Understanding & Applying GAAP for Nonprofits: FAQ Guide

Wednesday, April 8, 2026 by Jon Osterburg

Nonprofit accounting is unique in both its purpose and its execution. While for-profit organizations' primary accounting goal is profitability, your nonprofit's focus should be on accountability to donors, stakeholders, and the government. This shift in priorities allows your organization to remain tax-exempt and use its revenue more effectively to make a difference.

However, all organizations are expected to follow a set of accounting standards: the Generally Accepted Accounting Principles (GAAP). In this guide, we'll help you find your footing with GAAP for nonprofits by answering the following common questions:

• What are the Generally Accepted Accounting Principles?
• Who developed GAAP?
• Why do nonprofits need to comply with GAAP standards?
• How can my nonprofit ensure adherence to GAAP?

Let's get started by reviewing the standards that make up GAAP so your organization can get on the road to compliance and more effective financial management.

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What are the Generally Accepted Accounting Principles?

The Generally Accepted Accounting Principles (commonly known as GAAP) are a set of agreed-upon accounting standards that provide a framework for recording and reporting financial information. They ensure consistency and comparability in financial management among all organizations in the United States—both for-profit and nonprofit.

The 10 GAAP standards are as follows:

1. Principle of Regularity: GAAP-compliant accounts adhere to established rules and regulations.
2. Principle of Consistency: Financial reports are created according to consistent standards.
3. Principle of Sincerity: Accounting practices are conducted accurately and impartially.
4. Principle of Permanence of Methods: Financial reports are prepared using standardized procedures.
5. Principle of Non-Compensation: All aspects of an organization's performance—both positive and negative—are reported with no prospect of debt compensation.
6. Principle of Prudence: Reported financial data is not influenced by speculation.
7. Principle of Continuity: Asset values are reported under the assumption that the organization's operations will continue.
8. Principle of Periodicity: Financial reporting schedules are divided into standard accounting periods, such as fiscal years, quarters, and months.
9. Principle of Materiality: Financial reports fully disclose an organization's financial situation.
10. Principle of Utmost Good Faith: Everyone involved in accounting processes is assumed to be acting honestly.

These principles apply to all types of organizations, but they're especially useful for nonprofits like yours because they're designed to promote accountability.

Who developed GAAP?

Since GAAP first came about in the early 20th century, it has been a collaborative effort to create, update, and maintain. The primary organizations involved include:

• American Institute of Certified Public Accountants (AICPA). This organization, which administers the CPA certification exam and establishes various accounting and auditing requirements, laid the foundation for GAAP.
• Financial Accounting Standards Board (FASB). A private-sector organization created for the primary purpose of accounting standardization, FASB has been in charge of keeping GAAP up-to-date since the organization was founded in 1973.
• Securities and Exchange Commission (SEC). This federal government agency regulates the market and protects investors, meaning it's the most involved organization in maintaining GAAP on a national level.
• State governments. Individual states also help uphold GAAP through the reporting regulations they set forth, although each government does this slightly differently. Check the IRS requirements for your state to stay up-to-date on this aspect of compliance.

Although the primary goal of GAAP—ensuring consistency, comparability, and transparency—has stayed the same over the 100-plus years of its existence, accounting practices have evolved as technology has become more prevalent. So, GAAP has also had to evolve, and multiple organizations in different niches of accounting continue to guide that process to ensure it's holistic.

Why do nonprofits need to comply with GAAP standards?

The greatest advantage of GAAP compliance is the rigorous accountability it provides. However, these principles also have other purposes for organizations like yours. Here are some additional reasons why your nonprofit should follow GAAP standards:

• Legal compliance. Although GAAP principles aren't laws themselves, they inform many of the legal guidelines your nonprofit has to follow. For instance, despite being tax-exempt, your organization probably still files an annual tax return via IRS Form 990 to align with the Principles of Consistency and Periodicity.
• Credibility and confidence. Reporting your finances in good faith and according to standardized procedures helps external stakeholders see your nonprofit as a professional, trustworthy organization. GAAP in particular requires accurate, thorough reports that deepen that confidence, which can boost your nonprofit's reputation and help you secure more high-impact contributions.
• Grantmaker and auditor expectations. If your organization applies for grants or undergoes independent financial audits, the grantmakers and auditors you work with will assume that you comply with GAAP and assess your nonprofit's information accordingly. It's much easier for everyone when this is the case, and you'll have to include disclaimers on all of your grant or audit materials if not.
• Standardized financial management. GAAP also provides a framework for allocating, recording, and overseeing your nonprofit's finances to help you further your mission. That way, all of the internal and external financial professionals you work with—whether they're bookkeepers, accountants, treasurers, controllers, advisors, or in any other role—will be on the same page about these activities.

To begin implementing GAAP, sit down with your financial professionals, leadership, and members of your fundraising team who can provide insight into your nonprofit's everyday resource use so you can create a comprehensive financial action plan together. Once you've started following this plan, check in with your team regularly to identify what's going well and where there is room for improvement.

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How can my nonprofit ensure adherence to GAAP?

The action plan you develop may involve creating or updating a variety of financial policies, procedures, and documents. To get your nonprofit on the right track and assess how well you're currently following GAAP, take the quick quiz below, then read on to discover some strategies for improving or maintaining adherence to these principles.

Use the Accrual Accounting Method

In an accrual accounting system, your nonprofit will record revenue when it's pledged and expenses when they're incurred. This method contrasts with a cash accounting system, which records revenue when it's received and expenses when they're paid.

Accrual accounting is more complicated than cash accounting and requires dedicated accounting software to implement properly. However, because this system includes both financial commitments and cash flows, it provides a more complete picture of your organization's situation as required by GAAP. It also makes filing your Form 990 easier since you'd have to include a disclaimer and do additional calculations if you used the cash accounting method.

Properly Recognize Different Types of Revenue

Your nonprofit likely brings in funding from various sources—individual donations, grants, investments, earned income, and/or corporate contributions. Each of these revenue types should be recorded separately in your accounting system to ensure consistency and materiality.

Some revenue streams have additional recognition requirements for GAAP compliance. For instance, you should record the monetary value of an in-kind gift as both a debit and a credit to note that you received it, but the amount of cash your organization has hasn't changed.

There is also a difference between contribution transactions (where your nonprofit doesn't promise anything in return for funding) and exchange transactions (where you do promise something in return), which dictates when you recognize each type of revenue. You can record revenue from a contribution transaction as soon as you know the full amount you'll receive, but you have to wait to recognize exchange transactions until you've fulfilled your obligations.

Honor Donor Restrictions on Funding

Some of the revenue your nonprofit receives will likely be restricted, meaning the contributor has designated it for a specific purpose. This most often happens with major gifts and grant funding because large-dollar donors and grantmakers want to ensure their significant contributions are used to advance aspects of your mission that align with their values.

To act sincerely and in good faith, your organization needs to honor your commitments to use those funds as the donor or grantmaker intended—and indicate that you've done so in your financial reports. These contributors have the right to sue your nonprofit for misuse of funds if you don't respect their official wishes, which is another way GAAP and legal requirements for nonprofits align.

Allocate Expenses by Function

Generally speaking, there are two ways your organization can allocate expenses in its budget. The first method is based on the type of payment you'll make to cover each intended cost, referred to as natural expense allocation. The second method, functional expense allocation, is based on how each expenditure impacts your mission.

The three categories of functional expenses are:

• Program costs, which are directly related to the activities that further your mission.
• Administrative costs, which are essential for your nonprofit to operate (such as paying utility bills and compensating your staff).
• Fundraising costs, which are associated with running giving campaigns, planning events, and marketing your nonprofit.

While all three types of expenses are necessary to achieve your goals, your nonprofit should be spending much less on its administrative needs and fundraising than it does on its programs. Allocating your expenses based on these categories allows you to see exactly how much of your funding goes toward mission-related activities and how much is being used to run the organization, allowing for the full transparency that GAAP calls for.

Compile & Publish Financial Statements

Since many of the GAAP standards are related to reporting, ensuring your nonprofit creates accurate financial statements each year is the most essential aspect of adhering to these principles. These statements organize and summarize data in consistent ways to provide different insights into your organization's financial situation.

Under GAAP, both nonprofit and for-profit organizations are required to compile these three financial statements:

• Income statement or statement of activities. These terms are interchangeable, although for-profit organizations prefer the former and nonprofits tend to use the latter. This report outlines your organization's revenue, expenses, and net assets to provide actual numbers that you can compare to your budget and use to inform more accurate projections for the future.
• Balance sheet or statement of financial position. This statement is usually known as a balance sheet in the for-profit sector and a statement of financial position in the nonprofit world. It breaks down your assets, liabilities, and net assets to provide a snapshot of your organization's financial health, which is especially useful if you're planning for growth.
• Statement of cash flows. Most organizations use the same term for this statement, which shows how cash moves in and out of your organization through operating, investing, and financing activities to help you stay on track with your spending and revenue generation.

There is also a fourth type of financial statement that is unique to nonprofits: the statement of functional expenses. This report divides your organization's natural expenses into the three functional expense categories to show how your spending furthers your mission.

In addition to informing internal decision-making and tax filing, financial statements can help your organization maintain external transparency if you publish them on your website or attach them to your annual report. This way, stakeholders who want to dig deeper into your nonprofit's finances can do so easily. For your less financially savvy supporters, consider pulling the most important data from your financial statements and using it to create charts or graphs for your website or annual report so they can at least understand the basics of your financial situation.

GAAP is among the most fundamental concepts for nonprofit accounting, so you need to know what it entails to manage your organization's finances effectively. Use the information and application tips above to get started, and don't hesitate to reach out to nonprofit accounting experts (like the team at Jitasa!) with any questions or concerns that come up along the way.

For more information about GAAP for nonprofits, check out these resources:

• What Is Fund Accounting? A Guide to Basics & Best Practices. Dive deeper into the unique accounting system your nonprofit should use to transparently track funding and honor restrictions under GAAP.
• How Do Nonprofits Make Money? FAQ Guide to Nonprofit Revenue. Explore the different revenue streams that your nonprofit might leverage and the requirements to account for each one according to GAAP.
• Nonprofit Revenue Recognition: What It Is & Why It Matters. Learn more about contribution transactions, exchange transactions, deferred funds, and other revenue recognition concepts that affect GAAP compliance.

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