How to Master the Art of Nonprofit Financial Statements

Income sources can consist of things like grants, donations, and investment income. Expenses can include things like salaries, office expenses, and program expenses. Looking at both of these levels will indicate whether the nonprofit is running at a surplus or a deficit. With so many pressing causes worth their https://greatercollinwood.org/main-benefits-of-accounting-services-for-nonprofit-organizations/ attention, donors want to feel confident that your nonprofit will put their funds to good use.

How do SOAs Help Organizations?

The nonprofit should also make it clear that funds are only being spent per the wishes of the donor. Your organization must also list expenses on your Statement of Activities report. You should split your expenses by programs, administrative, and fundraising costs. The changes in net assets section of the Statement of Activities gives stakeholders a clear picture of the organization’s financial health. Understanding these changes and trends can guide strategic decision-making, helping to ensure the organization’s long-term sustainability.

Donor Restrictions

• Blue Avocado Accounting Procedures Manual Template is a great resource and guide for establishing accounting processes for your nonprofit.
• At its core, this statement is designed to provide a clear picture of the organization’s financial performance over a specific period, typically a fiscal year.
• The rest of the organization’s 2023 report is packed with interesting insights, quotes from individuals they’ve helped, and more.
• Many nonprofits find that the word “activities” better reflects their focus on mission-driven work and the fact that they bring in revenue from a variety of sources—not just earned income.

Note, that there is special guidance on allocating costs related to an activity that combines fundraising with elements of another function. If you’re a voluntary health or welfare organization you also must present your expenses in a matrix, which includes both the natural and functional expenses by program, according to FASB Statement 117. For example, among the nonprofit reporting standards laid down by the Financial Accounting Standards Board is FASB 117, which calls for a functional classification of expenses. It details how your organization’s resources have changed, covering funds raised, expenses paid, and the resulting net change in assets. You’re required by FASB 117 to report your expenses by functional classification, meaning you’ll need to at least split up your expenses by administrative, fundraising, and program costs. Generally accepted accounting principles dictate that these two categories must be clearly delineated and recorded differently.

• Net assets with donor restrictions are usually never below zero, although special reporting may apply to an “underwater ” endowment balance (topic not covered here).
• Ultimately, your nonprofit financial statements are snapshots of your financial health and activities that you can use to improve your decision-making and secure more support down the line.
• Unlike for-profit businesses that exist to generate profits for their owners, nonprofit organizations exist to pursue missions that address the needs of society.
• These articles and related content is the property of The Sage Group plc or its contractors or its licensors (“Sage”).
• Permanently restricted funds are given to the nonprofit to be used as investments.

What Are Nonprofit Financial Statements?

However, if $15,000 of your revenue is restricted, you’re actually $5,000 in the red and should cut expenses to maintain a sustainable organization. The expenses your organization incurs should all support your mission in some way, whether that’s by funding daily nonprofit operations or a specific project relevant to your mission’s purpose. Meanwhile, unrestricted revenue can be allocated toward projects, operations, and other expenses as chosen by the nonprofit itself. Thankfully, there are plenty of tools out there to smooth the process of accounting for the modern nonprofit. Accounting software programs like QuickBooks or Sage Intacct can make gathering, organizing, and presenting information a much more straightforward process.

The Statement of Activities is a fundamental document for nonprofit organizations, serving as a financial roadmap that outlines the inflows and outflows of resources. At its core, this statement is designed to provide a clear 5 Main Benefits of Accounting Services for Nonprofit Organizations picture of the organization’s financial performance over a specific period, typically a fiscal year. It is akin to the income statement used by for-profit entities but tailored to meet the unique needs of nonprofit accounting.

The difference between total revenue and total expenses is known as the change in net assets. A clear breakdown of expenses also helps demonstrate your organization’s efficiency and commitment to mission-driven activities. For example, nonprofits record incoming funds only after meeting donor conditions, while for-profit companies can recognize revenue as soon as a sale is complete.

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Nonprofit accounting can feel complicated for nonprofits without a solid financial background, but there are ways to make filing reports easier. A Statement of Activities is similar to a for-profit income statement and is one of the four financial reports nonprofits must file. Additionally, comparing the statement of activities with previous years’ statements and industry benchmarks can help identify trends and highlight areas for improvement or concern. It is important to note that each nonprofit is unique, and the interpretation of financial performance should take into account the specific circumstances and objectives of the organization.

• The income statement is also referred to as the profit and loss statement, P&L, statement of income, and the statement of operations.
• You can include all restricted funds together or segment them by donation type.
• The World Wildlife Fund (WWF) features graphs alongside its statement of activities to present its annual report readers with a more visual perspective of its revenue and expenses.
• Understanding these differences is essential for anyone involved in the financial management, oversight, or analysis of a nonprofit entity.
• Unconditional contributions, on the other hand, are recognized as revenue immediately upon receipt, as there are no barriers to their use.

This statement is basically like a non-profit equivalent of the corporate balance sheet. This statement will analyze all of a nonprofit’s various assets and liabilities. 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. (However, churches and some other nonprofit organizations are not required to file.) The title of Form 990 is Return of Organization Exempt From Income Tax.

This integrated approach illustrates your organization’s impact in a more relatable, holistic way. Encouraging a collaborative effort between financial and programmatic departments is key to crafting a comprehensive and compelling financial narrative. Month-to-month comparisons are crucial for detecting trends, anomalies, and areas of concern in your financial activities. Skipping this analysis can lead to missed opportunities for adjustment and improvement, potentially causing long-term financial issues.