Revenue recognition, or “rev rec,” might sound like something only nonprofit accountants and bookkeepers worry about. But if you’re running a nonprofit, it’s not just an accounting issue – it’s an organizational risk.
One that can shake donor confidence, damage board relationships, and even put your nonprofit’s future (and your job) at risk.
Here’s why getting it right matters more than ever.
1. You Can’t Spend Money With Conditions
Let’s say a major donor pledges $500,000 over three years. That feels like a big win – and it is! But that doesn’t mean you can treat it as revenue all at once. If the funds are tied to specific conditions, they’re not recognized as revenue until you fulfill those conditions.
Spending ahead of revenue recognition is like cashing a check before it clears. You might not see the downside right away, but eventually, it catches up to you.
2. Misstated Revenue = Misleading Financials
Your Form 990 is public. Your board sees it. Funders look at it. If revenue is overstated because it was recognized too early or recognized at all when it shouldn’t have been, you could unintentionally mislead stakeholders about your financial health.
That’s how nonprofits end up in trouble: thinking they’re flush with cash, only to hit a wall when it’s time to deliver on promised services without the actual funds in the bank.
Contact an expert. We can help.
3. Revenue Recognition Ties Directly Into Audit Prep
Revenue recognition is one of the first things auditors examine. If you’ve booked revenue that hasn’t been earned yet, it can trigger:
- A qualified audit opinion (a red flag for donors and funders)
- Delays in filing your 990
- Potential scrutiny from the IRS
The bigger you grow, the more visible you become – and the less tolerance there is for mistakes in financial reporting.
4. Deferred Revenue Is a Liability – Not a Windfall
Sometimes, you get paid before delivering the service. For example, a parent pays for next year’s after-school program upfront. That payment feels like a win, but in accounting terms, it’s deferred revenue. It’s not income yet. It’s a liability, and it should show up that way on your balance sheet.
If you treat deferred revenue like available cash, you risk spending money that doesn’t really belong to you yet.
5. ASC 606: The Standard You Can’t Ignore
The ASC 606 revenue recognition standard outlines how and when to recognize revenue from contracts. You might think that doesn’t apply to you, but if you’re receiving multi-year grants, donor pledges, or fee-for-service income, it absolutely does.
And if you’re ever in a situation where you need GAAP-compliant financials for a bank, a donor, or even a merger or acquisition, ASC 606 becomes non-negotiable.
Final Thought
Revenue recognition isn’t just a box to check at audit time. It’s part of running a resilient, trustworthy organization, supported by reliable and thorough accounting. It protects your credibility, helps your board make good decisions, and gives donors confidence that their support is being managed responsibly.
If you're unsure whether your nonprofit accounting team is handling revenue recognition correctly, it's worth finding out before it becomes a problem.
Not sure if your revenue recognition policies hold up? Get a free, confidential assessment of your current financial practices – no pressure, no obligation. Schedule your free financial readiness assessment.
Tammy Hanson
https://www.linkedin.com/in/tammydhanson/Tammy Hanson, CPA, CGMA has over 25 years of experience in public accounting and consulting. With specific expertise in accounting operations and managerial accounting across a variety of industries, she is uniquely qualified to advise growing companies looking to scale and professionalize their accounting operations to support growth, capitalization, or sale. Tammy is a Certified Public Accountant, a Chartered Global Management Accountant, and received her BA in accounting and MBA from the University of Arkansas at Little Rock.
