Reading and understanding financial statements for NPOs

Tyler’s extensive background in accounting, tax, and financial consulting set the foundation for Velu’s outsourced accounting solutions for nonprofits and small businesses. As a fractional CFO, he goes beyond routine duties, guiding organizations with strategic insights for sound financial decisions. Velu’s services address the unique challenges faced by nonprofits and small businesses, fostering sustainable growth. Tyler places great emphasis on meticulous attention to detail in financial record-keeping, implementing efficient systems to ensure transparency and streamline operations. This approach is crucial for these organizations, as it aligns revenue recognition with related expenses, offering a true reflection of financial health and operational effectiveness within a reporting period. Gathering all financial data for the fiscal year is a critical task that underpins the integrity of nonprofit financial statements.

Classify Revenue and Expenses

The structure of the statement of financial position is similar to the basic accounting equation. The statement of financial position must reflect nonprofit accounting principles and guidelines. The statement of the nonprofit financial position report provides an overview of what an organization is worth and a birds eye view of the health of the organization. Net assets, presented in the nonprofit Statement of Financial Position report, reveal total revenue, assets and liabilities. Failure to honor donor restrictions can have serious consequences, both legally and in terms of donor trust. Nonprofits must carefully track restricted funds to ensure they are used according to the donor’s wishes.

Ignoring Donor Restrictions in Nonprofit Financial Statements

Stakeholders, including donors, grantmakers, and regulatory bodies, require assurances that a nonprofit is managing its resources wisely and is financially sustainable. The statement of financial position, commonly referred to as the balance sheet in the for-profit sector, is a crucial tool in providing this assurance. Financing activities refer to the activities that involve raising funds for the nonprofit organization. These activities include obtaining loans, issuing bonds, and receiving contributions from donors. The funds raised through financing activities are used to support the organization’s operations and programs.

• From your nonprofit’s statement of financial position, you can derive crucial data like Liquid Unrestricted Net Assets (LUNA) and cash on hand.
• For-profits list owner’s equity or shareholder funds, while nonprofits show net assets (after liabilities are subtracted from assets).
• If you’re ready to step up the financial reporting game at your nonprofit, give JFW Accounting Services a call today to learn how we can help.
• It serves as a foundational tool for strategic planning, risk management, and ensuring compliance with financial regulations.
• Nonprofit organizations must stay current on accounting standard changes and how they may impact financial reporting.
• Deferred revenue is a liability that represents funds received for goods or services that have not yet been delivered and must be recorded as a liability until the goods or services are provided.

Assets – Liabilities = Net Assets

One of the key financial documents that you need to understand and manage is the statement of financial position. In this article, we’ll provide a cheat sheet for nonprofit organizations to help you understand and effectively manage your statement of financial position. One of the most important financial statements for a nonprofit organization is the statement of financial position. The statement of financial position, also known as a balance sheet, is a statement that details the assets, liabilities, and net assets of your nonprofit. If donor restricted net assets are not fully released during the year the gift was received, the balance is carried over to the subsequent fiscal year are and shown as net assets with donor restrictions.

• Revenue recognition for NPOs is different from revenue recognition for for-profit entities because NPOs have different sources of revenue and different goals for their financial activities.
• Nonprofits with positive net assets can weather economic downturns and unexpected expenses while continuing to deliver their programs and services.
• It provides critical information about an organization’s financial health, including its assets, liabilities, and net assets.
• However, there are a number of other key assets that a Statement of Financial Position summarizes for the organization.
• The Liabilities Section of the Statement of Financial Position provides important information about the financial obligations of a nonprofit organization.
• Like any other organization, nonprofits need to maintain financial records to track their income, expenses, and overall financial health.

That said, it’s important to examine each section in relation to the others to accurately determine your nonprofit’s current financial situation. The Leukemia & Lymphoma Society (LLS) shares its audited financial statements for the past five years on its website. Each report comes with a note from the independent auditor stating accounting services for nonprofit organizations that they conducted the audit according to the Generally Accepted Auditing Standards (GAAS) to ensure that each document is free from any misstatement. As with the for-profit sector, net assets represent the financial resources available to an organization after deducting liabilities.

If that is not clear, then the expenses should be reported in the period in which they are used up. If there is uncertainty as to when an expense is matched or is used up, the amount spent should be reported as an expense in the current period. In order to accurately report the amount in each of these subgroups, it may be necessary to allocate some management and general salaries to fundraising based on the time spent by employees performing fundraising activities. For example, a management employee might be spending 30% of her time in fundraising activities but her entire salary has been recorded as management and general expenses.

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When analyzing the Statement of https://greatercollinwood.org/main-benefits-of-accounting-services-for-nonprofit-organizations/ Activities, nonprofit leaders can look for financial growth by identifying positive changes in net assets where revenue exceeds expenses. Net assets are typically categorized as unrestricted, temporarily restricted, or permanently restricted based on donor stipulations. Changes in accounting standards can significantly impact nonprofit statements of financial position. Nonprofits may benefit from seeking professional assistance when preparing their statement of financial position.

Your nonprofit’s statement of financial position is based on numbers pulled from your chart of accounts—a detailed list of all your accounts and ledgers. Restricted funds are allocated for specific purposes dictated by your donors, while unrestricted funds can be used for general operations. Sometimes, what appears to be lessening resources results from your organization using what it has to make improvements and invest in your nonprofit’s future. Additionally, nonprofits and for-profits use slightly different terminology for their balance sheets.

• This document is crucial in understanding the financial stability of your nonprofit, essentially acting as a financial report card.
• Often called a “balance sheet” in the for-profit industry, this document details both assets and liabilities in one consolidated view.
• Revenue recognition is an accounting principle that prescribes how and when an organization earns revenue and presents that revenue in the financial statements.
• That said, it’s important to examine each section in relation to the others to accurately determine your nonprofit’s current financial situation.
• Your organization may have enough cash and other assets on hand to meet its short-term obligations.
• The assets section provides information about the organization’s investments, such as stocks, bonds, or real estate.

Green Future has been operating for over a decade with the mission to promote sustainable environmental practices through education, advocacy, and community engagement. In recent years, the organization expanded its operations and took on several high-profile projects, funded primarily through grants and major donor contributions. Examples of these activities may include receiving contributions of fixed assets or securities, purchasing a building by incurring a mortgage, or obtaining an asset by entering into a capital lease. To decide which basis is right for your organization, learn more about cash basis vs accrual basis accounting in nonprofits. The Statement of Activities summarizes the money you’ve received (revenues) and the money you’ve spent (expenses) during a given period. If a grant-maker or a donor gives you money that is dedicated for specific programs, or that you need to use by a specific date, it’s still an asset.