In this lesson (lesson 5 in the course Intro to Nonprofit Accounting), we are going to learn about nonprofit financial statements, a.k.a. reports. We will take a look at the two reports everyone needs, a third report nonprofits need, and other types of reports that can benefit your organization. If you have set up a chart of accounts and started to record transactions, this is the lesson for you!
What are Financial Statements?
Over the past two lessons, we have learned how to begin structuring a nonprofit accounting system. First, set up your chart of accounts, and then use those accounts when recording transactions. Once those are complete, you can begin to generate reports based on the information you’ve recorded. These, when compiled in specific ways, are referred to as your financial statements. Reports can vary from listing contacts to reviewing your transaction history, but there are two specific reports that every organization needs to know.
Balance Sheet (Statement of Financial Position)
The balance sheet, known as the statement of financial position for nonprofits, illustrates an accounting equation and shows a snapshot of your organization’s financial health. The accounting equation is:
Assets = Liability + Equity
What this means is that the things you own (assets), equal the debt you have (liability), plus your overall worth (equity). An easier way to illustrate this is by saying the things you own, minus what you owe, equal your overall worth. When viewing this report, it will quickly show you if your organization owes more than it owns. This is the first of two reports that every organization (nonprofit & for-profit) needs to provide.
Income Statement (Statement of Activities)
The income statement, known as the statement of activities for nonprofits, shows the following formula in a report:
Income – Expense = Net Income (Increase in Net Assets)
What this means is the money you receive, minus the money you spend, is called your net income(increase in net assets for a nonprofit). When viewing this report, it will quickly show whether your organization is making more than it’s spending. This is the second of the two reports that every organization (nonprofit & for- profit) needs to provide.
Nonprofit Financial Statements
Nonprofits have unique guidelines for their reporting, which we will dive into in later lessons. In addition to the two reports noted above, nonprofits also must provide a statement of functional expenses.
The statement of functional expenses is where fund accounting really begins to shine. This report shows not only how much money you’ve spent, but breaks each expense down by fund and category. For instance, it would show the total administrative costs across your entire organization. It also shows how much each fund has spent using these accounts. Assuming you have created an effective chart of accounts and recorded everything properly, these reports should be very simple to create.
A report is really just a collection of data presented in a certain way. That being said, this can truly be anything that you or your nonprofit want. The ability to generate different types of reports is going to come down to the amount of detail you have been recording, and the method you use to generate nonprofit financial statements.
When choosing software, you may want to glance at their reporting capabilities before making a decision. Especially for nonprofits, you want to choose software that will allow you to find the information you need quickly. Also, be thinking through the other types of information you may want to see in a report. For instance, will you want/need to see how many people have given to a particular fund? Or, will you want/need to see how much you have received and spent on a fundraiser within a certain time-frame? Again, all of these reports will come down to the amount of detail you’ve been recording, and the capabilities of the software you’ve chosen to use.
A nonprofit accounting system begins with accounts, that are then used to record transactions, that allow you to create nonprofit financial statements. This is essentially the nuts and bolts of any accounting system. If you would like to explore other resources going over these reports, read up here.
Now that you have a foundational understanding of these components, you can move forward in creating your own nonprofit accounting system.
In the next few lessons, we’re going to take a look at how to protect and maintain your accounting system. We’ll also go over the rules and guidelines you’ll need to adhere to as a nonprofit. These lessons won’t be as practically-implemented as the previous few, but they’re still important for your nonprofit’s accounting system. In the meantime, if you’d like a more in-depth guide on nonprofit accounting, then check out our Ultimate Guide To Nonprofit Accounting.