A Complete Guide to Demystifying Nonprofit Financial Statements

In other words, the amount allocated to expense is not indicative of the economic value being consumed. Similarly, the amount not yet allocated is not an indication of its current market value. It is also the term used by not-for-profit organizations instead of owner’s equity or stockholders’ equity. Under the accrual basis of accounting, revenues are recorded at the time of delivering the service or the merchandise, even if cash is not received at the time of delivery. You should consider our materials to be an introduction to selected accounting and bookkeeping topics (with complexities likely omitted). We focus on financial statement reporting and do not discuss how that differs from income tax reporting.

• Nonprofits may also invest restricted funds that they can’t use for their nonprofit’s operations.
• Accountants often refer to businesses as for-profit entities and to nonprofit organizations as not-for-profit entities, or NFPs.
• The statement of financial position is equivalent to the balance sheet for a for-profit business.
• Each statement, and any accompanying disclosures, convey all kinds of information, from the liquidity of the organization to the effectiveness of the fundraising team.
• Examples include outstanding bills, accrued expenses, payroll and payroll tax liabilities, lines of credit, and short-term loans.

Fundraising Efficiency Ratio

• We’ve created an example below to show you what a nonprofit statement might look like.
• A complete set of financial statements can help reveal your organization’s strengths, weaknesses, and areas for opportunity.
• The Cash Flow Statement tracks the movement of cash in and out of your organization over a given period.
• They are required by law to comply with your request and can loose their nonprofit status if they fail to comply.
• While there may be some legitimacy behind your concern, there’s no need to panic just yet.

Nonprofits must file financial statements with the IRS to follow compliance laws, which is not the only reason they should include these activities. Providing detailed financial statements and an explanation of how these details help the organization and its beneficiaries strengthens relationships with donors and opens up opportunities to solicit significant gifts. At times, supporters will give donations stipulating that they can only be used on a specific project or program. The net assets on your statement of financial position are where your organization must list these restrictions. When https://nerdbot.com/2025/06/10/the-key-benefits-of-accounting-services-for-nonprofit-organizations/ listing your nonprofit’s liabilities, you must list them by when they must be paid and separated by current and long-term liabilities.

Additional Nonprofit Accounting Resources

It ensures that you comply with accounting standards and regulations, such as accounting services for nonprofit organizations the Generally Accepted Accounting Principles (GAAP). Nonprofit financial reporting is not just about balancing the books; it’s about providing clear, accurate, and timely information to stakeholders, including the board, donors, and the IRS. Nonprofit organizations do not have the same financial reporting requirements as for-profit businesses. Since nonprofits operate for the purpose of fulfilling their mission instead of distributing profits, financial reporting can get lost in the shuffle. Your statement of financial position is a financial report that provides an overview of the organization’s financials at a specific point in time. For-profit businesses also call the statement of financial position a balance sheet, and many nonprofits do the same.

• Your nonprofit must include natural and functional classifications for all expenses.
• If you owned a house (an asset) valued at $300K, and you had an outstanding mortgage balance (a liability) of $200K, your net assets (equity) would be $100K.
• The U.S. Internal Revenue Service (IRS) requires some tax-exempt nonprofit organizations to file Form 990 (some can file Form 990-EZ) each year.
• These are key indicators of the organization’s financial health and its ability to manage its obligations.
• They allow for informed decisions on how to allocate resources, as well as help with audits and compliance.

Step 7: Understand the Generally Accepted Accounting Principles (GAAP)

The Statement of Financial Position is a snapshot of what your organization owns and what it owes to others at a specific point in time. This balance sheet template simplifies the balance sheet process by asking plain language questions and then a balanced balance sheet will be generated from those questions. Nonprofit accounting best practices recommend creating a Statement of Financial Position each month when the monthly accounting records are closed. Jo-Anne Williams Barnes, is a Certified Public Accountant (CPA) and Chartered Global Management Accountant (CGMA) holding a Master’s of Science in Accounting (MSA) and a Master’s in Business Administration (MBA). Jo-Anne is a certified Sage Intacct Accounting and Implementation Specialist, a certified QuickBooks ProAdvisor, an AICPA Not-for-Profit Certificate II holder, and Standard for Excellence Licensed Consultant. These may include personnel costs, professional services, office expenses, occupancy, utilities, and depreciation.

• Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting.
• Even if a nonprofit is exempt from federal income taxes, it is likely that its employees will be subject to employment taxes.
• It is crucial for nonprofit organizations to prepare accurate and reliable financial statements to maintain trust and credibility.
• It is one of the essential financial statements that nonprofit founders need to know how to read.
• We will not discuss the accounting which is similar to that used by for-profit businesses.

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 value, however, is further divided on the Statement of Financial Position into restrictions – either temporarily restricted, permanently restricted, and unrestricted net assets. These classifications are used to segregate funding based on any restriction(s) imposed by each donor as to how the funds can be spent. For example, if an individual donates money to a nonprofit organization and limits how the organization can use the funds, that money is considered restricted solely for that purpose. On the other hand, if an individual donates money to an organization but never specifies on what or how the organization can use the funds, these funds have no restrictions and are therefore classified as “unrestricted”. It is interesting to note that occasionally funds are restricted internally (i.e., management or the Board of Directors decides to restrict how some of the unrestricted funds are to be spent).

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