A Complete Guide to Demystifying Nonprofit Financial Statements

When a restriction is satisfied, those monies are moved from restricted to unrestricted and then used for expenses. Commercially available accounting software offers adjustable templates that you can tailor to the revenue or expense categories that are most relevant to your operation. If donors, grantmakers and regulatory bodies can clearly see how much revenue you generated, where it came from, and how it was spent, that demonstrates responsible financial management, which builds trust.

• It differs notably in its presentation of net assets, categorized into unrestricted, temporarily restricted, and permanently restricted funds.
• You should review your statement of activities monthly to identify trends and changes.
• They provide insight into the organization’s overall financial health and stability.
• For example, interest earned by a manufacturer on its investments is a nonoperating revenue.
• Like all nonprofit financial statements, the central role of the Statement of Activities is to provide transparency and accountability to your donors and board.

Wrapping Up: Understanding Your Nonprofit’s Financial Health

• Whether you add graphs to visualize your most important financial details or simply include your audited reports on your website, consider how you can cater to your audience’s interests and preferences.
• Furthermore, a statement of activities gives you another opportunity to be transparent and accountable to your donors.
• MIP Accounting® allows you to easily generate a statement of expense with its 130-plus pre-built reports and custom report-builder.
• Revenue recognition in nonprofit accounting is a nuanced process that requires careful consideration of various factors to ensure accuracy and compliance with accounting standards.
• Nonprofits are required to file Form 990, with the IRS by the 15th day of the 5th month after the end of their fiscal year.

This https://greatercollinwood.org/main-benefits-of-accounting-services-for-nonprofit-organizations/ classification helps stakeholders see the direct impact of their contributions on the organization’s core activities. It also aids in evaluating the effectiveness of these programs by comparing the resources allocated to them with the outcomes achieved. To avoid this mistake, organizations must develop robust systems for tracking and reporting on restricted versus unrestricted funds. This involves clear communication with donors about the terms of their contributions and meticulous record-keeping to ensure that funds are used according to donor restrictions.

Reporting Contributions and Grants

Smith & Howard Advisory, LLC and its subsidiary entities are not licensed CPA firms. The entities falling under the Smith & Howard brand are independently owned and are not liable for the services provided by any other entity providing services under the Smith & Howard brand. Our use of the terms “our firm” and “we” and “us” and terms of similar import, denote the alternative practice structure conducted by Smith & Howard PC and Smith & Howard Advisory LLC.

Non Profit Financial Statement Template

Although there are similarities in profit-and-loss elements, nonprofits must follow different rules and reporting structures. One of the key documents to help you make that call is the statement of activities. While the fiscal year is the most common choice for a Statement of Activities (SOA), it’s not the only option. The fiscal year usually makes sense because it lines up with other key financial documents, making it easier for managers and stakeholders to analyze and compare the numbers. Next, you add together all expense items, such as salaries, facility costs, supplies, and other operational costs, to get the total expenses line. Here’s an example of a Statement of Activities that was a part of the organization’s audited financial statement in 2021 (page 5).

Management and General Expenses

Tom is a multi-disciplined leader with over a decade of experience in nonprofit operations, technology leadership in government, and over two decades of servant leadership. This gives you and your stakeholders time to spot discrepancies and correct errors if necessary. This allows you to mitigate risks and seize opportunities, redirecting funds to the initiatives that most effectively advance your mission. Fees paid by your supporters in exchange for privileges, such as newsletters, information, contacts, or access to events. Income generated from services aligned with your mission, such as tuition fees, ticket sales or workshop fees. Non-cash gifts such as materials, venues or volunteer labor in support of your campaigns and operations.

Accounting & Financial Reporting Resources

• Nonprofits have a primary responsibility to the Internal Revenue Service (IRS) and their donors when filing and sharing financial statements.
• Conversely, a program with high costs but low revenue or impact might need to be reassessed or refined to better align with the organization’s mission and financial capabilities.
• Since a nonprofit organization does not have owners, the third section of the statement of financial position is known as net assets (instead of owner’s equity or stockholders’ equity).
• Operating expenses are your employees’ salaries and the amount spent on equipment and supplies.
• However, they also serve an incredibly important function within the nonprofit itself.

The net asset section of the Statement of Activities is thus not just a reflection of past and present financial status but also a guide to potential future challenges and opportunities. A Statement of Activities shows whether an organization made a profit or a loss during a period of time. It is a financial snapshot that can be used to track the organization’s financial progress. Your nonprofit statement of financial position is another key document for your cause. MIP is today’s leading accounting software for nonprofits and government organizations. Designed to let you track unlimited funds and manage your books with ease, MIP Accounting® software offers a simple way to manage intricate financial processes in a single, user-friendly system.

Improved Financial Management

The largest nonprofits in the US can accumulate annual contributions totaling billions of dollars, but the statement of activities breaks the figure down into just a few lines. For example, donors often check how much is spent on program services compared to administrative or fundraising activities to ensure their contributions are being used effectively. By “function” they mean the reason any expenses were incurred, such as management fees, or the costs of providing program services and fundraising activities. For instance, if your nonprofit has $55,000 in expenses and $65,000 in total revenue, it would appear that your net assets are positive, at $10,000.

• Our intent is to merely introduce some of the basic concepts that are unique to nonprofit accounting and reporting that are required by the Financial Accounting Standards Board (FASB).
• Income sources can consist of things like grants, donations, and investment income.
• 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.
• Improved management of resources can help your nonprofit organization to achieve its goals more efficiently and effectively.
• When a restriction is satisfied, those monies are moved from restricted to unrestricted and then used for expenses.
• This level of detail not only aids in internal financial management but also provides donors with confidence that their contributions are being used as intended.

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. As a result, nonprofits will issue a statement of activities instead of the income statement issued by for-profit businesses. From churches to youth organizations to the local chambers of commerce, nonprofit organizations make our communities more livable places.

Fundraising Efficiency Ratio

The purpose of the change in net assets is to articulate the net assets or equity of the statement of financial position. Once you have the change in net assets, you can compare revenue and expenses by significant program activity (or function) to see exactly where you are making or losing money. While the goal of a nonprofit isn’t to turn a profit, if you don’t bring in more than you spend, you won’t be able to survive. And a little “profit” helps build your operating reserves to help you survive a slow-fundraising quarter or unexpected expenses. Restricted accounting services for nonprofit organizations Revenue shows funds with donor-placed restrictions on how or when you can spend the money.