Not-for-profit financial statements differ than those used by for-profit businesses. Most businesses need two essential reports: the Balance Sheet and the Income Statement. Nonprofit organizations have a variation of these reports called the Statement Of Financial Position and the Statement Of Activities, respectively. There is also a third report that all not-for-profits must have, called the Statement Of Functional Expenses.
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. It also shows you the current balance of each of your funds if you have been doing true fund accounting. The accounting equation is:
Assets = Liability + 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.
Income Statement (Statement Of Activities)
The Income Statement, also known as the Statement Of Activities, shows:
Income – Expense = Net Income (Increase in Net Assets)
So 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 financial statement, it will quickly show whether your nonprofit is making more than it’s spending.
Statement Of Functional Expenses
The Statement Of Functional Expenses is where fund accounting really begins to shine. Furthermore, 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, and 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.
Want to see more on not-for-profit financial statements? Check out our Guide On Nonprofit Accounting, where we delve deeper into the subject. Also, you can read further on the topic of financial statements.