Nonprofit organizations are institutions that exist for the welfare of society. The purpose of nonprofit organizations, as the name suggests, is not to make a profit but to assist individuals and communities in different ways. The goal of these nonprofit organizations depends on the individuals or groups of individuals they are trying to serve.
Nonprofit organizations exist around the world and are helped by different governments and donors in achieving their goals. Most governments around the world grant nonprofit organizations a tax-exempt status, which means they don’t have to pay taxes on any incomes. Incomes for nonprofit organizations can be generated in the form of fundraising activities or donations received from the public or specific donors.
There are many differences between nonprofit organizations and businesses that exist to make profit, the main difference being their goal. Nonprofit organizations’ main goal is to serve the community or a cause while the goal of profit-making businesses is to generate wealth for their owners. Another difference between the two types of organizations is the stockholders they report their financial activities to. Nonprofit organizations mainly report to donors while profit-making organizations report to shareholders. The financial statements of the two types of organizations also differ from each other.
The financial statements of nonprofit organizations are different from the financial statements of profit-making organizations. The basics of the statements are still the same, however, there are some differences which make them different from regular financial statements. Therefore, it is important to know what these key financial statements for nonprofit organizations are and what they represent.
There are 4 main financial statements for nonprofit organizations. These are the Statement of Financial Position, the Statement of Activities, the Statement of Cash Flows and the Statement of Functional Expenses.
Statement of Financial Position
The Statement of Financial Position, also known as the Balance Sheet, is the financial statement that represents the financial position or condition of an organization. The Balance Sheet represents the accounting equation which states that the total assets of a business at the end of a period will always be equal to the total equity and total liabilities of the business. Since nonprofit organizations don’t have any owners, the equity portion of the Balance Sheet is replaced by net assets for nonprofit organizations.
The Statement of Financial Position of nonprofits differ from the balance sheet of profit-making organizations mainly due to the inclusion of net assets instead of owners’ equity. Profit-making businesses use the classical approach to Balance Sheet where the assets of the organization are represented on one side of the equation and owner’s equity and total liabilities represented on the other. Nonprofits organizations balance sheets take the total liabilities of the organization and subtract them from the total assets of the organization to arrive at the net assets value at the end of a period.
The net assets of a nonprofit organization are classified into three categories. These net assets can either be categorized as unrestricted, temporarily restricted or permanently restricted net assets. Nonprofit organizations may serve more than one purpose or goal and that is why some funds may be restricted by donors. When funds are restricted, it means the funds can be only used for a specific purpose and under specific conditions as described by the provider of the funds.
The Balance Sheet of a nonprofit organization signifies the overall stability of the organization. It can be used by donors to assess the overall position of the organization and whether further funds need to be donated to the organization. If nonprofit organizations want to obtain loans from financial institutions such as banks, the Statement of Financial Position is used by the financial institution to assess whether the loan should be granted or not.
Statement of Activities
The Statement of Activities is a unique financial statement to nonprofit organizations. It is similar to the Income Statement of profit-making businesses. The Statement of Activities reports the revenues and the total expenses for different categories of a nonprofit organization. Furthermore, it describes the effects of these activities on the net assets of the organization.
The revenues and expenses are also broken down into unrestricted, restricted and temporarily restricted activities based on the fund used for these activities. The net effect of the revenues and expenses are used to describe the change in the net assets of the organization.
The Statement of Activities is used to determine the extent the funds allocated to certain projects or for the year have been used in the operations. Ideally, the funds allocated for activities must all be used for the activity and not underutilized or overutilized.
Statement of Cash Flows
The Statement of Cash Flows shows the cash-related activities of a nonprofit organization for a period. It shows the total cash receipts and total cash payments of the organization. These cash-related activities are further classified into operating activities, financing activities or investing activities. It is similar to the Cash Flow Statement of profit-making businesses.
The Statement of Cash Flows is used by the organization and donors to know whether the organization has sufficient funds in cash form to meet its future activities needs.
Statement of Functional Expenses
The Statement of Functional Expenses is also a unique financial statement of nonprofit organizations and shows the expenses of the organization categorized according to the function the expense was occurred in. The functions can be categorized as program expenses, administration and management expenses and fund-raising expenses. The expenses reported in this statement should match the expenses reported in the Statement of Activities as they are a breakup of those expenses.
The Statement of Functional Expenses is an essential financial statement used to monitor the expenses of the organization. By breaking down the expenses of the organization into common categories by their function, the organization can easily track the functions with most expenses. This is further used to report the proportion of funds used in main program activities as compared to administration activities.
Nonprofit organization differ from for-profit businesses in many ways such as their purpose and their goals being different. One of the ways it is different from for-profit organizations is the key financial statements for nonprofit organizations are different than usual financial statements used in other businesses. The key financial statements used in nonprofit organizations are the Statement of Financial Position, the Statement of Activities, the Statement of Cash Flows and the Statement of Functional Expenses.