Nonprofit Accounting Basics: Financial Statements

Accuracy and transparency in financial reporting are like the foundation of a house. They need to be strong and reliable, or everything built on them might crumble. For nonprofits, this means making sure that the organization’s net assets are clearly shown and explained. Net assets represent what the organization owns and what it owes, sorted in order of liquidity, or how easily they can be turned into cash. While the statement of activities gives an overall view of financial performance by showing total expenses from total revenue, the statement of functional expenses breaks those numbers down.

Addressing Fundraising and Financing Activities in Nonprofit Financial Statements

The Generally Accepted Accounting Principles (GAAP) are important for nonprofit organizations because they ensure that financial statements are transparent and easily understandable. The GAAP also help to provide a consistent set of standards, so that all organizations can accurately compare their results with others in their industry. By understanding the GAAP and how it applies to nonprofit financial statements, nonprofits can better ensure accurate and reliable reporting in order to remain accountable to those who depend on them for services. Analyzing revenue and expenses in a nonprofit financial statement is essential for understanding the financial health of the organization. It helps to answer questions about income and spending trends and provides insight into how much money is being spent on programming activities versus management and fundraising activities.

Do You Struggle to Make Sense of Your Financial Statements?

You can use this data to assess how your nonprofit is achieving its mission-driven goals and what adjustments, if any, need to be made. Additionally, the line items in your organization’s statement of activities should match those in the operating budget you created at the beginning of the fiscal year. By comparing these two documents, you can evaluate your planned versus actual expenses and revenue generation.

• This involves recording revenue and expenses from both the current and previous periods to show how the organization’s net assets have changed.
• Since each of these core financial statements provides a different way to visualize the data you’ve collected, you can glean unique insights about your organization’s financial health from all of them.
• Preparing accurate and transparent financial statements is essential for building trust with stakeholders and ensuring compliance with regulatory requirements.
• The investing section also reports the amount received from the sale of long-term assets.
• A Statement of Activities is similar to a for-profit income statement and is one of the four financial reports nonprofits must file.

Prepare the Statement of Financial Position

The first step to having clear and transparent financial statements is to open a bank account. At Relay, we help nonprofits simplify 5 Main Benefits of Accounting Services for Nonprofit Organizations their finances, securely collaborate with their financial advisors, and stay on top of their cash flow. From no-fee checking and savings to powerful accounting integrations, Relay is uniquely built to serve nonprofits. A balance sheet in nonprofit accounting is also called the statement of financial position. It provides an overview of your finances and helps assess your organization’s solvency (ability to pay off debts) and liquidity.

State Law Nonprofit Audit Requirements: 50-State Chart

• Similar to equity, the net assets section denotes the “value” of the nonprofit.
• Automated systems also help with compliance and make it easier to produce accurate reports.
• Below, you’ll learn about the value of each, what information to report, and how they work together to keep your nonprofit financially sound.
• This financial statement reports the revenues and expenses and the changes in the amounts of each of the classes of net assets during the period shown in its heading.
• This statement also lists the resources, obligations, and ownership details of a company on a specific date, thus providing you with a snapshot of what the company looks like.
• Even though you don’t have to pay federal taxes, almost all nonprofit organizations (the few exceptions are listed here) must file an IRS Form 990 each year.

For donors, board members, and other supporters, financial notes offer a comprehensive view of the organization’s stability, highlighting any special conditions or financial commitments that could influence its future. Positive changes in net assets indicate that the organization’s https://greatercollinwood.org/main-benefits-of-accounting-services-for-nonprofit-organizations/ revenue exceeds its expenses, reflecting financial growth and potential for expansion or reserve building. Conversely, negative changes in net assets suggest that expenses are outpacing revenue, which may signal financial challenges. By analyzing the expense breakdown, stakeholders can gain insights into how the organization allocates its resources and make informed decisions regarding funding and budgeting. Now you know the basics of the five essential financial reports that every nonprofit needs. The definition of a financial statement is a simple report that can be pulled together monthly (or as-needed) to give you a view of your financial health.

• Each type of organization plays a role in their communities, but by understanding nonprofit accounting, you get a better insight into how organizations prioritize finances.
• The fundraising efficiency metric shows how cost-effective a nonprofit’s fundraising efforts are by comparing the cost of fundraising to the revenue generated.
• Consequently, the laws that require a charitable nonprofit to submit audited financial statements also vary state-by-state.
• This way, donors see the real impact of their support and feel appreciated for their generosity.
• A detailed insight enables the nonprofit to assess its financial sustainability, identify trends, allocate resources effectively, and plan for future funding needs and projects.
• The Statement of Cash Flows provides insights into the cash inflows and outflows from operating, investing, and financing activities.

The statement of financial position also gives board members, donors, and foundations a clear view of your organization’s available cash and where you are as compared to past years. Understanding a nonprofit’s net assets is pivotal to both short- and long-term planning. This is because it’s possible for a nonprofit to have plenty of money, yet still struggle month to month.