Final answer:
NPOs use fund accounting to maintain financial statements that categorize funds into unrestricted, temporarily restricted, and permanently restricted net asset classes for transparency and accountability.
Step-by-step explanation:
Nonprofit organizations (NPOs) are required to maintain financial statements that show the amount in each net asset class to ensure transparency and accountability. These net asset classes are typically broken down into unrestricted, temporarily restricted, and permanently restricted funds. To manage and report on these funds effectively, NPOs utilize a system of fund accounting, which enables them to track and report on the financial activities of each class separately. This accounting method is essential for NPOs as it allows stakeholders to see how funds are being used in line with donor restrictions and organizational objectives.