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GAAP is set by the Financial Accounting Standards Board (FASB), and for nonprofits specifically, FASB’s Accounting Standards Update 2016-14 reshaped how net assets are classified and disclosed — consolidating what used to be three donor-based categories into the two used today: with donor restrictions, and without donor restrictions.

Following GAAP matters most at two moments: when an external CPA firm performs an audit (auditors test compliance with GAAP, not just internal policy) and when a funder or lender requires GAAP-basis financial statements as a condition of a grant or loan. Smaller organizations without an audit requirement sometimes use a simplified or cash/tax basis internally, but almost always need to convert to GAAP for any audited or reviewed statements.

Because GAAP is a living standard — FASB periodically issues updates like ASU 2016-14, or newer guidance on gifts-in-kind — nonprofit finance teams need to track when new standards take effect and adjust reporting accordingly.

Every journal entry, every invoice paid, every donation deposited eventually lands in the general ledger. It’s the record everything else — the statement of activities, the statement of financial position, budget-to-actual reports, and the annual audit — is ultimately built from.

In a fund-accounting system, the general ledger doesn’t just track debits and credits by account; it tags each transaction with a fund, so the same $10,000 expense can be sliced by account (what was purchased), by fund (which restricted or unrestricted pool paid for it), and by function (program, management, or fundraising) — all from one underlying record.

Reconciling the general ledger to bank statements, and closing each month cleanly, is what keeps the rest of an organization’s financial reporting trustworthy. A messy or unreconciled general ledger undermines every report generated from it, no matter how polished those reports look.

Grants are the clearest real-world example of a donor restriction: a funder awards $150,000 specifically for a job-training program, and that money can’t be spent on the annual gala or a different program, no matter how tight the budget gets elsewhere.

Most grants come with a reporting schedule — quarterly or annual narrative and financial reports showing how the money was spent against the approved budget — and many require the recipient to return unspent funds at the end of the grant period. Government grants add another layer: compliance with Uniform Guidance (2 CFR 200), allowable cost rules, and potentially a Single Audit if federal awards exceed $750,000 in a year.

Tracking each grant as its own restricted fund, with its own budget-to-actual view, is what makes accurate, on-time grant reporting possible — and what prevents the all-too-common problem of accidentally spending one grant’s money on another grant’s activities.