Nonprofit Accounting Basics: Financial Statements

A nonprofit’s expenses usually include all cash flowing out of the organization during the period. Plus costs incurred but not yet paid, like payroll that won’t be paid until next month or vendor invoices with 30-day terms. The statement of functional expenses gives donors more details on how the organization spends funds. The IRS also requires nonprofits to include this statement when filing Form 990. Gathering data and properly categorizing it in each financial statement can be time-consuming, especially if you’ve never done it before.

Statement of Financial Position

Donorbox is an all-in-one online fundraising platform with simple-to-use and affordable features such as Recurring Donations, Crowdfunding, Peer-to-Peer, Events, Memberships, Text-to-Give, Donor Management, and more. The money that was spent on capital investments, like real estate, equipment, and other fixed assets and also any money received from the sale or benefit of those investments. Within each category, expenses are further broken down by type—such as salaries, benefits, rent, office supplies, and professional fees. If you’re ready for an accounting partner to ease the burden of monthly bookkeeping and accounting, reach out to us for a free consultation. Because if your Net Assets are increasing over time, you know you’re creating value and building a surplus you can use to achieve your future goals. Non-Current liabilities are liabilities that will not become due within the next year.

Navigating Government and Nonprofit Financials

Implementing clear guidelines for recording program-related expenses versus administrative or fundraising expenses can also prevent misclassification and improve the clarity of financial statements. Preparing accurate and transparent financial statements is essential for building trust with stakeholders and ensuring compliance with regulatory requirements. By following best practices, nonprofits can streamline their financial processes, reduce errors, and improve the reliability of their reports.

⃣ Income statement

•  Financing activities This includes earnings and expenses from financial activities, such as interest earned from savings or interest or fees paid on loans. A nonprofit’s net assets are its assets minus its liabilities, or, in other words, any assets left over after liabilities are taken out. As your transactions and receipts are tracked in a single location, completing your financial statements promptly is much easier.

• Budgeting is also complicated when sources of support are not secured at the time the budget is prepared for the upcoming year.
• When this total amount is added to the cash balance at the beginning of the reporting period, you will end up with the current cash balance, which will match the amount listed on the Statement of Financial Position.
• This metric provides insight into the organization’s financial stability and preparedness for unexpected expenses or revenue drops.
• From no-fee checking and savings to powerful accounting integrations, Relay is uniquely built to serve nonprofits.
• This could lead to the use of an account entitled Resource Development in order to balance the budget.

The Statement of Financial Position provides a snapshot of your nonprofit’s financial status at a specific moment in time. In other words, it shows what you own, what you owe, and what your organization is worth financially. A Statement of Activities includes revenue and expenses during a nonprofit’s reporting period (a fiscal or calendar year) and gives an overview of the changes to an organization’s net assets during that time. Since nonprofit financial statements differ from traditional financial reports, we’ve put together this simple guide to reading those essential statements. Keeping an accurate report of your nonprofit’s financial reports can be undeniably daunting, especially when you lack the required skills and have a lot on your plate. However, in recent times, numerous software that nonprofits can readily leverage to help with their finances are out there.

Final Thoughts on Nonprofit Financial Statements

• •  Financing activities This includes earnings and expenses from financial activities, such as interest earned from savings or interest or fees paid on loans.
• Accurate and transparent financial statements not only fulfill regulatory obligations but also support informed decision-making by stakeholders.
• Understanding these financial statements isn’t just about filling out Form 990—it’s about strengthening your nonprofit’s transparency, trustworthiness, and long-term success.
• Just like puzzle pieces fit together to show a bigger picture, different financial statements connect to give a full view of a nonprofit’s financial health.
• Nonprofits benefit from perks like tax-exempt status, meaning they don’t have to pay federal income tax on money they raise for their mission.
• For example, the program efficiency ratio (program service expenses divided by total expenses) can help you understand if most of your spending is going towards your core mission.

The definition of a financial statement is a simple report that can be pulled together monthly (or as-needed) to give you a view of your financial health. This report will show them which of your activities brought cash into your operation during the period and which expenses ate up large chunks of money. But in your audited nonprofit financials, it will be called a Statement of Financial Position.

3 Net assets

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• This statement helps stakeholders understand how a charitable organization manages its cash resources, which is crucial for assessing financial health and operational sustainability.
• This article will discuss what a statement of activities entails and why nonprofits need them.
• The statements for both governmental and nonprofit organizations are very similar, however.
• However, this does not meet the nonprofit fund and functional accounting requirements.

The difference between what you accounting services for nonprofit organizations own and what you owe represents your net assets – a crucial indicator of your organization’s financial health that potential donors often examine closely. Our complete guide to nonprofit financial statements has everything you need to ace these reports. Document all sources of income and expenses, and present financial statements in an understandable format that anyone involved with the organization can access and interpret. A good nonprofit financial statement provides the right visibility into your performance so you can make informed stewardship decisions and maintain donor trust and confidence. Especially if you worked for a for-profit organization before moving to the nonprofit sector, you might have heard the term “balance sheet” used to describe a report detailing assets and liabilities.

More importantly, you’ll maintain accuracy on these critical tax forms to avoid penalties. The Statement of Cash Flows categorizes cash activities into operating, investing, and financing activities. This statement is essential for showing how the organization generates and uses cash, providing insights into liquidity and financial flexibility.

What are nonprofit financial statements and why are they important?

If your accounting software doesn’t include these reports, there are templates available to help you create them, such as the Statement of Activities template in the Chazin & Company’s nonprofit accounting guide. The Statement of Functional Expenses reports in detail on your nonprofit’s expenditures. This document is a requirement for annual audits and categorizes your nonprofit’s costs based on their function according to your mission. When calculating net assets for the Statement of Financial Position, you’ll need to separate restricted net assets from unrestricted net assets.