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Each year, nonprofit organizations are required to file Form 990 with the Internal Revenue Service (IRS). This form is a public document that provides information about a nonprofit’s programs, mission, and finances—and part of it includes the Statement of Activities. The Statement of Activities lets you evaluate whether your organization is earning more than it spends, providing a snapshot of your financial health. By breaking down revenue and expenses, this report shows how efficiently your organization is using resources to support your mission. Fortunately, there is help for nonprofits that want functional financial reports and cohesive accounting procedures.

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Nonprofit organizations, by definition, operate with the principle of focusing on accountability, not profitability. Any revenue of income left over after all of the business expenses are paid is required to be put back into the organization for the purpose of funding the mission. Your nonprofit must include natural and functional classifications for all expenses. Organizations will separate these expenses by programs, fundraising, and management.

The Importance of Net Assets in Nonprofit Financial Statements

• The Statement of Activities is one of the core financial statements used in nonprofit accounting.
• The Statement of Activities is a fundamental tool in this process, serving as a comprehensive report that provides a snapshot of the organization’s financial activities over a specific period.
• A common error in nonprofit accounting is the incorrect handling of donor-imposed restrictions.
• By the end of the post, you’ll understand each section of the Statement of Activities, how they work, and how they come together to advance the sustainability and growth of your organization.
• Many platforms offer features tailored to nonprofit financial reporting, helping you track income, expenses, net assets, and other financial metrics more easily.

The net assets featured on your nonprofit statement of activities are simply your expenses subtracted from your revenue. This calculation shows the equity of your nonprofit organization and whether you have the revenue to cover expenses, creating a sustainable organization. Your organization works hard to raise funds and to use those funds to further your mission. Ensuring your reports are in check will help your nonprofit make the most of your finances moving forward. Let’s dive in to learn more about the specifics of your nonprofit statement of activities. Such analysis is indispensable for strategic planning and ensuring that the organization continues to effectively fulfill its mission.

What are unrestricted funds and funds with restrictions in a Statement of Activities?

• Unlike other reports, this document breaks down expenses by both functional category (purpose) and natural category (type), providing granular insights into resource allocation.
• If you haven’t seen one for your organization yet or want to try your hand at compiling one, use our template to get started.
• The net assets section breaks out net assets with donor restrictions and net assets without donor restrictions.
• It includes donations, grants, fundraising, earned revenue, government funding, and special events.
• One of the best is to segregate the duties to ensure there is always double checking.
• Many organizations choose to partner with a third-party nonprofit expert, like JFW Accounting Services, as a cost-effective and efficient way to manage reporting requirements.
• While nonprofit financial statements have some overlap with these, there are key differences.

Overall, significant accounting policies play a crucial role in nonprofit financial reporting. They determine how financial transactions are recorded, reported, and disclosed, and they provide stakeholders with valuable information about the organization’s financial health and performance. It is also important for nonprofit organizations to regularly review and update their accounting policies to adapt to changes in the regulatory environment and industry practices. This ensures that the organization’s financial statements remain relevant and compliant with the latest standards and regulations. All The Key Benefits of Accounting Services for Nonprofit Organizations firms must closely monitor their financial performance in order to make wise judgments.

Encouragement to Utilize This Knowledge to Make Informed Decisions About Involvement or Investment in a Nonprofit

While functionally similar, the terminology reflects the unique goals and nature of nonprofit organizations. It’s essential that you set up some sort of internal control of the statement of activities to avoid tampering and error. No one wants to admit to making a mistake, so it’s better that you head off that possibility. One of the best is to segregate the duties to ensure there is always double checking.

Common fund structures for nonprofits

However, organizations should generate it internally more often, such as monthly or quarterly, to monitor financial performance more closely. In this article, we’re going to break down the Statement of Activities and explain how to create one for your nonprofit. By the end, you’ll have a clear understanding of how it can help you manage your nonprofit’s finances better. At Altruic Advisors, our nonprofit accountants have helped more than 500 organizations across the country with outsourced accounting, Form 990 preparation, and nonprofit audit services. Tyler brings a wealth of expertise in accounting, tax compliance, and financial consulting with Velu’s outsourced accounting solutions for nonprofits and small businesses.

These funds must be used for specific purposes in perpetuity and are often received through endowments or bequests. Supporting expenses encompass administrative and general costs necessary to keep your nonprofit running smoothly. Examples include rent, utilities, office supplies, salaries of non-program staff, and professional fees. The Statement of Activities shows where your income comes from and how you spend that income.

• Unlike a for-profit balance sheet, the Statement of Financial Position emphasizes mission-driven resources rather than shareholder equity.
• Supporting expenses encompass administrative and general costs necessary to keep your nonprofit running smoothly.
• Internally you should create and use reports that give you the information you need to run your business effectively.
• Understanding and managing these types of funds correctly is crucial for compliance with accounting standards and donor requirements.
• These notes provide additional information and explanations about specific items in the financial statements, significant accounting policies, and other disclosures.
• One key aspect of the additional disclosures is the disclosure of significant accounting policies.

A nonprofit’s expenses usually include all cash flowing out of the organization during the period. Plus costs incurred but not yet paid, like payroll that won’t be paid until next month or vendor invoices with 30-day terms. But in a leadership role, you’ll need to understand both audited financial statements and internal reports to communicate effectively with your donors, grant-makers, board of directors, and your team. One of the primary challenges in nonprofit revenue recognition is the timing of when revenue should be recorded.

• These are key indicators of the organization’s financial health and its ability to manage its obligations.
• You’ll have to exclude unrealized gains or losses from investments, as well as the value of in-kind services and real estate donations.
• It shows the organization’s financial position and helps assess its liquidity and solvency.
• Sharing these financial statements with donors is one of the best ways to ensure transparency and build trust.
• The first and most desired financial statement is the statement of financial position.
• It also helps you identify how much of your organization’s money is going towards mission-based activities versus fundraising or administrative expenses.

As an executive or financial officer, make it a habit to regularly review all financial statements. Instead, review your Statement of Activities, Statement of Financial Position, and Cash Flow Statement monthly or quarterly. Pie charts can be added at the bottom of the report to visually show the proportions of expense allocated per activity and the breakdown of revenue sources to-date and/or as budgeted. This report format is for internal purposes, as income is not shown in this manner in external reports. So it’s very important that you learn to read the IRS 990 and understand what it says about the financial health and governance of your organization. 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.