The term nonprofit is a tax status. The nonprofit tax status does not mean a nonprofit organization cannot make a profit. They do, however, have to adhere to specific accounting standards. Failure to comply to the nonprofit accounting standards could mean penalties and fines for the nonprofit, and loss of nonprofit tax exempt status.

Nonprofits get funding in many forms. They hold fundraisers, charge membership fees, receive government and public monetary donations, as well as donations of time or services. A nonprofit must show where all donations are used, or will be used. A nonprofit could loose the nonprofit status if they cannot show what all donations will be used for the intended purpose.

To comply with the reporting requirements for most nonprofit donors, accountants must use a certain type of accounting process referred to as, fund accounting. Fund accounting breaks funding down into separate categories. In this way, any donations or grants a nonprofit receives can easily be tracked. All non for profit financial reports are required to be made available the public to review. Financial statements for nonprofits should show that any excess income from the nonprofits is earmarked for a specific business or service of the nonprofit.

Nonprofit accounting standards require a nonprofit to file a form 990 with the IRS every year. The IRS uses this information to see if the nonprofit is using its funding for the intended purposes and there is no excess of income that should be taxed. Other procedures include, quarterly filings, program specific reporting, and grant specific reporting. It is recommended any accountant working for a nonprofit organization become educated in the specific procedures for reporting and tracking procedures.