A Complete Guide to Demystifying Nonprofit Financial Statements

The number of accounts in a nonprofit’s general ledger could range from 30 to 1,000 or more. The number of accounts depends on the number of programs that the nonprofit has, the types of revenues it earns, and the level of detail required for planning and control of the organization. The following table compares the main financial statements of a nonprofit organization with those of a for-profit corporation. A second issue is whether a donor’s contribution to a nonprofit organization will qualify as a charitable deduction on the donor’s income tax return. While businesses are organized to generate profits, nonprofits are organized to address needs in society.

How to Review a Statement of Financial Position:

Thirty-nine states (plus the District of Columbia) require charitable nonprofits to register with the state in order to fundraise in that state. Consequently, the laws that require a charitable nonprofit to submit audited financial statements also vary state-by-state. It’s essential to determine from your review of an NBO’s financial statements whether you feel that the organization is treating your money prudently. Don’t give it your money if you find a nonprofit organization with exorbitant operating expenses. Hold your politicians and governmental employees accountable for their actions.

What Is Accrual Accounting?

Additionally, nonprofits distinguish between restricted and unrestricted funds, reflecting donor intentions. The Statement of Activities lets you evaluate whether your organization is earning more than it spends, providing a snapshot of your financial health. By breaking down revenue and expenses, this report shows how efficiently your organization is using resources to support your mission. Between fundraising, marketing, and keeping your programs afloat, your nonprofit team likely collects a variety of financial data. This information is crucial in making informed decisions about resource allocation and setting your organization up to prosper for years to come.

• Donations may also be restricted by the donor for specific uses, so the organization needs to be able to reflect that the funds were used for the designated purpose.
• A balance sheet for nonprofit organizations reduces your financial activities to what you own (assets), what you owe (liabilities), and the net assets available to you.
• Your nonprofit must include natural and functional classifications for all expenses.
• They include detailed information on accounting policies, contingent liabilities, and any significant events that could impact the organization’s financial position.
• With just a glance, it’s easy to see that 85% of total expenses were program-related and that the majority (29%) of operating revenue came from individual contributors.
• Your nonprofit balance sheet offers a snapshot of your organization’s financial health.
• Unrestricted net assets are funds that the organization can use for any purpose.

Classify Revenue and Expenses

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• They are also required to complete a Form 990 each year and submit it to the IRS.
• Instead, review your Statement of Activities, Statement of Financial Position, and Cash Flow Statement monthly or quarterly.
• Whether you are an experienced financial expert in the nonprofit field or a beginner, this guide offers helpful insights.
• 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.
• Budgeting and reporting functional activities allow the leadership to be aware of how resources are being used to address their mission and infrastructure activities.

Related AccountingTools Courses

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. Sharing your financial reports gives companies a clear view of how well you manage your funds and what kind of impact you’ve had. Financial statements allow the board see how well you’re sticking to the budget and if everything follows accounting rules. Your board members need to keep an eye on your nonprofit’s finances, but they don’t have to become finance pros to do this. They highlight potential vulnerabilities such as cash flow issues, dependency The Key Benefits of Accounting Services for Nonprofit Organizations on specific funding sources, and budget variances. Because this calculation is more precise, nonprofit accountants recommend having exactly three months of LUNA to achieve financial stability and just slightly more if you’re planning for growth.

• In the Operating Activities section, the statement shows the cash flow from the organization’s ongoing, regular business activities.
• This includes everything from cash inflows and outflows related to fundraising events to payments on long-term investments like buildings.
• However, the account balances will be combined into a few amounts that are presented in the financial statements and IRS Form 990.
• FastFund Nonprofit Accounting software helps you automate many parts of your nonprofit’s finance operation.
• All publicly traded companies and any entity that releases its financial statements to the public is required by U.S. law to adhere to GAAP financial and accounting standards.
• These guidelines provide specific rules and principles for recording and reporting financial transactions in the nonprofit sector.

It details the sources of cash (such as revenue and borrowing) and what it was used for (such as investing, operating, or financing). This statement allows investors and donors to assess whether the nonprofit has adequate resources to meet its obligations. You can use the insights from this nonprofit financial statement to guide your annual budget planning. Plus, this publicly available information can provide current and prospective donors with the context they need to decide whether they’d like to support your nonprofit based on how it employs its funds. Furthermore, charity watchdogs such as GuideStar and Charity Navigator often consider nonprofit financial reports when rating profiles on their website. Having clear and accurate statements can go a long way toward establishing trust in potential donors looking for new organizations to support.

Four Main Financial Statements for Nonprofits

To report on restricted or reserved funds in MoneyMinder, you will want to first make sure that any such funds are clearly labeled in your Budget Category Headings. This helps distinguish those funds from your general operating budget and allows MoneyMinder to display them in reports. While each financial statement provides unique insights, they complement one another to give nonprofits a full picture of their financial situation.

Liabilities

As opposed to an Income Statement which shows a profit or loss, the Statement of Activities instead shows a positive or negative change in each net asset fund. Thus, there is a drop in the ending balance of the temporarily restricted net assets. Individuals used to reading for-profit financial statements typically consider this a “loss”; however, nonprofits are not in the business of making a profit (or a loss), thus this is an incorrect assumption. Instead, the financial statement is showing that the organization expended some of the net assets that were obtained in a prior financial period(s).