Accounting Software for Nonprofits: Selection and Setup Guide

Accounting software for nonprofits must show more than whether cash increased. It should distinguish contribution and grant restrictions, programs, fundraising, management and general activity, donor and grant support, budgets, approvals, and the balances the board is responsible for stewarding.

A small nonprofit can use a general accounting product when its dimensions, reports, and controls support the organization’s requirements. A more specialized fund-accounting system may be needed when restrictions, grants, programs, allocations, entities, or reporting complexity exceed what a small-business ledger can manage cleanly.

Define the nonprofit’s reporting model first

List the legal entity, fiscal year, programs, grants, contribution restrictions, locations, departments, board reporting, tax filings, audits or reviews, and management decisions. Then decide what belongs in general-ledger accounts and what belongs in dimensions such as fund, program, grant, restriction, department, or location.

Do not create a separate bank account or revenue account for every donation or grant unless the legal or operational facts require it. Use a controlled dimension when the software can produce accurate statements and transaction detail without making the chart of accounts unmanageable.

Requirements to test

Contribution and donor-system integration

A donor database may own contacts, campaigns, pledges, receipts, and communications while accounting owns cash, receivables, contribution revenue, restrictions, and financial statements. Map campaign and fund codes carefully and reconcile gross gifts, refunds, processor fees, and net deposits.

The IRS describes substantiation and disclosure requirements for charitable contributions, including written acknowledgments and quid pro quo disclosures in specified circumstances. The donor system can help produce records, but configuration should be reviewed against current federal and state requirements.

Illustrative donation settlement

Assume an illustrative online campaign receives $20,000 in gifts. The processor refunds $500, withholds $600 in fees, and deposits $18,900. Of the net accepted gifts, $8,000 is restricted for Program A and the remaining $11,500 is unrestricted under the organization’s reviewed records.

The accounting entry should preserve gross contribution activity, refunds, fees, restrictions, and cash. The donor report, processor statement, bank deposit, restriction schedule, and ledger must agree. Recording only the $18,900 deposit as unrestricted contribution revenue loses material information.

Grant accounting needs agreement-level control

For each grant, record the agreement, period, award amount, restrictions or conditions, allowed cost rules, budget, match requirement, billing method, reporting dates, and responsible manager. The accounting treatment depends on the agreement and applicable standards. A grant category alone cannot determine it.

Test a direct cost, allocated cost, disallowed cost, reimbursement request, receivable, cash receipt, and amendment. The grant report should tie to ledger detail and source documents, while the remaining award calculation follows the reviewed policy.

Functional expense and allocation workflow

A nonprofit may need to distinguish program services, management and general, and fundraising expenses. Shared costs require documented allocation methods based on reasonable, consistently applied drivers. Software can calculate or store allocations, but management must approve the policy and source data.

Test a shared payroll or occupancy allocation and verify that total expense does not change, only its assigned functions or programs. Preserve the worksheet, basis, approval, and resulting entry.

Records and Form 990 readiness

The IRS says exempt organizations must keep books and records needed to show tax compliance and document sources of receipts and expenditures reported on annual returns and other filings. It also notes that records are required even when the organization files Form 990-N or no return. Software should therefore support complete exports and source documentation, not only a dashboard.

The applicable Form 990 series and schedules depend on the organization and year. Use current IRS filing resources and professional guidance. Build the close package around the schedules the preparer needs, including contributions, grants, functional expenses, compensation, fixed assets, related parties, and other applicable items.

General software or fund accounting

A general product may fit a small organization with few restrictions, programs, and grants when it supports the required dimensions and reports. Xero currently describes nonprofit workflows for donations, grants, expenses, reporting, reconciliation, and third-party apps. Other products provide different combinations.

Dedicated fund accounting is more likely to be useful when the organization needs complex restriction releases, multiple funds or entities, grant billing, encumbrances, advanced allocations, or specialized statements. Compare total implementation and control effort rather than relying on a nonprofit label.

Internal controls to require

• Separate contribution processing, deposit, entry, and reconciliation where staffing permits.
• Require documented approval for vendors, grants, payments, journal entries, and bank changes.
• Restrict changes to funds, programs, accounts, donor mappings, and closed periods.
• Reconcile bank, investment, payroll, donor, grant, receivable, payable, and fixed-asset records.
• Provide the board with statements and variance explanations tied to the ledger.
• Review conflicts, related parties, unusual transactions, and restricted balances.

Common failures

• Net processor deposits are recorded as donations. Gross gifts, refunds, fees, and restrictions disappear.
• Every grant becomes one revenue account. Periods, allowed costs, receivables, and remaining awards cannot be supported.
• Restrictions are tracked only in a spreadsheet. The schedule drifts away from the ledger.
• Allocations have no source or approval. Functional reports cannot be reproduced.
• Board reports use unreconciled dashboards. Decisions rely on incomplete or inconsistent data.
• The donor and accounting systems both own corrections. Gifts, refunds, or credits are duplicated.

Decision rule

Choose nonprofit accounting software only after it completes a representative donation, restriction, grant cost, allocation, vendor payment, correction, and month-end close. The donor, grant, bank, budget, board, and ledger reports must agree, and another reviewer must be able to reproduce them from retained records.

Continue with the Accounting Software and Tools hub, the guide to church accounting software, and the review of school accounting software.

Educational information only. Tax, payroll, and compliance rules change and may vary by jurisdiction. Confirm the current requirements for your facts with the appropriate agency or a qualified professional.

If donor, grant, bank, and ledger records do not reconcile, review Steady’s bookkeeping services.