Best Practices for Preparing Nonprofit Financial Statements

A good nonprofit financial statement provides the right visibility into your performance so you can make informed stewardship decisions and maintain donor trust and confidence. Keep in mind, though, that this report is more accurate and helpful if your organization uses an accrual method of accounting, rather than the cash method. Accrual accounting allows nonprofits to record revenue when earned and expenses when incurred rather than when the money actually enters or leaves the account (which is how cash accounting works).

What Does the Statement of Financial Position Tell You?

This means the organization has enough reserves to cover six months of expenses. Generally, a reserve of three to six months is considered healthy, though this can vary based on the organization’s size, mission, and funding sources. Nonprofit expenses are categorized to provide transparency in resource allocation, allowing stakeholders to see exactly how funds are distributed and used within the organization. By dividing expenses into distinct categories, nonprofits can demonstrate their commitment to using donor contributions responsibly and efficiently. The Statement of Functional Expenses breaks down expenses by both natural classification (e.g., salaries, rent) and functional classification (e.g., program services, management, fundraising). This statement is unique to nonprofits and is used to demonstrate financial efficiency and accountability.

• Financial analysis should be made so that they can have their money to its best.
• Choosing a template that would suit your organization best in creating a finance statement for itself at the end of the year might be a little tricky.
• Also called as expenditures, these help you get an idea of where you are spending more of your revenue and where do you have to reduce it.
• This allows these organizations to focus on fulfilling their mission, rather than making money.
• By effectively managing financing activities, nonprofits can secure the necessary resources to fulfill their mission and serve their beneficiaries.
• The purpose of the notes in nonprofit financial statements is to provide additional information and explanations that are not included in the main financial statements.

Where to find the Statement of Activities in a nonprofit?

• Once you have all of this information, you can start creating your statement of activities.
• Universities, museums, and religious organizations had previously reported by fund types, whereas hospitals and trade associations had focused on the consolidated entity.
• This understanding allows nonprofits to ensure their financial health and stability over time.
• A nonprofit financial statement is a snapshot of how your nonprofit has been doing with its money over a certain period, like a year or a quarter.
• This organized directory categorizes all financial transactions and provides a clear framework for reporting.

Also presented are sample note disclosures related to liquidity management and expenses (Exhibit 3). The liquidity management note will be new to most nonprofits and might require governing boards to adopt policies supporting these disclosures. For purposes of illustration, assume that ABC Foundation has $291,800 (discounted to present value) of pledges for capital additions, of which $45,000 is classified as current. The remaining $100,000 of contributions receivable is unrestricted as to purpose but have an implied time restriction because the amounts are not available until received in the following year. Contributions receivable are presented net of estimated uncollectible amounts and discounted to present value, unless expected to be collected within 12 months. For example, if unrestricted net assets are $120,000 and monthly expenses are $20,000, the operating reserve ratio is 6.

• Historical cost represents the original purchase price of the asset, while fair market value is the estimated price that the asset would fetch in the open market.
• Income sources can consist of things like grants, donations, and investment income.
• An organized record-keeping system ensures your nonprofit can easily access key financial data when the time comes to compile your financial statements.
• Instead, you’ll be reporting on net assets and how you use funds to advance your mission.

How It Differs from a For-Profit Balance Sheet

Remember, you must take an extra step to export all your data into spreadsheets to generate financials. This separation in the records makes sure the nonprofit uses grants and donations only for allowed purposes. FASB117 and FIN46 are the IRS resources that outline a nonprofit accounting system’s needs.

• This statement shows that the organization had $30,000 in donations and $20,000 in expenses, resulting in a net income of $10,000.
• For instance, nonprofits report net assets rather than equity and classify these assets based on restrictions (unrestricted, temporarily restricted, and permanently restricted).
• By analyzing the Statement of Activities, stakeholders can assess the efficiency and effectiveness of the organization’s operations and evaluate its impact on the community.
• This method records revenue and expenses in accordance with nonprofit accounting standards.
• Watching how these net assets change over time helps organizations and their supporters see how well the nonprofit is managing its resources and investing in activities that support its mission.

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’s important to note that nonprofit financial statements are not just for internal use. They are also used for compliance purposes, as regulatory bodies require nonprofits to submit these statements regularly. Additionally, donors and funders often request financial The Key Benefits of Accounting Services for Nonprofit Organizations statements to evaluate the financial health and sustainability of an organization before making contributions. But, since auditable nonprofit financial statements, we’ll talk about accrual accounting practices in this article.

Nonprofit Financial Statements

The nonprofit statement of activities, also known as the income statement or the statement of revenues and expenses, is a financial report that shows the organization’s revenues, expenses, gains, and losses. It provides a snapshot of the organization’s financial performance over a certain period, usually a year. The statement is prepared in accordance with Generally Accepted Accounting Principles (GAAP) and provides a comprehensive view of the organization’s financial activities. In fact, nonprofit financial statements are so important that many nonprofit organizations will make their annual reports publicly available by sharing them on their website. A nonprofit financial statement helps long-term financial planning by providing a clear picture of the organization’s financial health, including revenue streams, expenses, assets, and liabilities.