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Nonprofit Financial Statements: Complete Guide with Examples

Nonprofit Financial Statements: Complete Guide with Examples

Did you know that all nonprofit organizations are required by law to make their financial statements available to the public? This is so you know how well, or not so well a nonprofit is doing so you're able to deduce their financial data before making a donation or other gift. The financial statements are basically the same as a for profit company with a few changes, and the terminology is a bit different. There are also four documents that all nonprofits must submit to the different government agencies as far as federal, state and city.

These financial documents can be created on a quarterly or yearly basis, although most organizations choose to report yearly. As you read on, you'll get a clear understand of all of the required documents that nonprofits are responsible for, where to find them and how to understand what they mean. So read on!

Where to Find Financial Statements for Nonprofit Organizations Accounting?

Most organizations today have a website and post their financial documents online as it's the easiest way to disclose their number publicly without needing to fulfill requests from the general public. If for some reason you can't find their financial documents on their website, you can contact them and request they send you a copy of all their public financial statements. They are required by law to comply with your request and can loose their nonprofit status if they fail to comply.

And if they are dragging their feet or not being forthcoming, the last option is to file a Form 4506-A 'Request for a Copy of Exempt or Political Organization IRS Form' which you can find by following that link from IRS.gov website. The IRS will give you copies of all financial statements the nonprofit has submitted up to a three year period.

What Financial Statements Should a Nonprofit Have?

There are four required nonprofit financial statements or documents all nonprofit organizations must submit to the appropriate government agencies in order for them to stay complaint as far as their tax exempt status. We will go over each one in more detail below, but the four financial documents are their Statement of Financial Position, Statement of Activities, Statement of Cash Flow and Statement of Functional Expenses.

Combined these documents will allow you to access the nonprofits financial viability and help you understand not just how well the charity is doing, but what exactly they are spending their money on. This can be beneficial if you're thinking of becoming a major donor but want to know if the organization is really helping the cause they say they are. Here are the four financial statements in more detail:

Statement of Financial Position - Similar to a General Ledger 

The Statement of Financial Position report is required by the IRS and must be submitted with the organization's Form 990. This report is more like a financial overview of the entire organizations financial health. It lists its assets, liabilities, and net assets in one single document so you able to see and deduce how well the charity is financially positioned and its overall financial health. And as we stated above, this financial information and financial statements are normally available on their website or you can request a copy at any time and the nonprofit must comply with your request.

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Looking over Doctors Without Borders Statement of Financial Position we can see everything we should need to know to understand the charity's financial strengths and weaknesses. In order to stay cohesive, we'll use the same nonprofit's documents for all our examples. Here is all the key information broken down.

1.1 Assets

Assets cover anything that has value within the company including fixed, liquid (cash), long term, tangible and intangible assets. These financials can be any accounting assets from a band-aid to offices a nonprofit owns around the globe. Cash, donations, and grants and even any copyrights the nonprofit owns and profits from will all be on this accounting spreadsheet in order of liquidity position 

1.2 Liabilities

Liabilities are what your nonprofit needs to pay out or owes regardless if it is a short or long term financial liability. Short term financial liabilities are classified in accounting as Current Liabilities and support things like rent, payroll or short term loans. Long term financial liabilities mean a debt that is being paid over a long period of time. This can include a mortgage, car leasing or loan, and long term loans of more than one year. To make these accounting financial numbers clear on the statement, they are broken down into Current and Long Term Liabilities accounting categories and listed in the order of what needs to be paid first at the top. 

1.3 Net assets

Net assets are similar to what a for profit company would be reported as profit. Assets - Liabilities = Net Assets. But because nonprofits aren't allowed to make a financial profit or distribute one, it gets listed as net. Just subtract the nonprofit's Assets - Liabilities to get the Net Assets on its balance sheet.

You may have noticed both net assets without donor restrictions and net assets with donor restrictions sections under Net Assets on their document. Both are counted as revenue and both are assets, the only difference being one type has special restrictions on them, for example, a DWOB donor's ability to add additional information as how they want their donation to be spent. '...designate your contribution to support MSF programs in a particular area,' as listed on their site here

Statement of Activities - A Quick Financial Overview

The Statement of Activities or the Income Statement is a financial document that covers a specific time period, usually a year back, and includes revenues, expenses, gains, and losses. The gains and losses is normally only used if the charity has investment of some kind, like stocks or bonds, and aren't part of the organization’s normal operations

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This is a one page document that makes it very easy for donors and board members to understand exactly how the nonprofit is doing financially and where the bulk of revenues as well as costs are coming from. Often this is the most important financial statement for internal use and clearly demonstrates how well the charity did in the last year.


Statement of Cash Flow - How Cash is Being Spent

The statement of cash flow is an important financial document in that it tells you were the charity is getting their money and what that money is being spent on. This makes it a valuable way of understanding how much a contribution can make an actual difference or impact.

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For example, is the charity spending most of it's money on rent and fancy cars for their board or other in position, or is most of the money they get from fundraising going to pay for things directly related to their cause? This financial document will tell you exactly that. It can also tell you if there is enough cash coming in to cover expenses and if expenses have gotten bigger or less over the year. It also demonstrates the financial position to pay existing expenses.


Statement of Functional Expenses - Where the Assets Are Going

A Statement of Functional Expenses is something you'll only see if you're dealing with a nonprofit or tax exempt organization accounting. This is an important aspect of accounting as a lot of this information is also included in the organizations Form 990 for the IRS. These financial statements are broken down by each functional area within the nonprofit in order to show where finances are being used specifically and are often quite detailed accounting financial statements. These financial statements should clearly show each accounting heading and any money paid under that accounting heading.

What Does a Nonprofit Financial Statement Look Like?

A nonprofit financial statement or financial reports provide an accounting overview of a non-profits overall financial health and typically contains four or more key components. This information is required in order to stay compliant as a tax free enterprise. Here's an overview of what a nonprofit financial statements could look like for accounting:

  1. Statement of Financial Position (Balance Sheet): This sheet shows the organization's fundraising assets, liabilities, and net assets (or fund balances) as of a specific date.
  2. Statement of Activities (Income Statement or Statement of Comprehensive Income): These financial statements provides an overview of the organization's revenues, expenses, gains, and losses for a specific period (usually a fiscal year).
  3. Statement of Cash Flows: This statement outlines the sources and uses of cash during the fiscal year, categorizing cash flows into operating, investing, and financing activities for accounting purposes.
  4. Statement of Functional Expenses (for some nonprofits): A Nonprofit often presents their expenses in terms of their functional areas like fundraising so it’s clear what the non-profit organization's revenue is being spent on.
  5. Notes to Financial Statements: These are important explanatory notes that provide additional information about the organization's financial statements and general ledger.
  6. Supplementary Information (if applicable): Depending on the requirements and practices of the nonprofit and their accounting procedures, additional supplementary information may be included.

Most organizations use standard accounting options like the Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS) for your nonprofit to be consistent and clear.

How to Prepare Financial Statements for Non Profit Organization? (Plus Financial Audit )

Preparing compliant financial statements for 501(c)(3) organizations can be tricky and should always be done by a certified public accountant (CPA). But in order for them to do their job, you’ll first need to prepare all your accounting documents and be sure to include all the required information for each one. Here's our quick step-by-step guide to do just that:

1. Gather Financial Data: You’ll need to get together all your relevant financial data, including receipts, invoices, bank statements, payroll records, fundraising and any other financial transactions recorded in your accounting software. If you’re lucky enough to be using PayBee, there’s a reporting tool that does this on a daily basis and makes this part super simple!

2. Create the Statement of Financial Position (Balance Sheet): This IRS requirement is more like an entire snapshot of your organizations financial well-being. It lists assets, liabilities, and net assets (equity). The accounting equation is: Assets = Liabilities + Net Assets.

Components:

  • Assets: List all resources and assets owned by your nonprofit including cash, investments, property, equipment, and accounts receivable.
  • Liabilities: Include obligations like salaries, rent, loans, and other debts.
  • Net Assets: Differentiate between net assets without donor restrictions and net assets with donor restrictions sections. These reflect the organization's financial overall health.

3. Prepare the Statement of Activities (Income Statement): The Statement of Activities shows the financial statements nonprofits revenues, expenses, and changes in net assets over a specific accounting period (often a fiscal year).

Components:

  • Revenues: Include all financial sources of income, such as fundraising donations, grants, membership fees, and program fees.
  • Expenses: Categorize financial costs, such as program expenses, administrative expenses, and fundraising costs.
  • Net Assets Changes: Calculate the difference between the gross amount of financial revenues and expenses, reflecting the change in the organization's net assets.

4. Generate the Statement of Cash Flows: These statements track all the financial movements of cash both into and out of your charity.

Categories:

  • Operating Activities: Record cash flows from day-to-day operational activities, like membership sales and administrative expenses.
  • Investing Activities: Include cash flow related to financial investments, property, and equipment.
  • Financing Activities: Account for cash flow from activities like financial borrowing and repaying loans.

5. Disclosures and Notes: Many non-profit leaders include this nonprofit statement as a way to make their financial statements crystal clear to their donors and the general public. These might cover accounting policies, significant events, commitments, and any contingencies that may have been experienced.

6. Review and Audit: Non-profits often undergo external audits both as an indicator to the authenticity of their numbers, and as a way to show transparency to their supporters. If you decide to do all of this yourself, it’s also a great way to be sure there are no mistakes in your accounting process.

7. Present the Financial Statements: Publish your financial statements in your organization's annual report or on its website, this helps keep you in compliance with the IRS tax code as well as saving valuable time following up with requests for your financial data and statements.

Preparing compliant financial statements for 501(c)(3) organizations can be tricky and should always be done by a certified public accountant (CPA). If you decide not to go with one, please have a financial audit done just to make sure your 501 tax status is in compliance.

Wrapping up

As you can see, there are a lot of accounting statements when it comes to a nonprofit, and although it may seem like you need a lot of support in order to get the accounting right, it is possible to do yourself without too many restrictions. But it does help to have a platform like PayBee that can help with back end and accounting processes that can also help with donors and every day accounting tasks for your nonprofit. Book a free demo now and check out all the tools and feature we have incorporated to help you grow your nonprofit into a successful one.

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