Bookkeeping for Nonprofits: Tips for Efficiency, Compliance, and Accuracy

A common scene for nonprofit bookkeepers: You’re managing QuickBooks for basic expenses while juggling Excel files for restricted grants, donor funds, and program budgets. Every month-end becomes a puzzle, piecing together data from multiple sources to create meaningful reports. While many bookkeepers appreciate the systematic nature of financial record-keeping, a completely manual system or workflow can become overwhelming and increase the risk of error.

Luckily, there is a better option. With nonprofit bookkeeping best practices and system improvements, you can eliminate manual processes while preserving the organized approach that makes nonprofit accounting satisfying. This helps you focus on strategic financial management instead of administrative busy work.

Top 7 Bookkeeping Best Practices for Nonprofits

Smooth-running accounting operations requires a few foundational elements—all of which work together to create accurate and efficient financial reporting and management:

• Defined processes: Ensures consistency in how your team handles everything from invoice approvals to grant reporting.
• User-friendly systems: Eliminates the frustration of wrestling with complicated software or piecing together data from multiple sources.
• Cross-departmental collaboration: Helps maintain accurate financial data by working closely with program and development teams who provide essential budget updates, expense details, and grant requirements.

To make each of these foundational components come to life, your team will need to implement a few best practices. The following tips will help you create a more organized and efficient financial management system for everyone.

1. Automatically Record Transactions

For busy nonprofits, manually recording transactions can not only be a headache, but also a huge opportunity for error, too. Automated transaction recording, however, can minimize both.

Integrating your fund accounting and fundraising CRM can automatically pull donation information into journal entries and help nonprofits ensure that gift processing flows seamlessly into financial records without manual intervention. For instance, imagine a donor makes a $5,000 gift restricted for your scholarship program. The system automatically creates the proper journal entry with the gift agreement attached—no manual data entry required.

2. Maintain Your Chart of Accounts

Your Chart of Accounts is like your filing system for money—it should be organized and simple to navigate. But as nonprofits scale, more specific account categories get added. What begins as “Program Expenses” eventually becomes “Program-Expenses-AfterSchool-FederalGrant-MainSite-2025.”

While detailed tracking seems helpful, this complexity actually slows everyone down. Reports become more difficult to generate, data entry errors increase, staff become less efficient, and the learning curve for new employees gets even steeper.

To avoid this, be sure to:

• Conduct quarterly reviews: Every three months, identify unused accounts (no activity in the past 12 months) and consolidate similar categories. Instead of separate accounts for “Office Supplies – Pens,” “Office Supplies – Paper,” and “Office Supplies – Folders,” use one “Office Supplies” account.
• Limit new account creation: Require finance manager approval before adding accounts. Additionally, verify that existing accounts can’t serve the purpose, and new accounts will have regular activity (such as exceeding $1,000 annually).
• Use consistent naming conventions: Apply logical prefixes like “REV-” for revenue and “EXP-” for expenses. Plus, be sure to number accounts in sequences—donations at 4100-4199, grants at 4200-4299, earned revenue at 4300-4399, for example.

3. Reconcile Bank Accounts Often

Here is an example: a community food bank reconciles its accounts weekly every Friday morning. When they review their bank feed, they notice a $250 charge they don’t recognize from Tuesday.

By catching this charge within days rather than at month-end, they can quickly contact their bank and discover it was an illegitimate vendor payment. Without regular reconciliation, this could have led to weeks of confusion or missed fraudulent activity.

Bank feeds that automatically import transactions directly into your accounting can make this entire process more efficient. Instead of manually entering each transaction, you simply review and categorize imported data, ensuring simple and accurate reconciliation.

4. Consistently Run Financial Statements

Regular financial reporting keeps your organization’s financial health visible to leadership and ensures compliance with board governance requirements. Without consistent statements, problems can compound unnoticed—overspending in one program, cash flow shortages, or grant compliance issues that threaten future funding.

To consistently run accurate and timely financial statements, be sure to:

• Pull data from one single source of truth: House all information in one place rather than compiling data from multiple systems. For example, a community food bank might move from pulling volunteer hours from Excel, donor data from their CRM, and expenses from QuickBooks to one integrated system.
• Create board-ready formats: An animal shelter, for example, might set up monthly reports that always include a one-page summary showing adoption revenue, veterinary costs, and facility expenses so board members always know where to find key metrics.
• Run automated reports: If you’re a healthcare nonprofit, for example, you might automatically generate monthly nonprofit financial statements on the 15th showing clinic operating costs, patient assistance fund usage, and equipment purchase tracking.
• Build fund-specific reports: Generate monthly reports for major funding sources showing spent amounts (e.g., $15,000 of $25,000 Department of Education grant) with detailed expense categories (e.g., personnel costs, program supplies, etc.), and remaining balances.

5. Set Up Automatic Payment Processing

Manual payment processing and invoice management can create significant challenges for nonprofit organizations. Unpaid invoices get buried under stacks of paper. Vendors call asking about payments, which creates a 20-minute rabbit hole trying to find the information.

Relying on handwritten checks and manual invoice tracking increases the risk of delayed payments, lost documentation, and administrative bottlenecks. Over time, these inefficiencies can strain vendor relationships, disrupt cash flow, and divert valuable staff time away from mission-critical activities.

Automated payment processing, however, can automatically route payment approvals to the right people, create recurring payments for fixed expenses such as rent and utilities, and follow payment schedules, such as process payments every Tuesday and Friday at 10:00 a.m.

6. Use Digital Document Management

Manually searching for documentation might not feel that onerous, but over time, the hours spent hunting add up. The 15-20 minutes spent each day searching for invoices and receipts scattered across emails, filing cabinets, and computers can add up to several hours monthly that could be better used on analysis or other critical tasks.

Organized digital document management can eliminate these problems, making financial information easily accessible to authorized staff. With a digital document system, you can attach supporting documentation directly to journal entries, projects, and vendor records within your accounting system, creating clear audit trails and enabling smooth operations at the same time.

7. Track Restricted Funds Separately

Restricted funds require separate tracking to ensure compliance with donor requirements. Mixing restricted and unrestricted money can create compliance violations that lead to funding setbacks, damaged grantor relationships, and future funding suspensions. This kind of fund accounting mishap is one of the top signs your organization needs a nonprofit accounting system.

For example, when a foundation awards your organization $10,000 specifically for youth programming, those funds cannot pay for administrative costs or other programs—even temporarily. Proper segregation prevents accidental misuse and provides clear compliance reporting.

To avoid this, nonprofits should:

• Use a fund accounting system: Unlike commercial accounting software, which requires manual workarounds and spreadsheets to maintain this separation, purpose-built fund accounting systems handle restricted fund segregation seamlessly.
• Set up fund-specific tracking: Create separate fund codes for each restricted revenue source, including individual grants, donor-restricted gifts, and board-designated funds.
• Monitor spending restrictions: Create alerts when administrative expenses are accidentally charged to that fund or when the fund balance drops below $5,000.

Simplify Bookkeeping for Nonprofits with Fund Accounting Software

Commercial accounting software handles basic transactions but lacks the nonprofit-specific functionality your organization needs for restricted fund tracking, grant compliance, and donor accountability. The resulting workarounds—spreadsheets, manual allocations, and separate systems—create unnecessary complexity that increases both workload and compliance risk.

Purpose-built fund accounting software eliminates these inefficiencies by providing native nonprofit features that work seamlessly together. Easily manage restricted funds separately from unrestricted revenue, track grant expenses against approved budgets in real-time, and generate compliance reports in funder-required formats without manual compilation.

Ready to eliminate manual payment processing bottlenecks? Download our Understanding AP Automation Guide to streamline accounts payable workflows and free up time for strategic financial analysis.