Nonprofit Financial Statements

A nonprofit organization (NPO) is an organization that has no owners and which uses its net income to help it achieve the aims for which it was established. All surplus net income has to be kept within the organization and is not paid out as dividends or distributions.

The principles of double entry bookkeeping used by a nonprofit organization are the same as those used by any other for-profit business, except that the format of the financial statements changes.

The three main nonprofit financial statements are as follows:

  1. The statement of financial position
  2. The statement of activities
  3. The statement of cash flows

The Statement of Financial Position

The statement of financial position is equivalent to the balance sheet for a for-profit business. The main difference is that as there are no owners, the term equity is not relevant.

The accounting equation is normally written as follows:

Assets = Liabilities + Equity

As the term equity is not relevant, the accounting equation for a nonprofit organization is simply restated as shown below

Assets = Liabilities + Net assets

The term equity is replaced by the term net assets which is sometimes referred to as funds.

The statement of financial position shows a financial snapshot of the nonprofit organization at a specific point in time, usually at the beginning and end of an accounting period. It sets out the assets of the organization and how they have been funded. It tells you what your organization is worth at book value.

The top of the statement of financial position shows the assets of the organization, property, machinery, fixtures, inventory, accounts receivables, cash etc. The bottom part of the statement of financial position shows how those assets have been funded by liabilities such as supplier credit, bank loans, and by net assets. Net assets or funds represents the net income surplus of the organization and is equivalent to the net worth in for-profit business.

Nonprofit financial statements: Statement of financial position at 31 October 2014
Cash 30,000
Accounts receivable 300,000
Inventory 20,000
Current assets 350,000
Long term assets 450,000
Total assets 800,000
Accounts payable 160,000
Other liabilities 75,000
Current liabilities 235,000
Long-term debt 165,000
Total liabilities 400,000
Unrestricted 150,000
Temporarily restricted 75,000
Permanently restricted 175,000
Total net assets 400,000
Total liabilities and net assets 800,000

Under generally accepted accounting principles (GAAP), the net assets are divided as shown above into one of three types:

  1. Unrestricted

  2. Unrestricted net assets are any net assets or funds which are not restricted and which can be used by the organization as it sees fit. Unrestricted funds are normally further separated into two types

    1. Designated

    2. Designated net assets are unrestricted net assets which have been set aside by the organization for a specific (designated) purpose and are not generally available

    3. Undesignated

    4. Undesignated net assets are those which are generally available for use by the organization.

    Notice that it is the organization itself which decides whether the unrestricted net assets are designated or not.

  3. Temporarily restricted

  4. Temporarily restricted net assets or funds are usually funds contributed by a donor who has placed restrictions on what the funds are to be used for.

  5. Permanently restricted

  6. Usually endowments which have been donated to the organization. The organization can use the income from the endowment, but cannot use the original sum.

Notice that it is the donor who decides whether the net assets are restricted or not.

The assets and liabilities can be subdivided into various categories depending on the activities of the non profit organization. Our free downloadable nonprofit chart of accounts template is available to assist in setting up the types of asset and liability accounts needed.

The closing net assets shown above at 400,000 is highlighted in blue as it reconciles to the closing net assets on the second of the nonprofit financial statements which is the statement of activities discussed below.

The Statement of Activities

The statement of activities is the non profit organization equivalent to the income statement, and shows the financial performance over an accounting period. The accounting period can be any length but is usually a month or a year.

The statement of activities is used to tell whether an organization has made a net income surplus or deficit for the period, and follows the general format of Income – Expenses = Net Income.

Nonprofit financial statements: Statement of activities for year ended 31 October 2014
Unrestricted Temporarily Restricted Permanently Restricted Total
Income 100,000 15,000 80,000 200,000
Expenses 75,000 60,000 140,000
Net income 25,000 15,000 20,000 60,000
Opening net assets 125,000 60,000 155,000 340,000
Closing net assets 150,000 75,000 175,000 400,000

The income and expenditure are analysed into the categories of unrestricted, temporarily restricted and permanently restricted which have the same meaning as defined for the statement of financial position above.

As the net income surplus or deficit is retained within the organization it also represents the change in net assets for the accounting period. The closing net assets, which should agree to the net assets in the statement of financial position (in this case 400,000 highlighted on blue), is simply the net income for the year added to the opening net assets for each category.

The income and expenditure can be subdivided into various categories depending on the activities of the non profit organization. Our free downloadable nonprofit chart of accounts template is available to assist in setting up the types of income and expenditure accounts needed.

The Statement of Cash Flows

The non profit statement of cash flows shows a organizations cash inflow and cash outflow over an accounting period, and has a similar format to the cash flow statement used by a for profit business.

Nonprofit financial statements: Statement of cash flows for year ended 31 October 2014
Net income 60,000
Add back depreciation 12,000
Working capital -41,000
Operating activities 31,000
Capital expenditure -30,000
Investing activities -30,000
Debt repayments -10,000
New debt 38,000
Financing activities 28,000
Net cash flow 29,000
Opening cash balance 1,000
Closing cash balance 30,000

The net cash received or paid during the accounting period is referred to as the cash flow. In the above example, the cash flow is £29,000 into the organization.

Notice that the closing cash balance on the cash flow statement (30,000) is the same as the cash balance on the closing statement of financial position.

The Three Nonprofit Financial Statements Connected

There are three financial statements which you need to understand to operate a nonprofit organization effectively, the statement of financial position, the statement of activities, and the statement of cash flows.

The statement of financial position shows the assets of a organization and how they have been funded by liabilities and net assets (funds) at a particular point in time, usually the beginning and end of the accounting period.

The statement of financial activities shows the net income surplus or deficit of the organization for the period, which is equal to the movement in the net assets between the opening and closing statement of financial position.

The statement of cash flows shows the net cash in or out of the organization for the period, and the cash flow is equal to the movement on the cash balance between the opening and closing statements of financial position

Nonprofit Financial Statements November 6th, 2016Team

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