Accounting for NGOs in Kenya

ACCOUNTING FOR NGOs – A SIMPLE GUIDE

May 14, 2025

As the name implies, Non-Governmental Organizations (NGOs) are mission-driven and primarily focused on promoting public benefit rather than generating profit.

As a result, accounting for NGOs follows specific procedures designed to ensure transparency, fund stewardship, and regulatory compliance.

This guide explores what an NGO is, how NGO accounting works, and why it matters.

What is an NGO?

Previously, under Section 2 of the NGO Co-ordination Act, 1990, a Non-Governmental Organization (NGO) was defined as a voluntary group formed to benefit the public, either nationally or internationally.

However, the PBO Act, 2013 officially replaced this Act on May 14, 2024. It now governs NGOs in Kenya, referring to them as Public Benefit Organizations (PBOs).

Under the PBO Act, a PBO is a non-profit, independent, and non-partisan organization focused on activities that promote public benefit– such as poverty alleviation, health, education, and environmental protection, as outlined in the Act’s Sixth Schedule.

An NGO does not aim to make a profit but to advance social welfare.

Categories of NGOs

Based on Area of Operation

Charitable NGOs: Focused on philanthropy and helping the needy.
Advocacy NGOs: Aim to influence public policy and raise awareness on social issues.
Service NGOs: Provide direct services like education, healthcare, and vocational training.
Human Rights NGOs: Work to protect and promote fundamental rights and freedoms.
Environmental NGOs: Focus on conservation, climate change, and pollution reduction.

Based on Operational Scope

Community-Based NGOs (CBOs): Operate at grassroots or community level.
National NGOs: Operate within a single country addressing domestic issues.
International NGOs: Operate in multiple countries to provide aid, healthcare, or development services.

Based on Legal Registration (Kenya)

Community-Based Organizations (CBOs): Locally registered at county or sub-county levels.
NGOs: Registered under the NGO Coordination Board to operate nationally or internationally.
Trusts: Used for charitable purposes and governed by the Trustees (Perpetual Succession) Act.
Foundations: Private entities usually funded by individuals or families for philanthropic goals.
Societies: Often religious or social in nature, registered under the Societies Act.

What is NGO Accounting?

NGO accounting refers to the financial management and reporting practices specifically designed for Non-Governmental Organizations. It emphasizes fund accountability, donor compliance, and financial transparency, which are essential in ensuring that donations and grants are properly used for the intended purposes.

Key Components of NGO Accounting

a) Fund Accounting

Fund accounting is central to NGO accounting. It categorizes income based on donor restrictions:

Restricted Funds: Funds allocated for specific projects as per donor instructions.
Unrestricted Funds: Funds that the NGO can use freely across its operations.

b) Accrual Basis of Accounting

NGOs in Kenya use the accrual basis of accounting. This means:

Income is recorded when earned, not when received.
Expenses are recorded when incurred, not when paid.
This method offers a more accurate view of an NGO’s financial position.

c) Accounting Standards for NGOs in Kenya

IFRS for SMEs: Suitable for NGOs that do not have public accountability.
IPSAS: Applicable to NGOs funded by or reporting to government institutions.
Donor-Imposed Guidelines: Some NGOs follow unique financial formats required by their funders.

Key Financial Statements in NGO Accounting

1. Statement of Financial Position

Shows the NGO’s assets, liabilities, and fund balances.

2. Statement of Activities (Income & Expenditure)

Displays revenue, expenses, and net results per fund.

3. Statement of Changes in Fund Balances

Tracks changes in restricted and unrestricted funds.

4. Statement of Cash Flows

Summarizes cash inflows and outflows, classified by activity.

5. Notes to Financial Statements

Details accounting policies, donor-specific rules, and line item explanations.

Core Accounting Records for NGOs

1. General Ledger

The central document for all financial transactions.

2. Trial Balance

Used to ensure account balances are correct before reporting.

3. Chart of Accounts

The complete list of account codes used in the NGO’s accounting system.

4. Bank Statements & Reconciliations

Confirms recorded bank balances match actual bank statements.

5. Petty Cash Records and Cashbook

Used to monitor small expenditures and cash movement.

Donor and Income-Related Documents

Donation Receipts: Proof of funds received from donors.
Grant Agreements: Outline terms and usage restrictions.
Restricted and Unrestricted Fund Registers: Track how funds are used.
Pledges and Promises to Give: Track committed but not yet received funds.

Expense and Procurement Documentation

Receipts: Verify completed purchases.
Invoices and Payment Vouchers: Record disbursements.
Expense Reports: Justify NGO-related expenses.
Purchase Orders and Procurement Records: Show transparency in acquisitions.

Payroll and Staff Documentation

Payroll Registers: Show staff payments and deductions.
Employment Contracts and Timesheets: Validate payroll legitimacy.
PAYE/NSSF/NHIF Returns: Statutory compliance records.

Regulatory and Compliance Records

Audited Financial Statements: Required annually for transparency.
Tax Exemption Certificates: Prove the NGO’s tax-exempt status.
NGO Board Returns: Filed annually with the NGO Coordination Board.
Board Resolutions: Required for major financial decisions.

Project Reporting for NGOs

Budget vs Actual Reports: Compare planned to actual expenditures.
Donor Financial Reports: Show how donor funds were used.
Narrative Reports: Describe project implementation and outcomes.

Differences Between NGO and For-Profit Accounting

Feature	NGO Accounting	For-Profit Accounting
Purpose	Accountability and fund stewardship	Profit generation
Income Source	Donations and grants	Sales and services
Accounting Method	Fund accounting	Accrual or cash basis
Equity Term	Net assets (restricted/unrestricted)	Owner’s equity/shareholder equity
Expense Classification	By function (program, admin, fundraising)	By nature (rent, salaries)
Financial Statements	Statement of Financial Position, Activities	Balance Sheet, Profit & Loss
Audit Focus	Donor compliance, fund usage	Profitability, controls

Recent Trends in NGO Accounting

INPAS (International Non-Profit Accounting Standards): A global standard in development developed for the preparation of annual audited accounts and grant reports by Non-Profit Organisations (NPOs).
Increased Adoption of IFRS for SMEs and IPSAS: Common among Kenyan NGOs for improved reporting.
ICPAK Template for NGOs: A model annual report named “Hisani” aids NGOs in standardizing reports is in development.
Green Accounting and ESG Reporting: Environmentally focused NGOs are integrating sustainability metrics.
Diversified Financial Models: NGOs are embracing social enterprises and investments to supplement donor income-this creates additional accounting complexities.

Frequently Asked Questions

Are NGOs in Kenya required to follow specific accounting standards?
YES. NGOs are generally expected to follow IFRS for SMEs or IPSAS, depending on their structure and reporting obligations.

How often should NGOs report to the NGO Coordination Board?
Annually. NGOs must submit audited financial statements within six months after their financial year ends.

What’s the difference between restricted and unrestricted funds in NGO accounting?
Restricted funds are designated for specific projects or purposes by the donor, while unrestricted funds may be used for general operations at the NGO’s discretion.

Conclusion

Accounting for NGOs is not only about keeping books – it’s about building donor trust, maintaining compliance, and ensuring every shilling is used for the public good.

By implementing the appropriate NGO accounting practices, your organization can stay mission-focused while demonstrating financial integrity.

Need Help Navigating NGO Accounting?

At Bubi Alexander, we specialize in the unique financial needs of NGOs. Our Virtual CFO Services are designed to help you stay compliant, audit-ready, and strategically aligned.

Whether you’re managing restricted funds, preparing for donor reviews, or scaling your impact, we’re here to help.

Contact us today and let us simplify your numbers so you can focus on impact.

Disclaimer

This article is for educational purposes only and should not be taken as legal or financial advice. For professional support, consult a certified NGO accounting expert.

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