned with responsible party and timeline

   d. Remediation is monitored for completion

   e. If not timely remediated, escalation occurs to [committee/board]

Tax Exemption Compliance and Regulatory Considerations

Beyond internal accounting policies, nonprofit finance leaders must understand the regulatory compliance landscape that shapes accounting decisions.

IRS Form 990 and Tax Exemption Requirements

The vast majority of U.S. nonprofits must file Form 990 (Return of Organization Exempt From Income Tax) annually with the IRS. The form serves two purposes: it documents compliance with tax-exempt status requirements, and it provides the public with financial and operational information about the organization.

Form 990 requirements directly influence accounting policy design:

Filing Thresholds: Organizations with gross receipts less than $50,000 may file Form 990-N (electronic postcard); those with receipts between $50,000 and $200,000 and assets under $500,000 may file Form 990-EZ; and larger organizations file the full Form 990. Each form requires increasingly detailed financial and operational information.

Functional Expense Reporting: Form 990 requires nonprofits to report expenses by function: program services, management and general (administrative), and fundraising. Accounting policies must include procedures for allocating shared expenses and clearly documenting which costs are program versus administrative.

Related Party Transactions: Form 990 requires disclosure of transactions between the nonprofit and related parties (board members, officers, family members, for-profit entities controlled by insiders). Accounting policies should include procedures for identifying and documenting these transactions.

Executive Compensation: Form 990 requires reporting of compensation for the highest-paid officers and key employees. Policies should document how compensation decisions are made and approved.

Donor Advised Funds and Grants: Organizations managing donor-advised funds or making grants must disclose these activities on Form 990.

501(c)(3) Tax Exemption Requirements

To maintain 501(c)(3) tax-exempt status, organizations must comply with a set of federal requirements:

Organizational Test: The organization's articles of incorporation must limit its purpose to tax-exempt purposes and prohibit distribution of net income to shareholders or individuals. This is typically documented in the organization's bylaws and should be referenced in the accounting manual.

Operational Test: The organization must be operated exclusively for exempt purposes. This means:

• No substantial part of activities include lobbying or political activity

• No net earnings inure to the benefit of insiders (excessive compensation, loans to insiders)

• The organization does not engage in unrelated business activity (or properly reports it on Form 990-T)

Charitable Contribution Substantiation: For donations of $250 or more, nonprofits must provide written substantiation to donors. Accounting policies should document how these letters are prepared and tracked.

Donor Confidentiality: While not legally required, many donors expect their identity and gift amount to remain private. Policies should address donor privacy and how information is handled.

State Charitable Solicitation Requirements

Many states require nonprofits to register before soliciting charitable contributions. Registration typically requires submission of financial information, bylaws, and conflict of interest policies. Accounting policies should document how the organization will maintain the records required for state filings.

Advanced Accounting Policy Considerations

Investment Policy and Endowment Management

For organizations with endowments or investment portfolios, an investment policy is essential. This policy should address:

• Investment objectives: Balance between capital preservation and growth based on organizational risk tolerance

• Asset allocation: Target percentages for stocks, bonds, real estate, and other investments

• Spending policy: How much endowment earnings can be spent annually

• Valuation: How investments are marked to fair value for financial reporting

• Proxy voting: How the organization votes on shareholder issues

Materiality and Estimation Accounting Policies

Organizations must define materiality for financial reporting—the threshold at which items are considered significant enough to require disclosure. Policies should also address accounting estimates such as:

• Allowance for doubtful pledges: Percentage of pledges estimated to be uncollectible

• Useful lives of assets: For depreciation calculations

• Going concern assessments: When to question whether the organization will continue operating

• Fair value measurements: For in-kind donations and investment valuations

Accounting Changes and Error Correction

Policies should establish how accounting changes (changes in accounting methods) and prior-period error corrections are handled. GAAP requires that:

• Changes in accounting method are restatements applied retroactively (with prior period financial statements restated)

• Errors are corrected through adjustment in the current period

• All changes and corrections are disclosed in the notes to financial statements

Implementing Accounting Policies: A Practical Roadmap

Developing a comprehensive accounting manual is a substantial project. Here's a practical implementation approach:

Step 1: Assess Your Current State (Weeks 1-2)

• Review existing policies and procedures (likely scattered across emails and files)

• Identify gaps and inconsistencies

• Document current practices for each major accounting function

• Involve staff in the assessment to understand actual processes versus documented procedures

Step 2: Define Your Framework (Weeks 3-4)

• Decide on accounting basis (accrual vs. cash) based on organization size and complexity

• Define your fund accounting structure (unrestricted, temporarily restricted, permanently restricted)

• Outline your chart of accounts structure

• Identify the policies most critical for your organization

Step 3: Draft Core Policies (Weeks 5-8)

• Start with the highest-priority policies (revenue recognition, cash management, internal controls)

• Use templates and examples from professional resources as starting points

• Adapt policies to your organization's specific structure and risk profile

• Involve both accounting staff and program leadership in drafting (programs need to understand grant compliance requirements)

Step 4: Test and Refine (Weeks 9-10)

• Walk through current transactions and determine how they would be handled under the new policies

• Identify process changes required

• Train accounting staff on new procedures

• Conduct a dry run of month-end closing using new policies

Step 5: Board Approval and Formal Adoption (Week 11)

• Present accounting policies to the board's Finance Committee

• Address questions and concerns

• Obtain formal board approval

• Document approval in board minutes

• Make the effective date clear

Step 6: Communication and Training (Weeks 12-13)

• Hold all-staff training on new policies (especially revenue recognition, expense approval, and documentation)

• Provide written policies to all staff

• Create quick-reference guides for common transactions

• Establish process for questions and clarifications

Step 7: Ongoing Monitoring (Ongoing)

• Schedule quarterly reviews with accounting staff to discuss implementation challenges

• Conduct annual policy reviews to ensure continued applicability

• Adjust policies as operations change (new grants, new programs, staff transitions)

• Include policy compliance assessment in internal audits

The Role of Technology in Implementing Accounting Policies

Modern nonprofit accounting software—from QuickBooks to specialized nonprofit platforms like Sage Intacct—can significantly simplify policy implementation by:

• Automating transaction categorization: Software can be configured to automatically assign transactions to the correct account based on rules (e.g., all Visa charges to credit card clearing account)

• Enforcing approval workflows: Systems can require proper approval before transactions are recorded, ensuring segregation of duties

• Generating financial statements: Software automatically produces financial statements formatted according to GAAP, reducing manual spreadsheet work

• Supporting fund accounting: Specialized nonprofit software tracks restricted and unrestricted funds separately

• Creating audit trails: Every transaction and change is recorded with user ID and timestamp

• Enabling real-time reporting: Management can view current financial position instantly rather than waiting for month-end closing

The adoption of integrated nonprofit banking and accounting solutions—where banking, accounting, and reporting are unified—further reduces errors and manual reconciliation work. These platforms can synchronize transactions directly from the bank, automatically categorize expenses, and prepare grant-compliant reports with minimal manual intervention.

Conclusion: Building a Culture of Financial Accountability

Nonprofit accounting policies are far more than compliance documents—they are the manifestation of your organization's commitment to stewardship, transparency, and sustainable mission delivery. Well-designed policies create the infrastructure for accurate financial reporting, effective resource management, and donor confidence.

The investment in developing thoughtful accounting policies pays dividends across your organization:

For leadership: Clear policies provide the financial information needed to make strategic decisions about programs, staffing, and growth.

For staff: Documented procedures reduce confusion, support training, and prevent costly errors.

For donors and grantmakers: Transparent financial reporting and demonstrated internal controls build trust and confidence in your organization's stewardship.

For auditors: Well-documented policies streamline audits and reduce time spent on basic procedures, lowering audit costs.

For the board: Strong policies fulfill the board's governance responsibilities and demonstrate that the organization takes accountability seriously.

The templates in this guide provide a starting point, but the most important step is to begin. Start with the policies most critical for your organization (typically revenue recognition, cash management, and internal controls), implement them systematically, and build from there. Within a year, you will have created the financial foundation for sustainable mission impact.

Remember: The best accounting policy manual is one that is actually used. Make it practical, train staff on it, and refine it continuously as your organization evolves. Your future donors, grantmakers, and auditors—and most importantly, your mission—will thank you.