Statement of Activities: Reading a Nonprofit Income Statement

Some of these terms are common to accounting tasks for both for-profit businesses and nonprofit organizations. In this article, we’ll explore why nonprofit organizations need financial statements. Plus, how they contribute to informed decision-making, effective nonprofit budgeting, and accountability. The Statement of Activities is like the scoreboard for a nonprofit organization.

Time Value of Money

Conversely, an unrestricted fund budget should provide a framework for operational costs and other activities central to the organization’s mission. Program services expenses are directly related to the organization’s mission and programs. These expenses https://holycitysinner.com/top-benefits-of-accounting-services-for-nonprofit-organizati/ include salaries and benefits for program staff, program materials and supplies, and any other costs incurred in delivering the organization’s services to its beneficiaries. Monitoring program services expenses is essential for nonprofits to assess the impact and reach of their programs. Understanding how resources are being utilized in program delivery helps organizations make strategic decisions to enhance program effectiveness and efficiency.

Internal Users Of The Statement Of Activities

They include salaries and other costs to show exactly where the money goes, helping everyone understand the financial health of the nonprofit. By analyzing the operating activities section, stakeholders can assess the organization’s ability to generate sufficient cash to cover its ongoing expenses and support its mission. It provides a snapshot of the organization’s financial health and sustainability.

Statement of Cash Flow – How Cash is Being Spent

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. This report will show them which of your activities brought cash into your operation during the period and which expenses ate up large chunks of money. If a grant-maker or a donor gives you money that is dedicated for specific programs, or that you need to use by a specific date, it’s still an asset. But accounting services for nonprofit organizations in your audited nonprofit financials, it will be called a Statement of Financial Position. The main purpose of this statement is to help you file your annual taxes with the IRS. However, it’s also a great way to analyze expenses and make data-driven decisions for the annual budget.

• Nonprofit accounting can feel complicated for nonprofits without a solid financial background, but there are ways to make filing reports easier.
• And a little “profit” helps build your operating reserves to help you survive a slow-fundraising quarter or unexpected expenses.
• Many nonprofits find that the word “activities” better reflects their focus on mission-driven work and the fact that they bring in revenue from a variety of sources—not just earned income.
• This includes money from donors, loans from banks, and cash paid out for things like loan repayments or distributing funds to your projects.
• In this nonprofit garden, the water is used to keep the plants (programs and services) healthy and growing.
• Nonprofit organizations often categorize their expenses into different groups to better understand where their resources are being allocated.
• The liabilities section includes items such as accounts payable, loans, and deferred revenue.

When a restriction is satisfied, those monies are moved from restricted to unrestricted and then used for expenses. We consider that there is a time restriction on the funds allowing only 1/3 of the donation to become unrestricted in a given year. Jackie is a seasoned accounting professional with over 35 years of accounting experience, 18 years specific to nonprofit accounting. Having the right fund accounting software with sub-fund capabilities makes creating these reports simple and easy. Check out how Blackbaud Financial Edge NXT® simplifies reporting with our quick guide, Save Time and Make Informed Decisions with Blackbaud Financial Edge NXT Reports. Since many of your expenses will cover salary, insurance, rent, utilities, events, technology, etc., you may find that your restricted funds are higher than unrestricted ones.

• The net assets on your statement of financial position are where your organization must list these restrictions.
• It’s important for nonprofits to include a statement that clearly shows how these funds are being used to support their mission.
• The Statement of Cash Flows categorizes cash activities into operating, investing, and financing activities.
• If you’re ready to step up the financial reporting game at your nonprofit, give JFW Accounting Services a call today to learn how we can help.
• Restricted net assets are funds that are designated for specific purposes by donors or other external parties.
• For that reason, we default to talking about accrual basis accounting in this article.

The Statement of Activities, similar to the for-profit income statement, details a nonprofit’s revenue sources and expenses. This document subtracts total expenses from total revenue to let you know if your organization is bringing in more money than it is spending. On the balance sheet, non-profits differentiate funds by listing them in separate categories within the net assets section. Unrestricted funds are listed under net assets without donor restrictions, while restricted funds are categorized as net assets with donor restrictions. Regularly updating these statements is necessary to comply with audit requirements and provides essential information for decision-making within the organization. By adhering to these practices, nonprofits demonstrate their dedication to compliance and stewardship of the funds entrusted to them by donors and grantors.

• An income statement is a critical tool for non-profit organizations as it helps them track their financial performance and understand their sources of revenue and expenses.
• In a true endowment, the principal amount donated cannot be spent (held in perpetuity), and is used to generate income which must be spent in accordance with the donors wishes.
• It outlines the cash inflows and outflows that are directly related to the organization’s core activities.
• This report also shares how things can be improved by increasing revenue and decreasing costs.
• Keeping in mind the net costs for every department, you can check out sample financial statement templates to get a better idea of what should such kind of a sample sheet contain.
• If your accounting software doesn’t include these reports, there are templates available to help you create them, such as the Statement of Activities template in the Chazin & Company’s nonprofit accounting guide.
• This includes bank statements, invoices, receipts, payroll data, donation records, and any other financial transactions.

The money that was spent on capital investments, like real estate, equipment, and other fixed assets and also any money received from the sale or benefit of those investments. Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries.

Important Aspects of Nonprofit Taxes

Nonprofits must also provide a functional expense analysis, and many organizations choose to meet this requirement using a nonprofit Statement of Functional Expenses. We will go over each one in more detail below, but the four financial documents are their Statement of Financial Position, Statement of Activities, Statement of Cash Flow and Statement of Functional Expenses. This rigorous review process, whether internal or external, is crucial for building trust among donors, grantors, and other stakeholders. Accurately categorizing revenue into unrestricted, temporarily restricted, and permanently restricted funds is essential for clear nonprofit financial statements.