Nonprofit accounting includes several areas that differ significantly from traditional business accounting, particularly when an organization receives contributions and grant funding.

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One of the most important distinctions is between a donor restriction and a donor-imposed condition. They are not the same.

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A donor restriction limits how or when contributed resources may be used. A condition, on the other hand, generally involves a barrier that must be overcome and a right of return or release if the condition is not met. That distinction can affect when revenue is recognized. FASB's nonprofit guidance specifically distinguishes donor-imposed conditions from donor-imposed restrictions.

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Organizations should therefore retain contribution letters, grant agreements, award notices, and other documentation supporting the terms of significant funding.

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Net asset classification is also important. Donor-restricted amounts should be tracked separately so that releases from restriction can be properly recorded when the applicable purpose or time restriction has been satisfied.

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Year-end cutoff can present another challenge. Contributions, grants, expenses, payroll, and accounts payable should be evaluated to determine whether they have been recorded in the proper reporting period.

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These issues are easier to address when accounting records are maintained throughout the year rather than reconstructed during the audit.

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Clear documentation and consistent tracking of grants and contributions can improve both the audit process and the financial information available to management and the board.