Mastering Financial Statements: Essential Accounting Practices for Not-for-Profit Organizations

Examples include interest earned from savings or investments, rent from leasing out property, any special partnerships or royalties, and income from ads or sponsorships. They might also have to handle some of the same taxes as for-profits, as payroll taxes, and local tax rules can vary. They can also receive tax-deductible donations, encouraging more people to give. If someone donates for a particular cause, like a scholarship or research, that money has to go exactly where it’s intended. This transparency can make businesses feel more confident about partnering with you. By hosting virtual events, you’re able to cut down on expensive venues and catering while still bringing in funds.

• Nonprofit financial statements also have specific reporting requirements and use fund accounting.
• Your statement of activities is divided into three sections, revenue, expenses, and change in net assets.
• This part is all about showing your work to ensure everyone knows you’re doing things right.
• Assets are typically liquid, while liabilities refer to amounts that are due within the year or further out over multiple years.

Preparation of Nonprofit Financial Statements

It gives insight into the organization’s financial performance and whether it is generating enough revenue to cover its expenses. Even though you don’t have to pay federal taxes, almost all nonprofit organizations (the few exceptions are listed here) must file an IRS Form 990 each year. Cash basis accounting means that you record revenues and expenses based on when the cash moves in or out of your business.

• One of the reasons nonprofits track expenses is to report on the percentage of its funds that go toward programs compared to funds spent on administration costs, such as employee salaries.
• 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.
• Temporarily restricted funds that must be held for a short period will be unrestricted eventually, but they must be listed under restricted funds until then.
• When reviewing financial statement notes, look closely at explanations for any unusual items or significant changes, as these can indicate shifts in financial strategy or unforeseen challenges.
• Initiating the preparation of the Statement of Financial Position requires listing assets, starting with the most liquid assets like cash and receivables, which can be quickly converted into cash.
• According to a recent Independent Sector study, nonprofits are still among the most trusted institutions in America, with 57% of people saying they have “high trust” in them.

5 Program fees

Having clear and accurate statements can go a long way toward establishing trust in potential donors looking for new https://nerdbot.com/2025/06/10/the-key-benefits-of-accounting-services-for-nonprofit-organizations/ organizations to support. Financial statements function as an organized system for reporting on your nonprofit’s resources, so your organization is regularly held accountable to itself, its supporters, and its community. Consider developing a financial reporting policy to provide an official reference for how your organization will create and distribute each of the four major statements in a way that maximizes transparency. In addition to being a helpful management tool, your financial statements are also essential to maintaining compliance with reporting requirements for tax-exempt organizations. They help hold your nonprofit accountable for its use of resources, ensuring you can maintain your 501(c)(3) status. Overall, nonprofit financial statements provide a snapshot of your organization’s current financial standing so you can better plan for your nonprofit’s future.

Support risk management

Non-Current liabilities are liabilities that will not become due within the next year. On the Statement of Financial Position, your assets break down into current assets, fixed assets, and other assets. Letting people know you’re on top of compliance shows you’re committed to running things properly and transparently. This part is all about showing your work to ensure everyone knows you’re doing things right. For example, if a big donor gave a huge amount of money, make sure to mention it and explain what their donation helped achieve. Donor and fundraising highlights are all about shouting out your biggest supporters and most successful events.

• With a clear calendar, nonprofits can manage their workflow more effectively, reduce last-minute pressures, and ensure that financial statements are ready for timely review and submission.
• Financial statements allow the board see how well you’re sticking to the budget and if everything follows accounting rules.
• So, while both types of organizations keep track of their finances, they report and use that money differently.
• But there is one other major difference, and it’s the issue of restricted funds.
• Your nonprofit’s Statement of Activities must include your organization’s revenue, expenses, and net assets.

Here’s a look at five essential financial documents for nonprofits, what The Key Benefits of Accounting Services for Nonprofit Organizations each statement is designed to show, plus an example of a nonprofit financial statement. Each of the four core reports that nonprofits compile annually summarizes your financial data in a different way, providing unique insights into your organization’s current situation. This guide walks you through everything you need to know about nonprofit financial statements—from understanding essential metrics and ratios to common reporting pitfalls and best practices.

3 Net assets

• Nonprofit financial reporting is not just about balancing the books; it’s about providing clear, accurate, and timely information to stakeholders, including the board, donors, and the IRS.
• By keeping these explanations straightforward, donors can see how effectively you’re using their contributions.
• These statements allow non-profit leaders to track and monitor revenue, expenses, and other financial activities, making it easier to make informed decisions and improve financial management.
• It is one of the essential financial statements that nonprofit founders need to know how to read.
• Staying on top of your financial statements throughout the year can simplify tax season.

Net assets represent the difference between your total assets (both current and non-current) and your total liabilities. It includes accounts payable, debt, and other expenses, such as amounts owed to employees, vendors, and contractors. It’s also the mandatory method for nonprofits that must adhere to Generally Accepted Accounting Principles (GAAP), such as those dependent on federal grants or those undergoing an audit. The IRS allows you to claim a tax deduction of up to 100% of your adjusted gross income (AGI) or the amount of your cash contribution, whichever is greater, if you give to a qualified organization. Jo-Anne Williams Barnes, is a Certified Public Accountant (CPA) and Chartered Global Management Accountant (CGMA) holding a Master’s of Science in Accounting (MSA) and a Master’s in Business Administration (MBA).

Why are nonprofit financial statements necessary?

In contrast, high fundraising or administrative costs can suggest inefficiencies or excessive overhead if they outpace program spending, potentially impacting donor trust and financial sustainability. Financial transparency is the backbone of every successful nonprofit organization. Donorbox is an affordable and simple-to-use online fundraising tool with powerful fundraising features such as Recurring Donations, Crowdfunding, Peer-to-Peer, Events, Memberships, and more. You can also manage donors, send them automated donation receipts, add offline donations, let donors login and manage their accounts themselves, and more on Donorbox.