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Under accrual basis accounting, a $50,000 grant is recorded as revenue the moment it’s awarded and the conditions for recognition are met — not when the check clears. Likewise, a bill for December’s utilities is booked as a December expense even if it isn’t paid until January.

This matters because it gives a nonprofit’s board and funders an accurate picture of financial position at any given moment, rather than one that’s skewed by the timing of deposits and payments. GAAP requires accrual basis accounting for audited financial statements, and most funders and auditors expect it.

The alternative — cash basis accounting, which only records money when it physically moves — is simpler but can make an organization look flush right after a big grant deposit, or strapped right before one, even when the underlying financial reality hasn’t changed.

Many nonprofits are required to obtain an annual audit — typically once they cross a state-specific revenue threshold, receive a certain amount in federal funding (triggering a Single Audit under Uniform Guidance), or because a major funder or lender requires one as a condition of the grant or loan.

An auditor reviews the general ledger, tests a sample of transactions, confirms bank balances directly with financial institutions, and evaluates whether internal controls — like segregation of duties — are strong enough to prevent or catch errors and fraud. The result is an audit opinion (ideally “unmodified,” meaning no material issues were found) along with a management letter noting any recommended improvements.

Being “audit-ready” year-round — clean reconciliations, documented fund restrictions, and an organized chart of accounts — turns the annual audit from a stressful scramble into a routine confirmation of work already done well.