Nonprofit Financial Statements: Understanding How To Use Nonprofit Financial Documents

05 Dec Nonprofit Financial Statements: Understanding How To Use Nonprofit Financial Documents

This statement includes different reports and disclosures that give stakeholders a good understanding of how funds are used. While the goal of a nonprofit isn’t to turn a profit, if you don’t bring in more than you spend, you won’t be able to survive. And a little “profit” helps build your operating reserves to help you survive a slow-fundraising quarter or unexpected expenses. Staying on top of your financial statements throughout the year can simplify tax season. More importantly, you’ll maintain accuracy on these critical tax forms to avoid penalties. These documents fulfill tax requirements but have many additional benefits for nonprofits who want to stay organized.

What’s on the Statement of Financial Position?

Automated systems also help with compliance and make it easier to produce accurate reports. This method records revenue and expenses in accordance with nonprofit accounting standards. Cash basis accounting is simpler and easier to understand compared to accrual basis accounting, which is commonly used in for-profit organizations. However, it may not provide a complete picture of the organization’s financial health. It is important for nonprofit organizations to carefully consider their accounting policies and choose the method that best suits their needs and goals. To present the financial information in a structured manner, nonprofit financial statements often include tables that summarize the data.

Breaking Down Form 990: Key Financial Statements That Define Your Nonprofit

The IRS also asks for some of the information in this statement when you file your Form 990. In contrast to the balance sheet, which is a picture at a single point in time, nonprofit income statements show financial activity over a period of time (usually a quarter or year). For nonprofits, income statements are often referred to as statements of activities. Like a for-profit company’s income statement, a statement of activities shows all of the financial activity that has taken place in your organization and the financial result of your work.

What is the purpose of the Notes to the Financial Statements?

Andy Smith is a Certified Financial Planner (CFP®), licensed realtor and educator with over 35 years of diverse financial management experience. He is an expert on personal finance, corporate finance and real estate and has assisted thousands of clients in meeting their financial goals over his career. Money that flows in and out of the organization due to activities related to debts and borrowing activity, like loan and note payments made each month as well as any income from stocks and bonds. Your team needs to spend countless hours entering receipts, invoicing clients, running payroll, and reconciling your books BEFORE you can get the reports you need to run your business the right way.

• Organizations will separate these expenses by programs, fundraising, and management.
• Finally, they also enable leadership to find potential financial opportunities and ways to address financial concerns.
• Understanding what fund accounting is and how it works is nonetheless the only way to confidently look at the financial publications that governmental and nonprofit organizations publish each year.
• Preparing a cash flow statement is one of the challenges of non-profit accounting, as there can be a lot of complexity to the unique cash flow items of a particular organization.
• In this article, we will explore the key components of nonprofit financial statements and understand their significance in assessing the financial performance and accountability of nonprofit organizations.

Your Statement of Cash Flows helps ensure that your organization always has enough liquid cash on hand. The core purpose of your nonprofit balance sheet is to provide a clear understanding of your nonprofit’s financial health and your ability to deliver your mission. While it may not be mandatory to publish your balance sheet specifically, it is a key part of the financial statements https://nerdbot.com/2025/06/10/the-key-benefits-of-accounting-services-for-nonprofit-organizations/ included in your annual reporting.

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• Meanwhile, adopting these best practices in managing financial statements can enhance your nonprofit’s economic sustainability.
• Interpreting notes to financial statements for nonprofits involves reviewing the information provided and understanding its implications for the organization’s financial health and performance.
• This value, however, is further divided on the Statement of Financial Position into restrictions – either temporarily restricted, permanently restricted, and unrestricted net assets.
• It’s important for nonprofits to carefully manage their investing activities to ensure they align with their financial goals and risk tolerance.
• The Statement of Activities, similar to the for-profit income statement, details a nonprofit’s revenue sources and expenses.

The statement of cash flows (SCF) for a nonprofit organization is similar to that of a for-profit business. The SCF reports the organization’s change in its cash and cash equivalents during the accounting period. In nonprofit organizations, that total change gives insight into how much money is available to reinvest into the organization’s mission. Another option for excess profits is for nonprofits The Key Benefits of Accounting Services for Nonprofit Organizations to set up reserve funds for future expenditures.

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. The Statement of Cash Flows is a financial statement that provides information about the cash inflows and outflows of a nonprofit organization. It shows how cash is generated and used by the organization during a specific period of time.

Nonprofit balance sheet example

Set guidelines for creating and distributing financial statements with our Nonprofit Financial Reporting Policy Template. They’re calculated by subtracting your total liabilities from your total assets, which should be listed in the other two sections of your balance sheet. An organization without owners and with the main purpose of providing services needed by society. Internal Revenue Service, a nonprofit organization may be granted tax exempt status. Since the Form 990 filed by the nonprofit becomes public information, you can learn much about a nonprofit by reading the information on Form 990.

General Ledger Accounts and Chart of Accounts

They show how much fuel (or financial resources) the nonprofit has to keep running its programs. Net assets are divided into without donor restrictions (free to use for any purpose) and with restrictions (must be used as the donor wishes). 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.