Nonprofit Finance Glossary
Plain-English definitions of fund accounting, grants, and nonprofit finance terminology — from accrual basis accounting to zero-based budgeting.
A
Accrual Basis Accounting
An accounting method that records revenue when it's earned and expenses when they're incurred — regardless of when cash actually changes hands.
Audit
An independent examination of an organization's financial statements and internal controls, performed by a CPA firm, to confirm they're accurate and free of material misstatement.
B
Board-Designated Net Assets
Unrestricted net assets that the board has voluntarily set aside for a specific purpose, like a reserve fund — as opposed to money restricted by a donor.
Budget Variance
The difference between what an organization budgeted for a line item and what it actually spent or earned, usually expressed in dollars and as a percentage.
C
Capital Campaign
A time-limited fundraising effort aimed at a large, specific goal — typically a building purchase, renovation, or major endowment gift — rather than ongoing operations.
Chart of Accounts
The complete, organized list of every account an organization uses to record financial transactions — assets, liabilities, net assets, revenue, and expenses.
D
Depreciation
The systematic allocation of a fixed asset's cost over its useful life, recorded as an expense each period rather than all at once when purchased.
Donor Restriction
A limitation a donor places on how or when their gift can be used, which the recipient organization is legally obligated to honor.
E
Encumbrance
A budgeted amount set aside for a purchase order or signed contract that hasn't been paid yet — reserving the funds so they can't be double-spent.
Endowment
A fund where the donor's gift (the principal) must be invested and preserved permanently, with only the investment earnings available to spend.
F
Fiscal Sponsorship
An arrangement where an established 501(c)(3) extends its tax-exempt status to a newer project or initiative that hasn't (or won't) incorporate on its own.
Fiscal Year
A 12-month accounting period an organization uses for financial reporting and budgeting — which does not have to run January through December.
Form 990
The annual informational tax return most tax-exempt organizations must file with the IRS, disclosing finances, governance, and program activities.
Fund Accounting
An accounting method that tracks money by restriction and purpose — not just how much an organization has, but what it's allowed to be used for.
G
GAAP (Generally Accepted Accounting Principles)
The standard framework of accounting rules and conventions that U.S. organizations follow to prepare consistent, comparable financial statements.
General Ledger
The complete, master record of every financial transaction an organization has posted, organized by account — the single source of truth for the books.
Grant
A sum of money awarded by a foundation, government agency, or corporation to fund a specific program or purpose, usually with reporting requirements attached.
I
In-Kind Donation
A non-cash contribution — goods, services, or use of facilities — that must still be recorded at fair market value in the financial statements.
Indirect Cost Rate
A negotiated percentage a grant allows an organization to claim for overhead — rent, HR, IT, accounting — that supports a program without being directly tied to it.
L
Ledger Entry
The double-entry record of a single financial transaction — the debit and credit lines that, together, make up a journal entry in the general ledger.
Liquidity
How quickly an organization's assets can be converted to cash to meet near-term obligations — a measure of financial flexibility, not just total wealth.
M
Matching Gift
A donation that a company or foundation agrees to match — often dollar-for-dollar, sometimes at 2:1 or higher — up to a stated cap, doubling (or more) a donor's contribution.
Mission Statement
A concise statement of an organization's core purpose — why it exists and who it serves — that anchors both its programs and, indirectly, its tax-exempt status.
N
Net Assets
A nonprofit's total assets minus its total liabilities — the equivalent of what a for-profit business would call equity, split by donor restriction instead of ownership.
Nonprofit Organization
An organization formed for a public or mutual benefit purpose rather than to generate profit for owners — surplus revenue is reinvested in the mission, never distributed as dividends.
O
P
Permanently Restricted Net Assets
Donor-restricted funds — most commonly endowment principal — that can never be spent, only invested, with earnings released for the donor's designated purpose.
Pledge Receivable
A donor's unconditional written promise to give a specific amount in the future, recorded as revenue and an asset when the pledge is made — not when the cash arrives.
Program Service Revenue
Income a nonprofit earns by charging fees for the services central to its mission — tuition, ticket sales, membership dues, or client fees — as opposed to donations or grants.
Q
Qualified Charitable Distribution
A direct transfer of funds from an individual's IRA to a qualifying charity, which counts toward required minimum distributions but isn't counted as taxable income.
Quorum
The minimum number of board members who must be present for a vote to be legally valid — defined in an organization's bylaws, not chosen meeting by meeting.
R
Reconciliation
The process of comparing two sets of records — most commonly the general ledger's cash balance against the bank statement — to confirm they agree, and investigating any difference.
Restricted Fund
A pool of money set apart in the accounting system because a donor has limited how, when, or for how long it can be used.
S
Segregation of Duties
An internal control that splits key financial tasks — authorizing, recording, and safeguarding assets — across different people, so no single person controls a transaction end to end.
Statement of Activities
A nonprofit's equivalent of an income statement — showing revenue, expenses, and the resulting change in net assets over a fiscal year, split by donor restriction.
Statement of Functional Expenses
A financial statement, required for most nonprofits, that breaks every expense down by both nature (what was bought) and function (why it was bought).
T
Tax-Exempt Status
IRS recognition that an organization is exempt from federal income tax — most commonly under section 501(c)(3) — granted after a formal application, not automatically upon incorporation.
Temporarily Restricted Net Assets
Donor-restricted funds that become available for general use once a specific purpose is fulfilled or a specific time period passes.
U
Unrelated Business Income (UBI)
Income from a regularly-conducted trade or business that isn't substantially related to an organization's tax-exempt purpose — and is taxable even though the organization itself is tax-exempt.
Unrestricted Net Assets
Net assets with no donor-imposed restrictions — free to be used for any legitimate purpose the board and management decide, including day-to-day operations.
V
Variance Analysis
The practice of reviewing budget variances to understand their root cause, rather than simply reporting that actual results differed from the plan.
Vesting
The process by which an employee earns a non-forfeitable right to employer-contributed retirement benefits over time, based on years of service.
W
W-9 Form
An IRS form a nonprofit collects from a vendor, contractor, or honorarium recipient before paying them, to obtain their tax ID and confirm 1099 reporting requirements.
Whistleblower Policy
A board-adopted policy that protects employees, volunteers, and board members from retaliation when they report suspected financial misconduct or fraud in good faith.