Nonprofit Fund Accounting Journal Entries: Categories and Best Practices
Learn how nonprofits can accurately manage fund accounting with clear journal entries, proper expense allocation, and effective balance tracking.
Nonprofit organizations operate under distinct financial reporting standards compared to for-profit businesses. A primary distinction involves fund accounting, a method used to track resources based on their designated purpose, enhancing transparency and accountability. Accurate journal entries within this system are necessary for regulatory compliance, maintaining donor confidence, and informing organizational decisions.
This article outlines how nonprofits manage fund accounting through journal entries, covering key transaction categories and best practices.
Recording Contributions
Accurate recording of contributions is foundational for nonprofit financial reporting. These inflows represent resources provided by donors to support the organization’s mission. Proper accounting adheres to Generally Accepted Accounting Principles (GAAP), primarily guided by the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 958, ensuring transparency for stakeholders.1The CPA Journal. Applying the New Accounting Guidance for Contributions
When a contribution is received, the basic journal entry increases an asset (like Cash or Pledges Receivable) and increases a contribution revenue account. Contributions must be classified based on donor intent: without donor restrictions or with donor restrictions. Unrestricted contributions can fund any aspect of the nonprofit’s mission. Restricted contributions are limited by the donor for a specific purpose, time period, or must be held permanently. This classification dictates how revenue is recognized and reported within the net asset section of the statement of financial position. A simple unrestricted cash donation is recorded as: Debit Cash, Credit Contribution Revenue – Without Donor Restrictions. If restricted, the credit is to Contribution Revenue – With Donor Restrictions.
Nonprofits often receive non-cash contributions, known as in-kind donations, such as supplies, equipment, property, or services. GAAP requires recording these at their fair value upon donation. Fair value, as defined by FASB ASC 820, is the price an asset would sell for in an orderly market transaction. Determining this value may involve market comparisons, appraisals, or other estimation methods. For donated goods, the entry typically debits an asset or expense and credits In-Kind Contribution Revenue. FASB guidance (ASU 2020-07) requires nonprofits to present contributed nonfinancial assets separately on the statement of activities and disclose details about the assets received, their valuation, and use.
Recording contributed services follows specific criteria under ASC 958-605. Services are recognized only if they create or enhance nonfinancial assets, or if they require specialized skills provided by professionals who possess those skills, and would otherwise need to be purchased. Examples include professional legal or accounting services. General volunteer time typically doesn’t meet these criteria and isn’t recorded as revenue, though disclosure might be suitable. When recognized, the entry debits an expense or asset account and credits Contributed Services Revenue for the fair value of the services.
Promises to give, or pledges, also have specific accounting rules. Unconditional pledges are recorded as revenue and a receivable when the promise is made. The entry is Debit Pledges Receivable, Credit Contribution Revenue (classified appropriately by restriction). Pledges expected to be collected over more than one year should be recorded at net present value. An allowance for uncollectible pledges must also be estimated and recorded. Conditional pledges, dependent on a future event, are not recognized as revenue until the conditions are substantially met.
Allocating Expenses
Assigning expenses to the activities they support is essential for nonprofit financial management. GAAP, particularly ASC Topic 958, requires nonprofits to report expenses by functional classification—grouping costs based on their purpose.2PwC Viewpoint. 3.5 Expenses—Presentation and Disclosure This provides clarity on how resources are used to achieve the mission. Functional reporting differs from natural classification (e.g., salaries, rent). Nonprofits must present an analysis showing both classifications, often via a Statement of Functional Expenses.
The main functional classifications are Program Services and Supporting Activities. Program Services are activities directly fulfilling the mission. Supporting Activities include Management and General (M&G) and Fundraising. M&G covers operational oversight, administration, accounting, and human resources. Fundraising involves costs to solicit contributions.
Accurate reporting requires distinguishing how costs relate to these functions. Direct costs, identifiable with a single function (like a program teacher’s salary), are assigned directly. Indirect costs benefit multiple functions (like rent for a shared building or an executive director’s salary).
These indirect costs require allocation across benefiting functions using a rational, systematic, and consistent method. Common bases include employee time tracking, square footage measurements, or personnel counts. For example, facility costs might be allocated based on the percentage of space used by program, M&G, and fundraising activities. The chosen methods must be reasonable, documented, and disclosed in financial statement notes.
Journal entries for expense allocation reclassify costs initially recorded by natural type. An adjusting entry might debit Program Expense, M&G Expense, and Fundraising Expense, while crediting the original natural expense account (e.g., Rent Expense), distributing the cost based on the allocation method. This ensures the Statement of Functional Expenses accurately reflects the full cost of each activity.
Inter-Fund Transfers
Nonprofits often manage resources designated for various purposes, requiring movements between these internal categories or “funds.” These inter-fund transfers reallocate assets within the organization and are distinct from external transactions; they do not represent overall revenue or expense. They reflect internal resource decisions or the fulfillment of donor conditions, guided by GAAP under ASC Topic 958.
A common reason for transfer is satisfying a donor restriction. When expenses fulfill the purpose or time requirements of a restricted contribution, net assets are released from restriction. This is reported as a reclassification on the Statement of Activities, moving the amount from “Net Assets With Donor Restrictions” to “Net Assets Without Donor Restrictions.” The journal entry typically debits “Net Assets Released from Restrictions – With Donor Restrictions” and credits “Net Assets Released from Restrictions – Without Donor Restrictions,” indicating the resources are now available for general use. This release generally occurs when the qualifying expense is incurred.
Internal movements also involve board-designated funds. A nonprofit’s board may set aside unrestricted net assets for specific purposes like reserves, future projects, or quasi-endowments. These actions create board-designated net assets but, under GAAP, remain part of “Net Assets Without Donor Restrictions” because the board can reverse the designation. The designation is documented through board resolutions and disclosed in financial statement notes, as required by FASB ASU 2016-14.3Financial Accounting Standards Board. FASB Accounting Standards Update No. 2016-14 Internal journal entries might track these designations, but the total externally reported unrestricted net assets are unaffected.
It is important to differentiate permanent inter-fund transfers from temporary inter-fund loans. Transfers are permanent reallocations with no repayment expectation. Loans represent temporary borrowing between funds requiring repayment, creating inter-fund receivables and payables tracked internally. Transfers appear in the Statement of Activities or Statement of Changes in Net Assets as reclassifications reflecting a permanent resource shift.
Tracking Balances
Maintaining accurate balances for each fund or net asset class is an ongoing process in nonprofit accounting, reflecting the cumulative effect of recorded transactions. This tracking demonstrates accountability and ensures resources align with donor stipulations or board designations, following GAAP principles outlined in ASC Topic 958.
Following updates from ASU 2016-14, nonprofits must classify net assets for external reporting into two categories: Net Assets Without Donor Restrictions and Net Assets With Donor Restrictions. The former are available for discretionary use supporting the mission. The latter are limited by donor stipulations regarding purpose, time, or perpetuity (like endowments). Total net assets represent the residual interest after deducting liabilities.
Nonprofits use their general ledger system to manage these classifications. The chart of accounts is typically structured for fund accounting, often using codes to tag transactions to specific funds or net asset classes. While external reports show only the two main classes, internal tracking may be more detailed to monitor individual funds or grants, supporting management and board decisions.
The results are presented in the financial statements. The Statement of Financial Position shows the total amount in each net asset class at the end of the reporting period. The Statement of Activities details the changes in each net asset class over the period, reporting revenues, expenses, gains, and losses by restriction category. This statement shows how contributions were received and how expenses affected unrestricted balances. Nonprofits must also provide note disclosures detailing donor restrictions and board designations. ASU 2016-14 also mandates disclosures about liquidity and the availability of financial assets for general expenditures. Accurate tracking ensures these reports faithfully represent the organization’s financial status and activities.