Nonprofits can use either accrual- or cash-basis accounting to track the finances of their operation. Typically, larger organizations use the accrual method, as it is GAAP-compliant and aligns with the structure of fund accounting, a method in which costs and donations are designated for a specific use.

The balance sheet of a non-profit organization is prepared in the same manner as in the case of a business enterprise. The assets of the organization are recorded on the Right side and liabilities on the Left side. The Non-profit organizations do not use the term Capital.

Medium-sized and larger nonprofits typically turn quickly to accrual-basis accounting because it better accommodates the complex reporting requirements for nonprofit financial statements — as well any necessary compliance with government requirements, most notably tax-exempt status, which is overseen by the IRS.

You can choose a cash-basis or an accrual accounting system for nonprofit organization. Cash-basis accounting is a system where you record expenses or income when you actually pay or receive them, not when the transaction takes place. For example, you run a nonprofit where members must pay dues.