What This Glossary Covers
Nonprofit finance comes with its own vocabulary, and these terms surface constantly in board meetings, audits, grant reports, and conversations with funders. The glossary below is organized into four sections, and every term includes a plain-English definition, why it matters for your organization, and a real-world example, so you can find what you need and actually understand it.
Accounting Fundamentals
15 terms: The foundational accounting and bookkeeping concepts every nonprofit relies on.
Accounts Payable (AP)
Accounts payable is money your nonprofit owes to vendors, suppliers, or contractors for goods or services you have already received but have not yet paid for.
Why it matters: Tracking accounts payable accurately ensures your nonprofit’s financial statements reflect what you actually owe at any given time — critical for board reporting and audit accuracy.
Example: Your nonprofit receives an invoice for $3,000 from a printing vendor for your annual report in June, but you don’t pay it until July. That $3,000 sits in accounts payable on your June financial statements, showing the board the true financial picture.
See also: Related: Accounts Receivable, General Ledger. Related service: Accounting & Controller Services.
Accounts Receivable (AR)
Accounts receivable is money owed to your nonprofit for services delivered, grants awarded, or pledges made that you have not yet received.
Why it matters: For nonprofits, accounts receivable often includes government reimbursements and foundation grant payments that have been approved but not yet deposited — tracking these accurately prevents cash flow surprises.
Example: Your nonprofit delivers workforce training in March under a government contract, submits an invoice for $15,000, and receives payment in May. During April, that $15,000 sits in accounts receivable — it is money you have earned but not yet collected.
See also: Related: Accounts Payable, Pledges Receivable. Related service: Bookkeeping, Accounting & Controller Services.
Accrual Accounting
Accrual accounting is a method of recording revenue and expenses when they are earned or incurred, regardless of when cash actually changes hands.
Why it matters: Most auditors and major funders require nonprofits to use accrual accounting because it gives a more accurate picture of financial health than cash basis; it prevents organizations from looking financially healthier than they are simply because payments happen to arrive on time.
Example: Your nonprofit receives a $50,000 grant award letter in December. Under accrual accounting, you record that revenue in December even though the check arrives in February — your year-end financials reflect the grant as earned income.
See also: Related: Cash Basis Accounting, Modified Cash Basis. Related service: Accounting & Controller Services, Audit Assistance.
ASC 958 (Nonprofit Accounting Standard)
ASC 958 is the Financial Accounting Standards Board (FASB) standard that governs how nonprofits classify and report their net assets, contributions, and financial statements.
Why it matters: ASC 958 is the rulebook behind everything in your nonprofit’s financial statements — it defines how restricted and unrestricted funds are reported, how contributions are recognized, and what your Statement of Functional Expenses must show.
Example: ASC 958 is why your nonprofit reports net assets in two categories — with donor restrictions and without donor restrictions — rather than the single equity line you would see on a for-profit balance sheet.
See also: Related: Net Asset Classes, Statement of Functional Expenses, GAAP. Related service: Accounting & Controller Services.
Audit Trail
An audit trail is a chronological record of every financial transaction, showing who made each entry, when it was made, and what was changed.
Why it matters: A clean audit trail is what protects your nonprofit when auditors arrive — it proves that every transaction was authorized, recorded accurately, and can be traced back to its source document.
Example: Your auditor asks to see support for a $12,000 expense. A strong audit trail means you can immediately pull the original invoice, the approval email, the journal entry, and the payment confirmation — in under five minutes.
See also: Related: Internal Controls, Bank Reconciliation. Related service: Audit Assistance, Bookkeeping.
Bank Reconciliation
Bank reconciliation is the process of comparing your nonprofit’s internal accounting records to your bank statement to confirm they match and identify any discrepancies.
Why it matters: Monthly bank reconciliation is one of the most important fraud-prevention controls available to nonprofits — it catches unauthorized transactions, duplicate payments, and bookkeeping errors before they compound.
Example: Your accounting system shows a balance of $84,200 but your bank statement shows $83,950. A reconciliation reveals a $250 check written in your records that has not yet cleared — a legitimate timing difference that explains the gap.
See also: Related: Internal Controls, Month-End Close, General Ledger. Related service: Bookkeeping.
Cash Basis Accounting
Cash basis accounting is a method of recording revenue and expenses only when cash is actually received or paid — not when it is earned or incurred.
Why it matters: Cash basis is simpler to manage but gives a less complete picture of financial health; many small nonprofits start on cash basis but outgrow it when they begin receiving grants, which require accrual-based reporting.
Example: Under cash basis, a $30,000 grant you received in January shows up as January revenue even if it was awarded in November — which can make one month look unusually strong and distort year-over-year comparisons.
See also: Related: Accrual Accounting, Modified Cash Basis. Related service: Accounting & Controller Services, System Migration.
Chart of Accounts (COA)
A chart of accounts is a numbered directory of every financial account your nonprofit uses to categorize transactions — organized by assets, liabilities, net assets, revenue, and expenses.
Why it matters: Your chart of accounts is the foundation of your entire financial system — a poorly structured COA makes grant reporting, functional expense allocation, and audit preparation significantly harder than they need to be.
Example: A well-built nonprofit COA separates program expenses by each major program area, so you can pull a report showing exactly what you spent on your job training program versus your housing program — without manual sorting.
See also: Related: General Ledger, Functional Expenses, Fund Accounting. Related service: Bookkeeping, System Migration.
Fiscal Year
A fiscal year is the 12-month accounting period your nonprofit uses for financial reporting and tax filing — it does not have to align with the calendar year.
Why it matters: Your fiscal year determines when your Form 990 is due, when your audit takes place, and how your annual budget is structured — knowing your fiscal year end is the starting point for every financial planning conversation.
Example: A nonprofit with a June 30 fiscal year end closes its books on June 30, begins its audit process in July, and has its Form 990 due November 15 — not May 15 like a December 31 fiscal year organization.
See also: Related: Year-End Close, Form 990. Related service: Tax Preparation, Bookkeeping.
Generally Accepted Accounting Principles (GAAP)
GAAP is the standardized set of accounting rules and principles that govern how financial statements must be prepared and reported in the United States.
Why it matters: GAAP compliance is required for any nonprofit that undergoes an independent audit — and many major funders require GAAP-compliant financial statements as part of their grant application and reporting process.
Example: When your auditor issues an unqualified opinion on your financial statements, they are confirming that your books were prepared in accordance with GAAP — which is the standard of credibility that boards, funders, and government agencies expect.
See also: Related: ASC 958, Independent Audit, Accrual Accounting. Related service: Accounting & Controller Services, Audit Assistance.
General Ledger
The general ledger is the master record of all financial transactions in your nonprofit — every journal entry made to every account flows into the general ledger.
Why it matters: The general ledger is the source of truth for all of your nonprofit’s financial statements; if something is wrong in your financials, the answer is always found by tracing back to the general ledger.
Example: When your controller prepares your monthly Statement of Activities, they are pulling totals from accounts in the general ledger — every line on that report traces directly back to individual transactions recorded there.
See also: Related: Chart of Accounts, Journal Entry, Bank Reconciliation. Related service: Bookkeeping, Accounting & Controller Services.
Journal Entry
A journal entry is the basic unit of accounting — a recorded transaction that shows which accounts were debited and credited and why.
Why it matters: Every financial transaction your nonprofit makes — a grant payment received, a vendor invoice paid, a payroll expense recorded — begins as a journal entry; accurate journal entries are the foundation of clean books.
Example: When you pay your office rent, your bookkeeper records a journal entry that debits the rent expense account and credits your cash account — documenting the transaction in a way that flows accurately into all financial reports.
See also: Related: General Ledger, Audit Trail, Chart of Accounts. Related service: Bookkeeping.
Modified Cash Basis
Modified cash basis is a hybrid accounting method that uses cash basis for most transactions but applies accrual accounting to specific items like payroll, accounts payable, and fixed assets.
Why it matters: Modified cash basis gives small to mid-size nonprofits a more accurate financial picture than pure cash basis without the full complexity of accrual accounting — a common stepping stone as organizations grow.
Example: A nonprofit on modified cash basis records payroll expenses in the period they are earned — not when checks are cut — but records most other transactions when cash changes hands, striking a practical middle ground.
See also: Related: Cash Basis Accounting, Accrual Accounting. Related service: Accounting & Controller Services.
Month-End Close
Month-end close is the process of finalizing all financial transactions for the month — reconciling accounts, reviewing entries, and producing financial statements — so the books are accurate and complete.
Why it matters: The speed and accuracy of your month-end close determines how quickly your board receives financial reports — a close process that takes three weeks means your board is always making decisions based on outdated numbers.
Example: A well-run month-end close takes 5 to 7 business days: bank accounts are reconciled by day 3, journal entries are reviewed and posted by day 5, and final financial statements are ready for board review by day 7.
See also: Related: Bank Reconciliation, Year-End Close, Financial Statements. Related service: Bookkeeping, Accounting & Controller Services.
Year-End Close
Year-end close is the process of finalizing all financial activity for the fiscal year — completing reconciliations, making adjusting entries, and preparing the final financial statements that will be used for your audit and Form 990.
Why it matters: A clean year-end close is the single biggest factor in how smoothly your audit goes — organizations with well-prepared year-end books typically complete their audits faster, with fewer findings, and at lower cost.
Example: Your auditor will request your year-end trial balance, final bank reconciliations, and support for significant balances as their first step. If those documents are ready and clean, the audit fieldwork moves quickly; if they are not, the process stalls and costs more.
See also: Related: Month-End Close, Independent Audit, Form 990. Related service: Bookkeeping, Audit Assistance, Tax Preparation.
Fund Accounting
12 terms: Nonprofit-specific financial concepts that don’t exist in for-profit accounting.
Board-Designated Funds
Board-designated funds are unrestricted funds that the board of directors has voluntarily set aside for a specific purpose — such as an operating reserve or a capital project.
Why it matters: Board designations are internal decisions, not donor restrictions — the board can change or remove the designation at any time, which gives the organization more flexibility than donor-restricted funds.
Example: Your board votes to set aside $75,000 from your unrestricted surplus as an operating reserve. Those funds are now board-designated — they are still technically unrestricted but carry a board-level expectation that they will only be used for cash flow emergencies.
See also: Related: Restricted Funds, Unrestricted Funds, Operating Reserve. Related service: CFO Services, Accounting & Controller Services.
Endowment Fund
An endowment fund is a pool of invested assets where the principal is preserved permanently and only the investment income — typically a defined annual percentage — is spent on the organization’s mission.
Why it matters: Endowments provide long-term financial sustainability by generating reliable annual income independent of fundraising results — but they require careful investment management and clear spending policies.
Example: A $2 million endowment with a 5% annual spending policy generates $100,000 per year for your programs. The $2 million principal stays invested and grows over time, while you spend only the earnings.
See also: Related: Permanently Restricted Funds, Quasi-Endowment, Net Assets. Related service: CFO Services.
Fund Accounting
Fund accounting is a system of accounting used by nonprofits that tracks money in separate pools — called funds — based on the restrictions and purposes assigned to each pool of money.
Why it matters: Unlike for-profit accounting, where all money is interchangeable, nonprofit fund accounting ensures that restricted grant dollars are only spent on what the donor or funder intended — a compliance requirement and a trust signal to your funders.
Example: You receive a $40,000 federal grant restricted to youth programming and a $20,000 unrestricted donation in the same week. Fund accounting keeps these in separate funds so you can prove to the federal funder that their money was only used for youth programs.
See also: Related: Restricted Funds, Unrestricted Funds, Net Assets. Related service: Bookkeeping, Grant Management.
Net Assets
Net assets are the difference between your nonprofit’s total assets and total liabilities — the nonprofit equivalent of equity on a for-profit balance sheet.
Why it matters: Net assets tell your board and your funders whether your organization is financially healthy at a given point in time; negative net assets mean your liabilities exceed your assets, which is a serious warning sign.
Example: Your nonprofit has $500,000 in total assets and $180,000 in total liabilities. Your net assets are $320,000 — a positive position that signals financial stability to grant reviewers and board members.
See also: Related: Net Asset Classes, Statement of Financial Position. Related service: CFO Services, Accounting & Controller Services.
Net Asset Classes
Net asset classes are the two categories nonprofits use to classify their net assets under GAAP: net assets with donor restrictions and net assets without donor restrictions.
Why it matters: Properly classifying net assets between restricted and unrestricted categories is a GAAP requirement and an audit focal point — misclassification can trigger an audit finding and mislead your board about how much money you can actually spend freely.
Example: Your financial statements show $450,000 in net assets — but $380,000 of that is with donor restrictions, meaning it is tied to specific programs or purposes. Only $70,000 is without donor restrictions and available for general operations.
See also: Related: Net Assets, Restricted Funds, Unrestricted Funds, ASC 958. Related service: Accounting & Controller Services.
Pass-Through Funds
Pass-through funds are money your nonprofit receives from a funder and is required to distribute to another organization — your nonprofit acts as an intermediary, not the end recipient of the funds.
Why it matters: Pass-through arrangements require careful tracking because the funds must be distributed to the designated subrecipient — your nonprofit is responsible for ensuring compliance even for money it does not ultimately spend.
Example: A foundation grants your nonprofit $200,000 to distribute to ten smaller community organizations doing related work. Your nonprofit passes $20,000 to each sub-grantee, retaining a small administrative fee. The $180,000 is a pass-through and should not inflate your program expense ratio.
See also: Related: Restricted Funds, Grant Management, Subrecipient. Related service: Grant Management, Accounting & Controller Services.
Permanently Restricted Funds
Permanently restricted funds — now called net assets with donor restrictions in current GAAP terminology — are contributions that must be maintained permanently, with only the income from investing those funds available to spend.
Why it matters: Permanent restrictions are the most binding type of donor restriction; because the principal can never be spent, these funds require an investment policy, a spending policy, and ongoing tracking separate from operating funds.
Example: A donor gives $500,000 with the stipulation that the principal be held in perpetuity and only investment returns used for scholarships. That $500,000 is permanently restricted — your organization can never spend the original gift itself.
See also: Related: Endowment Fund, Temporarily Restricted Funds, Net Asset Classes. Related service: CFO Services.
Quasi-Endowment
A quasi-endowment is a board-designated endowment — funds the board has decided to invest and treat like an endowment, but which remain unrestricted and can be undesignated by the board at any time.
Why it matters: A quasi-endowment gives nonprofits the discipline of an endowment without the permanence of a donor restriction — useful for building long-term financial reserves when no major donor endowment exists.
Example: Your board sets aside $300,000 from a surplus year and designates it as a quasi-endowment, investing it with the intention of only spending annual returns. If a financial crisis occurs, the board can vote to undesignate those funds and access the principal.
See also: Related: Endowment Fund, Board-Designated Funds, Permanently Restricted Funds. Related service: CFO Services.
Restricted Funds
Restricted funds are contributions or grants that can only be used for a specific purpose defined by the donor or funder — your organization cannot redirect these funds without explicit permission.
Why it matters: Spending restricted funds on anything other than their stated purpose is one of the most serious compliance violations a nonprofit can commit — it can result in grant claw-backs, loss of funding relationships, and reputational damage.
Example: A foundation grants you $60,000 specifically for a summer literacy program. You cannot use those funds to cover your executive director’s salary or pay an unrelated vendor — even if your general operating budget is running short.
See also: Related: Unrestricted Funds, Fund Accounting, Grant Management. Related service: Grant Management, Bookkeeping.
Temporarily Restricted Funds
Temporarily restricted funds — now classified as net assets with donor restrictions that will be released — are contributions restricted by the donor for a specific time period or purpose, after which they are released to unrestricted use.
Why it matters: Understanding when and how restricted funds are released is essential for cash flow planning — funds that will be released in six months are meaningfully different from funds permanently restricted to a single purpose.
Example: A donor gives $25,000 restricted to your 2025 capital campaign. Once the campaign is complete and funds are spent as intended, the restriction is released and any remaining balance converts to unrestricted funds available for general use.
See also: Related: Restricted Funds, Permanently Restricted Funds, Net Asset Classes. Related service: Accounting & Controller Services, CFO Services.
Unconditional Contributions
An unconditional contribution is a gift given to a nonprofit without any conditions that must be met before the nonprofit can use the funds — the organization can recognize the revenue as soon as the gift is made.
Why it matters: Correctly identifying whether a contribution is conditional or unconditional effects when your nonprofit records the revenue — getting this wrong is a common audit finding that auditors specifically look for.
Example: A donor mails your nonprofit a $10,000 check with no strings attached. That is unconditional — you record it as revenue immediately. If the same donor says ‘use this only if you raise another $10,000 from others,’ it is conditional and cannot be recognized until that condition is met.
See also: Related: Restricted Funds, Unrestricted Funds, Revenue Recognition. Related service: Bookkeeping, Accounting & Controller Services.
Unrestricted Funds
Unrestricted funds are contributions or revenue that your nonprofit can use for any organizational purpose — there are no donor or funder conditions on how the money is spent.
Why it matters: Unrestricted revenue is the most flexible and valuable type of funding for nonprofits because it can go where it is needed most — covering overhead, building reserves, or supporting programs with funding gaps.
Example: Individual donations made through your annual fund drive are typically unrestricted — donors trust your organization to use their gifts where they are most needed, giving your leadership team the flexibility to allocate funds strategically.
See also: Related: Restricted Funds, Board-Designated Funds, Net Assets. Related service: Bookkeeping, CFO Services.
Tax & Compliance
16 terms: IRS requirements, tax obligations, and compliance essentials for tax-exempt organizations.
501(c)(3)
A 501(c)(3) is the IRS designation for a tax-exempt organization recognized as operating for charitable, educational, religious, or scientific purposes — the most common nonprofit tax status in the United States.
Why it matters: 501(c)(3) status is what makes your nonprofit exempt from federal income tax and makes donations to your organization tax-deductible for donors — it is the foundation of your organization’s legal and financial identity.
Example: When a donor asks ‘are you a 501(c)(3)?’ before writing a check, they want to confirm their gift is tax-deductible. Your determination letter from the IRS is the proof — and it should be kept on file permanently.
See also: Related: Tax-Exempt Status, Form 990, Public Charity, Private Foundation. Related service: Tax Preparation.
Charitable Solicitation Registration
Charitable solicitation registration is the process of registering your nonprofit with state authorities — typically the attorney general’s office — before soliciting donations from residents of that state.
Why it matters: Most states require nonprofits to register before fundraising within their borders; organizations that solicit nationally without proper state registrations face fines, penalties, and reputational risk.
Example: If your nonprofit runs a nationwide email fundraising campaign, you may be legally required to register in as many as 40 states before soliciting those donors — each state has different thresholds, fees, and renewal deadlines.
See also: Related: Tax-Exempt Status, 501(c)(3), State Tax Exemption. Related service: Tax Preparation, Accounting & Controller Services.
Form 990
Form 990 is the annual information return that most tax-exempt nonprofits must file with the IRS — it reports on organizational finances, governance, programs, and compensation, and it is publicly available for anyone to view.
Why it matters: Your Form 990 is your organization’s most visible public document — sophisticated donors, foundation program officers, and journalists all review it before making decisions about your organization; accuracy and completeness matter beyond just compliance.
Example: When a foundation reviews your grant application, they will almost certainly pull your last two 990s to check your program expense ratio, review executive compensation, and confirm your financial stability before deciding whether to award funding.
See also: Related: Form 990-EZ, Form 990-N, Form 990-T, Tax-Exempt Status, Fiscal Year. Related service: Tax Preparation.
Form 990-EZ
Form 990-EZ is the short version of the Form 990, available to nonprofits with gross receipts between $50,000 and $200,000 and total assets under $500,000.
Why it matters: Filing the wrong version of the 990 is a common error that creates unnecessary IRS correspondence — organizations that have grown past the 990-EZ threshold need to file the full 990, and continuing to file the EZ can trigger IRS scrutiny.
Example: Your nonprofit had $175,000 in gross receipts last year. You qualify for the 990-EZ. But this year receipts grew to $210,000 — now you must file the full 990, which has significantly more disclosure requirements.
See also: Related: Form 990, Form 990-N, Fiscal Year. Related service: Tax Preparation.
Form 990-N (e-Postcard)
Form 990-N, also called the e-Postcard, is the simplified annual filing for small nonprofits with gross receipts normally under $50,000 — it requires only basic information and is filed electronically.
Why it matters: Failing to file the 990-N for three consecutive years results in automatic revocation of your tax-exempt status — even though the form takes less than 10 minutes to complete, many small nonprofits miss it.
Example: A small neighborhood nonprofit with $35,000 in annual donations files the 990-N every year by clicking through eight questions online. It is simple — but missing it three years in a row means losing the 501(c)(3) status that took months to earn.
See also: Related: Form 990, Form 990-EZ, Tax-Exempt Status. Related service: Tax Preparation.
Form 990-T
Form 990-T is the IRS form that tax-exempt organizations use to report and pay tax on unrelated business income (UBIT) — it is filed in addition to the regular Form 990 when applicable.
Why it matters: Many nonprofits do not realize they owe income tax on certain revenue streams; failing to file Form 990-T when required creates IRS liability and can jeopardize tax-exempt status.
Example: Your nonprofit operates a gift shop that generates $40,000 in annual revenue from selling merchandise unrelated to your charitable mission. That income may be subject to UBIT — if so, you file a Form 990-T and pay tax on the net profit.
See also: Related: Unrelated Business Income (UBI), UBIT, Form 990. Related service: Tax Preparation.
Form 1099-NEC
Form 1099-NEC is the IRS form used to report payments of $600 or more made to independent contractors during the calendar year — nonprofits must issue these to contractors and file copies with the IRS by January 31.
Why it matters: Missing 1099-NEC deadlines or failing to issue forms to eligible contractors exposes your nonprofit to IRS penalties — this is an area of high compliance risk for organizations that rely heavily on contract workers.
Example: Your nonprofit paid a graphic designer $2,500, a consultant $8,000, and a videographer $900 during the year. All three are independent contractors who received $600 or more — each gets a 1099-NEC by January 31.
See also: Related: Payroll Tax Compliance, Form 990. Related service: Tax Preparation, Bookkeeping.
Payroll Tax Compliance
Payroll tax compliance means correctly calculating, withholding, depositing, and reporting all required federal and state payroll taxes for your nonprofit’s employees.
Why it matters: Nonprofits are not exempt from payroll taxes — FICA, federal income tax withholding, and state income taxes apply to all employees, and failures in payroll compliance can result in significant IRS penalties that compound quickly.
Example: Your nonprofit has 12 employees. Each pay period you must withhold federal income tax, Social Security, and Medicare from each paycheck, deposit those amounts with the IRS on a defined schedule, and file quarterly 941 reports — missing a deposit deadline triggers immediate penalties.
See also: Related: Form 1099-NEC, Tax-Exempt Status. Related service: Bookkeeping, Tax Preparation.
Private Foundation
A private foundation is a 501(c)(3) organization typically funded by a single family, individual, or corporation that primarily makes grants to other nonprofits rather than operating programs directly.
Why it matters: Private foundations are subject to stricter IRS rules than public charities — including mandatory minimum distribution requirements, excise taxes on investment income, and prohibitions on self-dealing — making their compliance requirements more complex.
Example: The Gates Foundation is a private foundation — it distributes hundreds of millions of dollars in grants annually to operating nonprofits but does not run programs itself. It files Form 990-PF, faces a 1.39% excise tax on net investment income, and must distribute at least 5% of assets annually.
See also: Related: Public Charity, 501(c)(3), Form 990. Related service: Tax Preparation, Accounting & Controller Services.
Public Charity
A public charity is a 501(c)(3) organization that receives funding from a broad public base — including government, foundations, and individual donors — rather than from a single source.
Why it matters: Most operating nonprofits are public charities, which receive more favorable tax treatment than private foundations and have fewer restrictions on activities — but they must demonstrate broad public support to maintain that status.
Example: Your community food bank qualifies as a public charity because it receives funding from hundreds of individual donors, government contracts, and multiple foundations — its support is genuinely public, not concentrated in one family or source.
See also: Related: Private Foundation, 501(c)(3), Tax-Exempt Status. Related service: Tax Preparation.
Sales Tax Exemption
Sales tax exemption is a state-granted status that allows qualifying nonprofits to purchase goods without paying state sales tax — and in some states, to not collect sales tax on items they sell.
Why it matters: Sales tax exemption is applied for separately from federal 501(c)(3) status — many nonprofits do not realize they need a state exemption certificate and continue paying sales tax on purchases they could be making tax-free.
Example: Your nonprofit spends $15,000 annually on supplies, equipment, and materials. With a valid state sales tax exemption certificate, you avoid paying 6–8% sales tax on those purchases — saving $900–$1,200 every year.
See also: Related: State Tax Exemption, Tax-Exempt Status, 501(c)(3). Related service: Tax Preparation.
State Tax Exemption
State tax exemption is a state-level recognition of your nonprofit’s tax-exempt status — required separately from the federal 501(c)(3) designation and applied for with each state where your organization operates.
Why it matters: Federal 501(c)(3) status does not automatically exempt your organization from state income, sales, or property taxes — each state has its own exemption application process and requirements that must be met independently.
Example: Your nonprofit operates in Missouri and Illinois. Federal 501(c)(3) covers federal income taxes, but you must apply separately with both states to be exempt from their income taxes, and separately again for sales tax exemption in each state.
See also: Related: Sales Tax Exemption, Tax-Exempt Status, Charitable Solicitation Registration. Related service: Tax Preparation.
Supporting Organization
A supporting organization is a 501(c)(3) that is organized and operated to support one or more public charities — it falls between a public charity and a private foundation in terms of IRS classification and requirements.
Why it matters: Supporting organization status affects a nonprofit’s compliance obligations and its ability to receive certain types of grants — understanding this classification matters when structuring relationships with parent or affiliated organizations.
Example: A university foundation that exists solely to raise and manage funds for a state university is a Type I supporting organization. It is controlled by the university and must operate exclusively for the university’s benefit.
See also: Related: Public Charity, Private Foundation, 501(c)(3). Related service: Tax Preparation, Accounting & Controller Services.
Tax-Exempt Status
Tax-exempt status is the IRS designation that exempts a qualifying nonprofit from paying federal income tax on revenue related to its charitable mission.
Why it matters: Tax-exempt status must be actively maintained — failing to file the required Form 990 for three consecutive years results in automatic revocation, forcing the organization to reapply and potentially pay taxes on income received during the lapse.
Example: Your 501(c)(3) receives $800,000 in grants, donations, and program service revenue this year. Because of your tax-exempt status, your organization pays no federal income tax on that revenue — as long as it is used for mission-related purposes.
See also: Related: 501(c)(3), Form 990, Public Charity. Related service: Tax Preparation.
Unrelated Business Income (UBI)
Unrelated business income is revenue earned by a nonprofit from a trade or business activity that is regularly carried on and not substantially related to the organization’s exempt purpose.
Why it matters: Many nonprofits do not realize that certain revenue streams — parking lot income, advertising revenue, certain rental income — may be taxable as unrelated business income, creating an unexpected tax liability.
Example: Your museum charges admission (related to your mission — no UBI) but also rents out its event space for corporate parties and earns $35,000 annually from those events (unrelated to your museum mission — potentially UBI).
See also: Related: Unrelated Business Income Tax (UBIT), Form 990-T, Tax-Exempt Status. Related service: Tax Preparation.
Unrelated Business Income Tax (UBIT)
UBIT is the federal income tax that nonprofits owe on net income from unrelated business activities — the same corporate tax rate applied to for-profit businesses applies to this taxable portion of nonprofit revenue.
Why it matters: UBIT exists to prevent nonprofits from using their tax-exempt status to compete unfairly with for-profit businesses — tracking revenue streams carefully throughout the year prevents UBIT surprises at tax time.
Example: Your nonprofit’s catering operation generates $60,000 in revenue and $40,000 in expenses from serving corporate clients — activities unrelated to your charitable mission. The $20,000 net profit is subject to UBIT and must be reported on Form 990-T.
See also: Related: Unrelated Business Income (UBI), Form 990-T, Tax-Exempt Status. Related service: Tax Preparation.
Audit & Internal Controls
17 terms: Audit types, findings, and the controls that keep your organization protected.
A-133 Audit
An A-133 audit — now formally known as a Single Audit under the Uniform Guidance — is a federally required audit for nonprofits that expend $750,000 or more in federal awards in a single fiscal year.
Why it matters: Nonprofits that accept significant federal funding are legally required to undergo an A-133/Single Audit, and failing to do so can result in suspension of federal funding — a critical compliance obligation for organizations with government contracts or grants.
Example: Your workforce development nonprofit receives $900,000 in federal Department of Labor grants this year. You are required to have a Single Audit completed and submitted to the Federal Audit Clearinghouse within nine months of your fiscal year end.
See also: Related: Single Audit, Uniform Guidance, Independent Audit. Related service: Audit Assistance.
Adverse Opinion
An adverse opinion is the most serious type of audit opinion — issued when an auditor concludes that an organization’s financial statements are materially misstated and do not fairly present its financial position.
Why it matters: An adverse opinion is a significant red flag to funders, board members, and lenders; it can trigger immediate loss of grants, trigger board action, and in some cases jeopardize an organization’s continued operation.
Example: An auditor issues an adverse opinion when they discover that a nonprofit has been recording restricted grant revenue as unrestricted — materially misstating its financial position in a way that cannot simply be noted as an exception.
See also: Related: Qualified Opinion, Unqualified Opinion, Material Weakness. Related service: Audit Assistance.
Audit Committee
An audit committee is a subcommittee of the board of directors responsible for overseeing the nonprofit’s financial reporting, internal controls, and relationship with the external auditors.
Why it matters: An effective audit committee is one of the strongest governance signals a nonprofit can have — it demonstrates to funders and regulators that the board takes financial oversight seriously and is not simply rubber-stamping management’s financial reports.
Example: Your audit committee meets with the external auditors before the audit begins to discuss scope, meets again when preliminary findings are ready, and reviews and approves the final audited financial statements before they go to the full board.
See also: Related: Independent Audit, Internal Controls, Management Letter. Related service: Audit Assistance, CFO Services.
Audit Opinion
An audit opinion is the auditor’s official conclusion about whether a nonprofit’s financial statements fairly present its financial position in accordance with GAAP — it is the final paragraph of every audit report.
Why it matters: The audit opinion is the first thing sophisticated funders and board members look for in an audit report — it tells them at a glance whether the organization’s financials can be trusted or whether something requires attention.
Example: Your funder requires audited financial statements with your grant renewal application. They want to see an unqualified opinion — anything else triggers questions about your financial management before they consider renewing the grant.
See also: Related: Unqualified Opinion, Qualified Opinion, Adverse Opinion, Independent Audit. Related service: Audit Assistance.
Compilation
A compilation is the lowest level of financial statement service an accounting firm can provide — the accountant puts your financial data into the proper format but performs no verification or testing of the underlying numbers.
Why it matters: A compilation is much less expensive than a review or audit but provides no assurance — many grant funders and lenders will not accept compiled financial statements and require a review or audit instead.
Example: A small nonprofit with $180,000 in revenue may have its accounting firm prepare compiled financial statements for internal use and grant applications to smaller funders who do not require higher levels of assurance.
See also: Related: Financial Review, Independent Audit, Audit Opinion. Related service: Audit Assistance, Accounting & Controller Services.
Financial Review
A financial review is a moderate level of assurance provided by an independent CPA — more rigorous than a compilation but less comprehensive than a full audit — typically required when an audit is not mandated but funders want some level of independent verification.
Why it matters: Many state charitable registration requirements and mid-tier foundation grants require a reviewed financial statement rather than a full audit — making the financial review an important stepping stone as your organization grows.
Example: Your nonprofit has $750,000 in revenue. A full audit would cost $15,000–$25,000. Several of your foundation funders require reviewed statements, so you engage your CPA for a review at $5,000–$8,000 — meeting funder requirements at a lower cost.
See also: Related: Independent Audit, Compilation, Audit Opinion. Related service: Audit Assistance.
Independent Audit
An independent audit is a formal examination of your nonprofit’s financial statements by a licensed CPA firm with no financial relationship to your organization — resulting in an official audit opinion on the fairness of your financials.
Why it matters: An independent audit is required by most state governments above certain revenue thresholds, by federal funding agencies when federal expenditures exceed $750,000, and by many major foundation funders as a condition of grant awards.
Example: Your nonprofit’s revenues crossed $500,000 last year, triggering your state’s audit requirement. You engage an independent CPA firm, they spend two weeks examining your books, and issue an audit report with an unqualified opinion — which you submit to the state and attach to your next grant applications.
See also: Related: Audit Opinion, Single Audit, Audit Committee, PBC List. Related service: Audit Assistance.
Internal Controls
Internal controls are the policies, procedures, and practices your nonprofit puts in place to protect assets, ensure accurate financial reporting, and prevent fraud or errors.
Why it matters: Weak internal controls are the most common root cause of nonprofit financial scandals — and auditors specifically test your controls every year; documented, functioning controls are one of the most important things you can have going into an audit.
Example: A basic internal control is requiring two authorized signers on any check over $5,000 — this simple procedure prevents a single employee from approving and executing large payments without oversight, significantly reducing fraud risk.
See also: Related: Segregation of Duties, Material Weakness, Significant Deficiency. Related service: Audit Assistance, Accounting & Controller Services.
Management Letter
A management letter is a communication from your external auditors to your nonprofit’s leadership identifying operational weaknesses, internal control gaps, and recommendations for improvement — separate from the formal audit report.
Why it matters: A management letter is one of the most actionable documents your nonprofit receives all year — treating it as a checklist of improvements rather than a nuisance protects the organization and signals to the board that management is responsive.
Example: After completing your audit, your auditors issue a management letter noting that your expense approval process lacks a second review for purchases under $1,000. They recommend implementing a secondary approval threshold. Addressing this before next year’s audit prevents it from becoming a formal finding.
See also: Related: Independent Audit, Material Weakness, Audit Committee. Related service: Audit Assistance.
Material Weakness
A material weakness is a significant deficiency in internal controls that creates a reasonable possibility that a material misstatement in the financial statements would not be prevented or detected — the most serious type of control finding.
Why it matters: A material weakness in your audit report signals to funders, boards, and government agencies that your financial management has a serious gap — it requires formal board acknowledgment, a remediation plan, and follow-up in next year’s audit.
Example: Your auditor discovers that one person in your finance department has the ability to create vendors, approve invoices, and process payments — with no secondary review. That lack of segregation of duties is typically cited as a material weakness.
See also: Related: Significant Deficiency, Internal Controls, Segregation of Duties. Related service: Audit Assistance, Accounting & Controller Services.
Prepared by Client List (PBC List)
A PBC list — Prepared by Client — is the list of documents, schedules, and reports that your auditor requests your organization to prepare and deliver before audit fieldwork begins.
Why it matters: How quickly and cleanly you respond to the PBC list directly determines how long your audit takes and how much it costs — organizations with well-prepared books deliver PBC items in days; organizations with messy books spend weeks pulling together support.
Example: Your auditor sends a PBC list requesting: year-end trial balance, bank reconciliations for all accounts, support for all grants receivable, a schedule of fixed assets, and documentation for the five largest expenses. Organizations with clean books deliver this in a week.
See also: Related: Independent Audit, Year-End Close, Audit Trail. Related service: Audit Assistance.
Qualified Opinion
A qualified opinion is an audit opinion issued when the auditor concludes that the financial statements are fairly presented except for a specific, limited issue — less serious than an adverse opinion but still a signal that something needs attention.
Why it matters: A qualified opinion does not mean your organization is in crisis, but it does require a clear explanation to your board and any funders who review the audit — ignoring a qualified opinion without addressing the underlying issue often leads to repeat findings.
Example: Your auditor issues a qualified opinion because your nonprofit was unable to provide sufficient documentation for $45,000 in in-kind donations. Everything else in the financial statements is fairly presented — but that one area cannot be verified.
See also: Related: Unqualified Opinion, Adverse Opinion, Audit Opinion. Related service: Audit Assistance.
Segregation of Duties
Segregation of duties is an internal control principle that requires dividing key financial tasks among multiple people so that no single person controls an entire transaction from start to finish.
Why it matters: In small nonprofits where staff is limited, segregation of duties is the most commonly cited audit finding — it is also the most practical fraud prevention tool available, requiring only thoughtful process design, not additional staff.
Example: Best practice: the person who opens the mail and receives checks should not be the same person who records deposits in the accounting system, and neither of those people should be the one who reconciles the bank account.
See also: Related: Internal Controls, Material Weakness, Fraud Prevention. Related service: Audit Assistance, Accounting & Controller Services.
Significant Deficiency
A significant deficiency is a control weakness that is less severe than a material weakness but important enough that those responsible for financial oversight should be made aware of it.
Why it matters: Significant deficiencies are the early warning signs that, if left unaddressed, often escalate into material weaknesses — treating them seriously when they are first cited prevents more serious findings in future audits.
Example: Your auditor notes as a significant deficiency that your nonprofit does not have a formal documented policy for reviewing and approving expense reports — it has not caused a problem yet, but the lack of a formal process creates risk.
See also: Related: Material Weakness, Internal Controls, Management Letter. Related service: Audit Assistance, Accounting & Controller Services.
Single Audit
A Single Audit is a federally required comprehensive audit that combines the financial audit with a compliance audit of federal program spending — required for nonprofits that expend $750,000 or more in federal awards in a fiscal year.
Why it matters: The Single Audit is significantly more rigorous than a standard financial audit — it tests whether federal funds were spent in compliance with the specific requirements of each federal program, and findings can result in repayment of federal funds.
Example: Your nonprofit receives $500,000 from HUD and $350,000 from HHS this year — total federal expenditures of $850,000. You are now required to have a Single Audit, which tests compliance with both programs separately in addition to your overall financial statements.
See also: Related: A-133 Audit, Uniform Guidance, Independent Audit. Related service: Audit Assistance.
Uniform Guidance (2 CFR 200)
The Uniform Guidance is the federal government’s consolidated set of rules governing how nonprofits must manage, account for, and report on federal grant funding — it replaced earlier circulars like OMB A-133 in 2014.
Why it matters: If your nonprofit receives federal funding, the Uniform Guidance governs nearly every aspect of how you manage those dollars — from procurement procedures to cost principles to audit requirements — and non-compliance can result in grant termination and repayment demands.
Example: Under the Uniform Guidance, your nonprofit cannot charge indirect costs to a federal grant unless you have a negotiated indirect cost rate agreement (NICRA) or use the 10% de minimis rate — an area where many organizations unknowingly leave money on the table or incur compliance risk.
See also: Related: Single Audit, A-133 Audit, NICRA, Indirect Cost Rate. Related service: Grant Management, Audit Assistance.
Unqualified Opinion
An unqualified opinion — also called a clean opinion — is the best possible audit outcome, meaning the auditor has concluded that the financial statements fairly present the organization’s financial position in all material respects in accordance with GAAP.
Why it matters: An unqualified opinion is what every nonprofit should be working toward each year — it is the green light that tells your board, your funders, and your government partners that your financial management meets professional standards.
Example: After reviewing your books, your auditor issues an unqualified opinion on your financial statements. Your foundation funder’s program officer sees the clean opinion when reviewing your grant renewal and moves your application forward without requesting additional documentation.
See also: Related: Qualified Opinion, Adverse Opinion, Audit Opinion, Independent Audit. Related service: Audit Assistance.
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