Common Nonprofit Accounting Mistakes and How to Avoid Them
Nonprofit accounting can be deceptively complex. Between donor restrictions, grant reporting, in-kind contributions, and functional expenses, even well-run organizations can trip over seemingly simple issues.
The good news: most of these mistakes are preventable with the right processes, training, and oversight.
Below are some of the most common accounting pitfalls nonprofits face and what you can do to avoid them.
- Mixing Restricted and Unrestricted Funds
The mistake: Treating all revenue as one pot of money.
Donor-restricted funds must be tracked separately and used only for their intended purpose. When organizations commingle these funds, they risk misusing restricted dollars and unintentionally presenting misleading financial statements.
How to avoid it: Use separate accounts, classes, or projects in your accounting system to track restricted activity. Review donor agreements and grant contracts regularly to ensure spending aligns with restrictions. Train staff and board members on the difference between restricted and unrestricted funding.
- Misclassifying In-Kind Contributions
The mistake: Recording everything donated or recording nothing donated.
Some organizations over-record in-kind contributions by treating promotional mentions, volunteer hours, or other non-recognizable items as revenue. Others under-record by missing donated professional services or donated goods used in operations.
How to avoid it: Record only contributions that meet GAAP criteria — donated goods, services that require specialized skills, and items you would otherwise have purchased. Document valuations and maintain a clear in-kind policy.
- Incorrectly Allocating Functional Expenses
The mistake: Throwing everything into “program” to look efficient or guessing on allocations.
Functional expense reporting requires thoughtful allocation of shared costs like rent, utilities, salaries, and technology. Overly simplistic or inconsistent allocations can hurt credibility and cause audit issues.
How to avoid it: Use a consistent, supportable allocation methodology based on actual usage such as square footage, time studies, or headcount. Review allocations annually and document your approach.
- Poor Documentation for Grants and Restrictions
The mistake: Filing grant agreements away and never revisiting them.
Grant reporting becomes stressful when support documents, allowable cost rules, and deadlines aren’t tracked. Missing documentation also leads to misuse of funds or grants that need to be paid back.
How to avoid it: Create a grant compliance checklist and maintain a centralized grant file (digital or physical). Track spending against each grant budget monthly. Review reporting deadlines quarterly with program staff.
- Relying Too Heavily on QuickBooks Defaults
The mistake: Assuming QuickBooks automatically handles nonprofit nuances.
QuickBooks (or any accounting system) is only as good as the structure behind it. Defaults often use for-profit terminology or accounts. Without customization, you may end up with inaccurate statements or missing required disclosures.
How to avoid it: Customize your chart of accounts, classes, and reports for nonprofit requirements. Regularly reconcile accounts, adjust mapping, and ensure your reporting aligns with GAAP and Form 990 categories.
- Not Reconciling Accounts Monthly
The mistake: Waiting until year-end or until the auditor asks.
Unreconciled accounts hide errors: duplicate entries, missed deposits, incorrect classification, or bank fees.
How to avoid it: Reconcile bank accounts, credit cards, investment accounts, and fundraising platform deposits every month. Have a second person review and approve reconciliations for internal control.
- Failing to Record Payroll Accurately
The mistake: Treating payroll as one lump-sum entry.
Nonprofits must ensure wages, taxes, benefits, and payroll allocations to programs, management, and fundraising are accurate. Errors here often snowball into inaccurate financials and incorrect functional expense reporting.
How to avoid it: Use payroll reports to break out wages and taxes by employee and function. Set up allocation percentages in advance and adjust as roles or funding change.
- Missing Required Acknowledgments to Donors
The mistake: Not issuing donor acknowledgments (or issuing incomplete ones).
Failure to send accurate written acknowledgments can result in donors losing tax deductions and nonprofits losing trust.
How to avoid it: Issue timely acknowledgments that include the gift amount, date, donor name, organization name, and required IRS disclosure language for quid pro quo contributions. Automate acknowledgments when possible.
- Not Tracking In-Kind Services or Volunteer Hours Properly
The mistake: Recording volunteer hours as revenue or ignoring donated specialized services.
Volunteer hours count for reporting to stakeholders but usually not for GAAP revenue unless the service requires specialized skills and would otherwise be purchased.
How to avoid it: Train staff to identify qualifying donated services and maintain volunteer logs for internal metrics. Record only the revenue items that meet accounting standards.
- Weak Internal Controls
The mistake: Trusting individuals instead of building systems.
A single person opening the mail, depositing checks, entering transactions, and reconciling the bank account creates risk even with honest employees.
How to avoid it: Implement segregation of duties, approval processes, and documented procedures. Review controls annually and adjust as staffing or operations change.
Most nonprofit accounting mistakes aren’t intentional, they’re typically the result of small oversights that snowball over time. With clear processes, regular reviews, and the right expertise, organizations can avoid these pitfalls and strengthen both their financial health and their credibility.
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