Article
How accrual accounting can empower your nonprofit
Summary
Accrual accounting helps nonprofits present a more accurate financial picture by matching revenue and expenses to the periods in which they occur. Beyond supporting GAAP compliance, it can improve decision making, strengthen stakeholder confidence, and help organizations better manage programs, grants, and resources to advance their mission. See Frequently Asked Questions. →
Nonprofits do important work that strengthens communities and changes lives. But to carry out its mission, a nonprofit must have a strong accounting foundation—one that properly tracks multiple funding sources and programs. This is where accrual accounting plays a key role.
Here’s what you should know about accrual accounting and how it can empower your nonprofit.
What is accrual accounting?
Accrual accounting, in plain language, is an accounting method that calls for recognizing revenue when it’s earned and expenses when they’re incurred, regardless of when the cash is received or spent. (Cash accounting, on the other hand, involves recognizing revenue and expenses based on the timing of the cash transactions.)
Accrual accounting helps to ensure financial statements accurately reflect what happened during a given period—and not just when the cash was exchanged. Although its definition is simple, applying it requires judgment.
For example, say a donor makes a pledge in May but doesn’t make a payment until June. Under accrual accounting, the revenue would be recorded in May to match the date of the donor’s pledge.
Why is accrual accounting required?
In Minnesota, nonprofits with total revenues greater than $750,000 are required to be audited in accordance with Generally Accepted Accounting Principles (GAAP), which requires accrual accounting.
Even so, organizations below the threshold (i.e., those that are not required to follow GAAP) can benefit from accrual accounting, in ways that impact both internal and external stakeholders.
Benefits of accrual accounting for nonprofits
Get a clearer picture of program costs
Under accrual accounting, a program’s expenses and revenues are tied to the same time periods instead of being recorded when the cash is paid or received. This allows you to more accurately assess a program’s financial success as well as its cost.
Bolster stakeholder trust
Even if your organization isn’t required to follow GAAP, doing so allows you to produce standardized reporting to board members, lenders, and major donors. This can go a long way toward maintaining stakeholder confidence.
Track grants and funds more accurately
Recognizing revenue from grants and funds can be complicated. Accrual accounting allows you to more easily account for things like delayed grant reimbursements, pledges, and multi-year awards.
Make more informed decisions
A good understanding of accrual accounting equals solid books. With these in hand, your organization’s decision makers can confidently make decisions about where to best utilize resources.
Strengthen your accounting policies and procedures
To fully benefit from accrual accounting, your organization must apply it accurately and consistently. This is where having accounting policies and procedures can help.
Even so, certain aspects of accrual accounting can be tricky for nonprofits, especially when it comes to recognizing restricted funds. To help your organization properly account for these, I’ve put together this quick reference guide that outlines a procedure for recording restricted net assets. You can download it here.
Drive your mission forward with confidence
Yes, accrual accounting can be complicated. But taking time to understand it and properly leverage it within your nonprofit can help to amplify its mission. This means taking time to deepen your knowledge of this accounting method, asking questions of your auditors when needed, and exploring ways to improve your accounting policies and procedures.
If you have questions about accrual accounting or would like to request a sample finance manual for your organization, our team at Abdo is here to help. We’re also planning a webinar on accrual accounting on August 17—we hope you can join us! Learn more and register for the webinar here.
To learn more about how we empower nonprofits, contact us today.
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July 7, 2026
Please note: Operational and regulatory guidance is frequently changing and the information included here may be out of date—please consult the latest guidance and with your advisor before taking action.
Frequently Asked Questions
What is accrual accounting for nonprofits?
Accrual accounting is an accounting method that records revenue when it is earned and expenses when they are incurred, regardless of when cash changes hands. For nonprofits, this approach provides a more accurate picture of financial performance by matching revenues and expenses to the periods in which they occur. It also helps organizations track grants, donor pledges, and program costs more effectively than cash accounting.
Is accrual accounting required for nonprofits?
Some nonprofits are required to use accrual accounting to comply with Generally Accepted Accounting Principles (GAAP). In Minnesota, nonprofits with annual revenues exceeding $750,000 must undergo a GAAP-compliant audit, which requires accrual accounting. Even organizations that are not required to follow GAAP may choose accrual accounting because it improves financial reporting, decision making, and stakeholder confidence.
What are the benefits of accrual accounting for nonprofit organizations?
Accrual accounting can help nonprofits better understand program profitability, accurately track grants and restricted funds, and produce more reliable financial statements. Because revenues and expenses are recognized in the periods they relate to, leadership teams can make more informed budgeting and resource allocation decisions. It can also strengthen trust with board members, donors, lenders, and funders by providing greater financial transparency.
How does accrual accounting help nonprofits manage grants?
Many nonprofit grants involve reimbursement schedules, funding restrictions, or multi-year award periods. Accrual accounting allows organizations to recognize grant revenue when it is earned rather than when funds are received. This provides a clearer understanding of available resources and helps ensure financial reports accurately reflect grant activity, funding commitments, and program performance.
What is the difference between cash accounting and accrual accounting for nonprofits?
Cash accounting records revenue and expenses when money is received or paid, while accrual accounting records them when they are earned or incurred. As a result, accrual accounting provides a more complete view of a nonprofit's financial position and operating results. For organizations managing multiple programs, grants, and donor funding sources, accrual accounting often offers better insights for planning, reporting, and long-term decision making.
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