Understanding Net Assets In Nonprofit Organizations: A Guide For Stakeholders

We will guide you through the key parts of nonprofit financial statements. You https://nerdbot.com/2025/06/10/the-key-benefits-of-accounting-services-for-nonprofit-organizations/ will also get practical tips to make your reports clear, trustworthy, and easy to read. It is the residual interest in the assets of the entity after deducting liabilities.

Interpreting Nonprofit Financial Statements

This information represents the total of all of the annual surpluses and deficits your organization has declared over its history, and its liquidity. Nonprofits prepare financial statements that meet the reporting and accounting standards required for nonprofits. A nonprofit accountant can determine the size of the nonprofit by reviewing its net assets. Moreover, the focus is on understanding financial statements and how to prepare them. In addition, nonprofit organizations must file annual reports with state authorities.

What is the difference between nonprofit and for-profit financial statements?

Collaborating with donors and funders can lead to innovative partnerships and opportunities for growth and sustainability. It shows the difference between the total assets and liabilities, indicating the organization’s overall financial position. Net assets are further broken down into different categories, including net assets with and without donor restrictions. This breakdown provides insights into the availability and restrictions placed on the organization’s resources. For example, if a donor restricts their donation to ensure it’s only used to fund that organization’s scholarship fund, that money would be added to a restricted fund set aside for the scholarship. If a donor does not restrict the donations they provide, that money can be added to your organization’s annual fund and used for overhead, programs, or any other expenses.

Should You Use Nonprofit Accounting Software for Your Organization?

If a nonprofit has gross receipts of less than $200,000 and total assets of less than $500,000, then a Form 990-EZ may be filed. However, with a basic understanding of the key parts and ratios, it becomes easier. In other words, financial statements for nonprofits are reports that show how well a nonprofit is doing with money. It shows how much money the organization has and how it spends its money. Donors, grant providers, and fundraising events primarily fund nonprofit organizations. Furthermore, they have a responsibility to demonstrate that they manage funds effectively and ethically.

Nonprofits are getting tax exemptions and have a different way of accounting and making financial statements. Nonprofits aren’t required to pay federal income or corporate taxes but might still need to pay state and local income taxes. To manage fund restrictions and comply with donor wishes, use a good accounting system to track funds by use. Document donation terms clearly, separate restricted and unrestricted funds, and regularly check financial reports to make sure restricted funds are used as intended.

• In-kind donations are when instead of providing donations to the nonprofit organization in monetary form, the entities provide goods or services to the organization.
• Organizations should track the financial transactions related to all donor restricted gifts in the accounting records to determine the status of the organization’s use of the gift and for reporting purposes.
• I recommend submitting feedback to the Product Development Team for review.
• The objective is to present clear and easily readable reports, and not to make the reader work hard to figure it out.
• The responsibility of the account will be shared equally among the members.
• Your nonprofit organization (NPO) has a fiduciary responsibility to report the details of its financial situation to donors and funders every fiscal year-end.

Nonprofit Accounting Statements

• Document donation terms clearly, separate restricted and unrestricted funds, and regularly check financial reports to make sure restricted funds are used as intended.
• Using this workaround, you can use QuickBooks to its best advantage and still be able show net assets balances that are appropriate for your organization.
• The bottom part of the statement of financial position shows how those assets have been funded by liabilities such as supplier credit, bank loans, and by net assets.
• For instance, the total net asset balance in all three examples below is $100,000.
• The debit to the PP&E account reduces the account balance per depreciation.
• Read our article on tracking business expenses; much of our guidance is transferable to nonprofit operations.

This ratio reflects your nonprofit’s future cash flow by measuring assets convertible to cash within the year against liabilities requiring payment during that time. Since this last provides the most comprehensive picture of your organization’s financial health and stability, it’s important that you become familiar with how to read a balance sheet for a nonprofit. IRS Form 990 is the most common tax form filed by charities in the United States; however, the amount of financial activity conducted by your nonprofit will determine which IRS form you’ll need to file. The longest form, Form 990, according to the IRS, is for “organizations with $200,000 or more in gross receipts or $500,000 or more in total assets.” If either condition is met, a nonprofit must file a Form 990.

Liabilities

• For-profit businesses use off-the-shelf accounting software, a one-size-fits-all solution.
• It’s our all-in-one solution that can be tailored to the needs of your nonprofit organization.
• Nonprofit organizations, also known as non-business entities, are organizations that exist for the purpose of furthering a social cause or to welfare the public.
• A strong culture of honesty, with everyone keeping an eye out and ready to speak up, helps keep things straight.
• To be clear, reading nonprofit financial statements is not just about numbers.
• In previous years, their bookkeeper did not defer revenues, so they’ve had funds accumulating for over 10 years into retained earnings to the tune of $70k.

On the other hand, a nonprofit generates a statement of financial position. Furthermore, it reflects assets on hand for furthering the mission of the organization. Every company in existence, large or small, for-profit or nonprofit, must keep track of their transactional financial activity.