financial statements for nonprofits

A good budget can act like a roadmap for a nonprofit, determining where and when the organization will deploy its resources, and whether it’s on the right track financially. Don’t use your personal bank account to receive, hold or disburse money for your nonprofit. Make sure all of your nonprofit’s transactions go through a dedicated bank account. Ask your bank whether they offer business chequing accounts tailored to nonprofits. Now, I’m not arguing for imposing the commercial accounting model on government. There is a fundamental distinction between governmental and commercial accounting. In governmental accounting, benefits do not necessarily flow in as revenues, so there is no inherent connection between revenues and expenses as there is in the commercial model.

The method of accounting, unless GAAP is required by an external reporting requirement , should be what is most useful to those reading the financial statements. Those users are typically management and the board and may also include donors, grantors, and other stakeholders. All users of the financial statements should be considered when determining the method of accounting to use. The cash flow statement can be presented using the direct method or the indirect method, which is the one that is most commonly used. The direct method shows financial statements for nonprofits in the operating activities section the inflows and outflows related to cash flows provided by and used in operating activities. The indirect method starts with the change in net assets, followed by additions to or subtractions related to changes in the statement of financial positon to adjust the change in net assets to a cash basis. The first section of the cash flow statement is cash provided by or used in operating activities, which shows the cash flows in and out of the nonprofit in relation to its mission-related operation.

Legal Forms & Services

For example, if your year end is December 31st, your Form 990 is due May 15th and if you file for an extension the return is due November 15th. If your year-end is June 30th, your Form 990 is due November 15th and if you file for an extension the return is due May 15th. Their 2018 annual report does an excellent job of carrying through design elements from page to page, weaving bright colors and solid rectangles through the various stages of the report. These are all opportunities to collect organic content by taking photos, Boomerang videos, and more!

financial statements for nonprofits

Second, many nonprofit organizations, particularly those in government, combine their financial accounting with their budgetary systems. They report actual revenues and expenditures and compare them with those budgeted. Anticipated expenditures are based on purchase orders, whose total is recognized as an encumbrance or obligation against the budget.

How To Read Nonprofit Financial Statements, Third Edition

In contrast, natural categories include salaries and benefits, supplies, professional fees, depreciation, and interest, among other operating costs and expenses. For nonprofit organizations, therefore, traditional corporate reporting is almost meaningless. The funds represent external restrictions on the use of resources, while the budget represents legislatively mandated restrictions on the distribution of monies. The statement of functional expenses is only used by nonprofit organizations based on the importance of monitoring expenditures. In general, this statement breaks down organizational expenses into common categories. The statement also shows the breakdown of expenses between program services and support services. One of the reasons nonprofits track expenses is to report on the percentage of funds that go toward programs compared to funds spent on administration costs, such as employee salaries and fundraising.

  • Net assets with donor restrictions would also include amounts to be held in perpetuity as required by the donor.
  • When you track the cash flow over time, you can gain new insights into the spending habits of your organization, helping to create more accurate budgets over time.
  • A nonprofit’s accounting system is typically a series of general ledgers, or funds, which enables the organization to track revenue and expenses to a single point of origin.
  • When you are thinking about ways to increase efficiencies, whether reducing cost, reaching a wider audience, or attracting more attention, think about whether going paperless is the right choice for your nonprofit.
  • The newly released not-for-profit reporting standard retains the current approach, focusing on the organization as a whole and providing a uniform reporting format across varying industries in the nonprofit sector.
  • You can see on the template that with and without donor restrictions are grouped altogether, without breaking down the exact assets.

It breaks down your expenses into your program, administrative, and fundraising expenses—the same breakdown required on your annual tax forms. If you’re like most nonprofit leaders, you didn’t get to the top of your organization by burying your nose in nonprofit financial statements. These are the Statement of Financial Position, the Statement of Activities, the Statement of Cash Flows and the Statement of Functional Expenses. After your review of a NBO’s financial statements, it is essential to determine whether you feel that the organization is treating your money prudently. If you find a nonprofit organization with exorbitant operating expenses, don’t give it your money.

Want To Make The Most Of Your Nonprofit Statement Of Financial Position?

Nonprofit enterprises have a more basic need for this kind of budgetary information. Existing to benefit society as a whole or particular groups in it , they are by definition not for profit. The appropriate measure of their performance is the level of benefits achieved, not revenues. Although our society clearly profits from education of our children, it is impossible to put an objective value on that education. So such benefits are not included in the accounting statements of nonprofit organizations. These observations indicate that the institution is much less solvent than a corporate balance sheet shows. Under business accounting principles, the restrictions on assets and fund balances would no doubt be explained in elaborate footnotes, which usually are not read as carefully as the rest of the report.

financial statements for nonprofits

For example, the large negative fund balance in the consolidated balance sheet of the U.S. government represents, in part, an investment in future social benefits. The investments made to achieve these benefits should be counted as assets and expensed as the benefits manifest themselves. But because of our inability to measure benefits, the government expenses the investments and puts no corresponding asset on the balance sheet. In this article, we explain accounting for nonprofit enterprises, examine its relevance, and comment on the proposed changes. In our view, fund accounting and budgetary accounting should not be abandoned. Quite to the contrary, we find them to be such informative methods that we urge the adoption of some aspects of nonprofit accounting in businesses.

Statement Of Financial Activities

The statement of functional expenses shows expenses of each functional area of the organization such as programs, fundraising, and management. You will see that the expenses listed in this statement are broken down further to list exact expenses. Now moving to the right side of the balance sheet equation, we have liabilities. If assets are what your organization owns, liabilities are what it owes. Liabilities include things like accounts payable , debt , and grants payable .

financial statements for nonprofits

In Exhibit IV, funds are comparable to the individual projects in a project monitoring system. Keep in mind that your Form 990 isn’t the only tax requirement that nonprofits must meet to remain compliant. Be sure to send any necessary donation receipts to your donors, sponsors, and other eligible organizations.

Financial Statements

These questions must be answered in light of what the trustees construe as the institution’s future ability to generate gifts for major additions. The existence of substantial interfund loans, particularly those of long tenure and in which the “debtor” fund seems to lack the resources to repay such a loan, also indicates fiscal stress.

  • If you don’t hear back from the IRS within 90 days, call Customer Account Services to check on its status.
  • Instead of presenting all their programming and reporting information at once, BRAC’s interactive report allows you to click through to subjects or campaigns of interest.
  • Many organizations have cut back on paper copies or supplement their print material with online resources.
  • Expenses of the Organization must be allocated between program services, general and administrative, and fundraising.
  • If you have more than three months of LUNA, you have a little more flexibility that can be used to fund organizational growth.

This is an incredibly important part of the nonprofit statement of financial position. It defines the net assets that you have available to conduct operations at your organization.


If the membership does not elect a new auditor at the annual meeting, the current auditor remains in that position for the next year. “Material weakness” generally indicates that the organization lacks financial capabilities. These comments are sometimes noted if an organization has to issue a restatement for an accounting error made in a previous year.

  • Accrual basis accounting means that you record revenues and expenses when they are incurred or earned.
  • Nonprofit shopping fundraisers can give your organization a new way to raise funds.
  • In Exhibit IV, funds are comparable to the individual projects in a project monitoring system.
  • Similarly, if it receives few endowment gifts, its endowment principal may not grow sufficiently to generate the higher income needed in future years to keep pace with costs.

Others opt for a completely paper-free path, releasing their annual report as an infographic, a video, or even a conference call. Your nonprofit’s statement of functional expenses describes the costs incurred for different areas of the organization.

While all for-profit businesses must pay taxes on their net income, nonprofits are not required to pay income taxes. Nonprofits are only assessed for taxes such as real estate or sales taxes and are required to file IRS Form 990. Filing the Nonprofit Form 990 ensures that charitable organizations are accountable to funding sources. For-profit businesses must file annual financial statements with the IRS, while nonprofits do not have to make these filings unless they choose to do so. For-profit businesses must report their income and expenses in monetary terms, while nonprofit organizations are not limited by this measure.

Propel Nonprofits is also a leader in the nonprofit sector, with research and reports on issues and topics that impact that sustainability and effectiveness of nonprofit organizations. Also presented are sample note disclosures related to liquidity management and expenses . The liquidity management note will be new to most nonprofits and might require governing boards to adopt policies supporting these disclosures.

Potential board members can see who else is on the board and what the cash reserves look like. Some people mistakenly belief that forming a nonprofit automatically gives the organization all the tax benefits that come along with being “exempt.” That is simply not the case. Keep in mind, nonprofit status refers only to your state’s laws regarding corporate status, while tax-exempt refers to federal and state exemption under the U.S. tax code. As a nonprofit organization, you have to apply for special tax designations under 501. See FindLaw’s Becoming a Tax-Exempt Organization to learn more about how to apply and enjoy exemptions from federal, state, and local taxes. If an organization has an average of less than $50,000 gross receipts each year a 990-N is required. The 990-N is an electronic form that requires only the EIN, tax year, legal name and address, name of principal officer, website address, and confirmation via checkbox that the annual gross receipts are $50,000 or less.