However, this can be extremely time-consuming for your nonprofit’s team and take energy away from focusing on your mission. Financial activities result in either a surplus (increase) or shortfall/deficit (decrease) in the organization’s net assets shown on the Statement of Financial Position (SOFP). Net results are classified as either with or without donor restrictions per FASB (the Financial Accounting Standards Board). The result of each year’s financial activity is shown as the “change in net assets,” that is, increases or decreases to the related net assets categories. A nonprofit’s version of an income statement is called a statement of activities.

Support risk management

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. In essence, the unique nature of nonprofit operations and funding mechanisms introduces complexities not typically seen in standard for-profit financial statements. These challenges necessitate specialized knowledge and careful attention to ensure that financial statements are accurate, compliant, and reflective of the organization’s true financial position. For many nonprofits, donations and grants constitute a significant portion of their revenue.

How to Master the Art of Nonprofit Financial Statements

Financial statements also give donors a better understanding of how the organization is doing. Your nonprofit Income Statement shows the year-over-year income and spending trends. You should look at your Statement of Activities https://greatercollinwood.org/main-benefits-of-accounting-services-for-nonprofit-organizations/ every month and compare to previous periods.

Revenues

• The nonprofit should also make it clear that funds are only being spent per the wishes of the donor.
• This statement provides a snapshot of the organization’s assets, liabilities, and net assets at a specific point in time.
• Sometimes rolled into the income statement, this focuses specifically on spending.
• They need to be clear about where every dollar goes—whether it’s directly supporting their mission or covering operations costs.
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• We consider that there is a time restriction on the funds allowing only 1/3 of the donation to become unrestricted in a given year.
• Financial statements are one of the most important tools that the leaders of a nonprofit organization can use to ensure the future health of the entity.

All revenue sections from your organization must also be split between unrestricted and restricted funds. If your nonprofit provides and charges people fees for their services, you can also report this revenue on your Statement of Activities. Organizations can also use this report to educate board members and staff leadership on financial needs and opportunities. Providing this report to the public on the website or annual report can give transparency and instill trust. The Statement of Functional Expenses reports expenses based on their nature and function.

• The expenses listed in this statement are broken down further into exact expenses, including salaries, events, and administrative costs.
• The notes to the financial statements disclose details about contingent liabilities, legal disputes, or potential financial risks that may impact the nonprofit’s financial position.
• This includes money from donors, loans from banks, and cash paid out for things like loan repayments or distributing funds to your projects.
• Operating expenses are your employees’ salaries and the amount spent on equipment and supplies.
• That means your revenue will also include any donations pledged in the period (whether you collected the cash or not) and any receivables (for services rendered but not yet paid).

Statement of Activities: Reading a Nonprofit Income Statement

Generally, nonprofits will report all their revenue into two categories – without accounting services for nonprofit organizations donor restrictions and with donor restrictions. For example, a nonprofit is likely to have a separate general ledger account for each of its bank accounts. It may also have 50 general ledger accounts for each of its major programs, plus many accounts under its fundraising and management and general expense categories. The items that cause the changes in Net Assets are reported on the nonprofit’s statement of activities (to be discussed later). 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.

It is good to monitor the non-profit’s financial reports and projections monthly. This way, you can ascertain that your organization will not be lacking in terms of money. If a non-profit wants to handle its financials well, the non-profit financial statement is the answer.