Nonprofit accounting is fund accounting. Instead of tracking one pool of money toward a profit figure, you track money according to the restrictions donors attached to it, and you report spending by function as well as by type. Ratios sit on top of that structure. They only mean something once the structure underneath them is right.
Most small organizations get the ratios wrong because they got the bookkeeping wrong first. A program expense ratio calculated from a chart of accounts that never separated program from administration is a number with no content. Start with the structure.
What makes nonprofit accounting different
A business asks one question of its books: did we make money. A nonprofit has to answer two questions at once. Did the organization live within its means, and did each restricted dollar go where the donor said it should. That second question is why the whole system exists.
Net assets, not equity
Where a company reports equity, a nonprofit reports net assets, and the Financial Accounting Standards Board requires them to be split into two classes: net assets with donor restrictions and net assets without donor restrictions. That two-class presentation came in with FASB’s Accounting Standards Update 2016-14, which replaced the older three-way split of unrestricted, temporarily restricted and permanently restricted funds. If your financial statements still use the old labels, they are out of date and a funder’s auditor will notice.
The practical version: a $20,000 grant for a summer reading program is not $20,000 you have. It is $20,000 you owe the reading program. An organization can be sitting on a healthy bank balance and still be unable to pay the electric bill, because almost all of it is restricted. That single misunderstanding closes more small nonprofits than any ratio.
Expenses by function, not just by type
Nonprofits report what they spent by natural category (salaries, rent, supplies) and also by function: program, management and general, and fundraising. ASU 2016-14 made that functional analysis mandatory for every nonprofit rather than optional. It is also the raw material for every ratio a watchdog or a funder will later calculate about you, which means the allocation decisions you make in your own accounting software determine the numbers strangers will judge you by. Write your allocation method down, appl