Statement of Activities: Reading a Nonprofit Income Statement

As a CPA working with nonprofits of all sizes, I’ve encountered numerous errors in Board of Directors’ financial reports and Statements of Activities documents. Being aware of these common pitfalls is crucial for maintaining the integrity of your financial reporting and in turn, the trust of your supporters. Your net assets can be from the current and previous operating years and include anything that holds value. Liabilities include things like salaries, debt, and grants to other organizations. When listing your nonprofit’s liabilities, you must list them by when they must be paid and separated by current and long-term liabilities. Nonprofit financial statements are similar to the financial statements for-profit businesses file, but there are some key differences to keep in mind.

Net Assets: Unrestricted, Temporarily, and Permanently Restricted

• Their expenses prioritize program services as part of their mission, followed by supporting services such as fundraising and indirect costs.
• YPTC is not a CPA firm, and provides no attestation services with regard to financial reports.
• You should look at your Statement of Activities every month and compare to previous periods.
• A common error in nonprofit accounting is the incorrect handling of donor-imposed restrictions.
• Today we are going to examine and learn how to understand your Statement of Activities, or Statement of Income and Expenses.

Nonprofits have essentially parallel reports, but because their accounting is different, the reports differ slightly as well. If you cannot find a nonprofit’s Statement of Activities, you can also ask the organization for a copy. Nonprofits unwilling to share this information should be questioned about their reasons for lack of transparency. You must share this at the Bookkeeping for Veterinarians beginning of the year and the end of your financial period. 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. Nonprofits can use this report to file Form 990 with the IRS and provide donors with transparency and trust in the organization.

Expenses

• A statement of activities is a comprehensive report that provides valuable information about an organization’s finances.
• Obvious differences you can see that there are two classification of receiving funds where it refers to their spending allocation.
• However, the account balances will be combined into a few amounts that are presented in the financial statements and IRS Form 990.
• The balance sheet reports the assets, liabilities, and owner’s (stockholders’) equity at a specific point in time, such as December 31.
• The below glimpse is taken from the same financial report of the Code for Science & Society that we shared earlier.

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See Financial Statements Through Your Accountant’s Eyes!

The revenue section contains a breakdown of the major sources of revenue, such as contributions, program fees, membership dues, grants, investment income, and amounts released from donor restrictions. By “function” they mean the reason any expenses were incurred, such as management fees, or the costs of providing program services and fundraising activities. Effective financial management is the backbone of a thriving nonprofit, ensuring stability, transparency, and informed decision-making.

• If that is not clear, then the expenses should be reported in the period in which they are used up.
• There are many different types of nonprofits, including governmental nonprofits, which we will not address.
• Providing this report to the public on the website or annual report can give transparency and instill trust.
• These include the Salvation Army, Girl Scouts, United Way, and organizations dedicated to social issues like curing or treating disease.
• To do that, we’ll follow the activities of a nonprofit organization called Home4U, a daytime shelter for adults.
• The statement of activities can be incredibly helpful when your nonprofit is analyzing its finances and trying to determine where those hard-earned fundraising dollars go.

CHANGES IN THE MASTER GLOSSARY

By understanding how to read and understand this key nonprofit financial report, you can better allocate your resources and improve your organization’s overall performance. Expenses are reported in categories that identify specific functional areas, such as mission based programs, and support services including management and general and fundraising. It lists crucial financial KPIs for a specific period, such as revenue, expenses and overall financial performance. Finally, one of the categories often listed as revenue on your statement of activities is your net assets released from restriction. These are the funds that you are now able to use as unrestricted revenue, although they may have been restricted in the past. Because restrictions on revenue are a key element to be recorded in your statement of activities, let’s explore them a bit further.

• This classification ensures that the financial statements accurately reflect the donor’s intentions and the organization’s ability to use the funds.
• One of the main financial statements (along with the statement of comprehensive income, balance sheet, statement of cash flows, and statement of stockholders’ equity).
• An example is a loan made to lower-income individuals to promote home ownership.
• It is basically the nonprofit income statement because nonprofit entities do not have an income statement.
• This segmentation allows stakeholders to understand the diverse sources of funding that support the nonprofit’s mission.

You can use unrestricted funds for any mission-oriented purpose, including paying general operating expenses and salaries. The Statement of Activities is the Income Statement of a nonprofit organization. If the government has immaterial business-type activities, it is not required to separate them on the face of financial statements. If you don’t keep up with the latest rules for recognizing revenue, you may report your organization’s income wrong on your Statement of Activities. Often, this leads to large audit adjustments, budget vs actual reporting difficulties, and other funding challenges. The Financial Accounting Standards Board (FASB) introduces guidelines on how nonprofits should handle grants and contracts, and these updates help nonprofits report their finances accurately and in a standard manner.

Where did the funds come from?

Since nonprofits do not have owners, there is no owner’s equity or stockholders’ equity and there cannot be distributions to owners. We will not discuss the accounting which is similar to that used by for-profit businesses. If you are not familiar with accounting statement of activities example for businesses or you need a refresher, you will find explanations, practice quizzes, Q&A, and more by visiting our course outline.

An organization must, at minimum, allocate expenses among program, management, and fundraising for purposes of the IRS 990 report and the organization’s audit (if applicable). Activity-based budgeting and reporting also benefits the organization as it allows an organization to see its business model. Internally, it makes sense to expand activity allocations to show income as well as expenses related to each activity showing which activities generate a surplus or require subsidy. This report would more accurately be called a Statement of Activities by Class (function) or a QuickBooks Line Items by Activity Report. Once the total expenses are subtracted from the total collected revenue, the result is a change in Net Assets. Since nonprofits operate with the intention of using all profit to fuel their mission, the change in net assets is typically much smaller when compared with a for-profit entity.