Top 4 Mistakes Nonprofits Make During Year-End Financial Reporting

7 min read

The process of closing out financial records is complex, and there are lots of places where nonprofit financial mistakes can occur. However, your final financial reports and records must be accurate and compliant. These mistakes don’t just affect your books. They can delay grant funding, create audit issues, and reduce confidence with donors and your board.

This nonprofit nearly DOUBLED its fundraising - from $75K to $150K per year!
How did they do it? By using smarter accounting strategies.

Key Takeaways:

• Avoid Common Nonprofit Year-End Reporting Mistakes: Avoid miscategorized revenue, unrecorded pledges, and overlooked in-kind donations to keep nonprofit financials accurate and compliant.

• Streamline Nonprofit Accounting with Outsourced Solutions: Outsourced nonprofit accounting automates processes, improves accuracy, and keeps your back office year-round ready.

You'll be using your financial data to make decisions about how your nonprofit is run in the coming year. You will also be sharing your year-end financial reports with your board of directors and stakeholders, and any misstatements or misrepresentations of your organization's finances would be undesirable (in the best case) and disastrous (in the worst case).

Common Year-End Financial Reporting Mistakes Nonprofits Should Avoid

Be on the lookout and vigilant to avoid the following top five year-end reporting errors that commonly occur in nonprofits:

1. Revenue and Expense Recognition Errors

Nonprofits must use accrual accounting, which means transactions are recorded at the time of the pledge, not when funds are received.

For example, if a donor makes a commitment, pledge, or promise to give, that revenue must be recorded at the time of the pledge, because that’s when it is earned, even if the actual money arrives weeks or months later.

Expenses must also be recorded when incurred, not when paid.

For example, if you receive an invoice on December 28th but don’t pay it until January, the expense still belongs in December.

Recording it in January would artificially increase the prior year’s net income and understate your liabilities.

Ultimately, mis-timing revenue or expenses distorts financial statements, misleads board members, and can create compliance issues.

Tip: Stay accurate by setting up a reliable system for recording pledges, donations, invoices, and expenses immediately when they occur, so each item is captured in the correct financial period.

Read More: The Key To Reporting on Multi-Year Grant For Your Nonprofit

2. Incorrectly Categorized Revenue

Revenue isn’t just about timing, it also needs the right classification. Proper categorization ensures compliance with GAAP and IRS standards.

Common categories include:

• Conditional: Funds contingent on specific conditions; recognize revenue only when conditions are met.

• Unconditional: No restrictions; recognize when pledged or received, whichever comes first.

• Restricted: Donor-designated for a specific purpose.

• Unrestricted: Funds your nonprofit can spend at its discretion.

For example, if a donor provides $10,000 specifically to fund scholarships, you must classify it as restricted revenue. Recording it as unrestricted would misstate your financials and could create compliance issues.

Tip: A fund accounting system helps, but accuracy starts with correctly assigning revenue as it’s recorded.

Don’t stress over proper revenue classification - schedule a call with GrowthForce and keep your nonprofit’s financials accurate and compliant.

Read More: Understanding Fund Accounting: The Backbone of Nonprofit Finances

3. Unreported In-Kind Donations

Goods and professional services donated to your nonprofit are valuable contributions and must be properly recorded.

You should:

• Assign a fair market value to each donation.

• Record donations as both revenue and the corresponding expense.

• Keep consistent documentation throughout the year rather than scrambling at year-end.

For example, if a local agency provides free design services valued at $2,000, you need to record that amount as both a donation and an expense in your financial statements. Ignoring in-kind contributions can understate your organization’s resources and operations.

Tip: A clear in-kind donation policy keeps tracking simple and audit-ready.

4. Improper Functional Expense Categorization

Nonprofits must categorize expenses by function (programs, fundraising, management, etc.) for compliance and transparency.

• Overhead allocation can be tricky, especially when an expense serves multiple purposes.

• Consistent functional categorization builds donor trust and helps leadership understand how funds are used.

For example, if a staff member works partly on fundraising events and partly on program delivery, you need to allocate their salary between the fundraising and program categories. Classifying the entire salary under one category could misrepresent how your organization uses its funds.

Tip: Establish clear guidelines for allocating expenses across functional categories to ensure consistency year to year.

GrowthForce can review your classifications and ensure your reports stay audit-ready

How GrowthForce Can Help

Many nonprofits struggle with year-end reporting, not because they lack dedication, but because their internal teams are stretched thin. When one person is managing accounting, HR, payroll, and program duties, mistakes are inevitable.

Outsourcing gives your organization a dedicated nonprofit accounting team, including experts who understand GAAP, fund accounting, grant compliance, and audit readiness. With the right systems and specialists in place, your financials stay accurate year-round, freeing your staff to focus on mission delivery instead of manual data entry and deadline stress.

Read More: Tracking Outcomes for Nonprofits with QuickBooks®

If year-end reporting feels overwhelming, GrowthForce can build the financial foundation that keeps your nonprofit accurate, compliant, and mission-focused all year long.

This content is for informational purposes only and should not be considered financial, legal, or tax advice. Contact us to speak with a qualified professional for guidance tailored to your needs.