Nonprofit Statement of Activities

For nonprofits lacking a solid financial background, accounting can feel complicated. Luckily, there are ways to make filing nonprofit financial reports easier. Nonprofits must file four financial reports, and in this article, we'll be discussing what a Statement of Activities is and why it's important to nonprofits.

A Statement of Activities is the nonprofit version of a for-profit income statement- this report can be used by nonprofits to file Form 990 with the IRS and provide donors with trust and transparency.

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Understanding Nonprofit Accounting

Nonprofit accounting differs from small business accounting- in the sense that it’s a structured approach to financial management, record-keeping, and reporting tailored specifically for not-for-profit organizations. Nonprofits are entities characterized by:

• Absence of owners or ownership interests
• Reception of contributions or donations from third parties without anticipating any financial return
• Dedication to objectives beyond profit-making

In nonprofit accounting, certain terminology and classifications are used to monitor funded activities and generate reports showcasing to donors how their contributions are used:

Programs

Services that are provided by a nonprofit are termed programs. Each program typically maintains its revenue, expenses, and records.

Donor Restrictions

Some contributors impose restrictions on their donations, specifying particular programs or purposes. In their financial management, nonprofits need to account for these restrictions. Funding not subject to donor restrictions can be allocated to any program, administrative costs, or other purposes.

Fundraising

Fundraising involves raising an organization’s profile or soliciting donations. These activities can include direct mail campaigns, email newsletters, and charity fundraising events.

Administration

Funds utilized for managing a nonprofit are referred to as administration or overhead funds. These funds are essential for keeping the nonprofit operational; they must be noted in all accounting and reported to donors. Donors typically prefer nonprofits to keep their overhead as low as possible to direct most funds toward programs.

What is a Nonprofit Statement of Activities?

A Statement of Activities-also referred to as an Income Statement or Statement of Operations- includes revenue and expenses covering a nonprofit's reporting period (whether fiscal or calendar year). This report also gives an overview of the changes of net assets of the nonprofit during that time. The Statement of Activities is used by nonprofits to file Form 990 with the IRS (Internal Revenue Service). 

It’s also crucial for nonprofits so that they can show how they afford fundraising and program activities. The Statement of Activities also offers insights into the overall improvement of the organization, including decreasing costs and increasing revenue. By publishing your Statement of Activities on your website or annual report, you're giving your existing and potential donors instilled trust and transparency.

Why Is a Nonprofit Statement of Activities Important? 

As a nonprofit, it remains imperative to prioritize your finances- financial records offer insights into whether your nonprofit organization possesses the resources required to fulfill its mission. The Statement of Activities aids in understanding how net assets have been used over time by the organization.

This report is vital to have on hand when approaching funding sources or anyone else inquiring about your organization’s overall health. Additionally, it facilitates reporting the necessary information to the IRS (Form 990).

It also enables measuring if mission-based programs have sufficient resources for efficient operation and sustainability. Better planning for the future is possible, whether it involves cutting back on expenses, discontinuing unjustified programs, or organizing more fundraising events to attract additional sponsors and volunteers. 

Is There a Difference Between a Nonprofit's Statement of Activities and an Income Statement?

The nonprofit statement of activities and the income statement are two terms that describe the same report.The main difference between them is in their usage: "income statement" is more frequently used by for-profit organizations, whereas "statement of activities" is favored among nonprofits.

Many nonprofits feel that "activities" better represent their focus on mission-driven work and the variety of revenue sources they utilize, beyond just earned income. Moreover, the term "statement of activities" is more consistent with the names of the other three financial statements that nonprofits compile annually than "income statement" is. These reports include the four nonprofit financial statements:

• Statement of Activities
• Balance Sheet
• Cash Flow Statement
• Functional Expense Report

What Are Nonprofit Financial Statements?

Nonprofit financial statements summarize the financial activities and health of nonprofit organizations over a particular period- usually a quarter or fiscal year. Various disclosures and reports are included in the statements that help stakeholders understand how the nonprofit manages its funds and resources to fulfill its mission. 

Nonprofit financial statements typically include a statement of activities, a statement of financial position, a statement of functional expenses, and a statement of cash flow. Additional components can be found in some nonprofit financial reporting.These statements are crucial for nonprofits to demonstrate their transparency and accountability to stakeholders, including the public, donors, grantors and board members.

Detailed and accurate financial statements also help nonprofit management make informed decisions, assess fiscal performance, and ensure regulatory and legal compliance with nonprofit requirements.

Financial Documents for Nonprofits

Nonprofit organizations use similar financial statements to record their financial transactions as for-profits. However, due to the differences between for-profit and purely philanthropic entities, there are variations in the financial statements used. The standard set of financial statements for a nonprofit entity includes:

Statement of Financial Position

The Statement of Financial Position is used by nonprofits to show what they own and what they owe. Essentially, it provides the nonprofit's overall picture at a specific time- also showing the financial health of the organization. This statement lists the nonprofit's net assets, assets, and liabilities- and it has to be included when organization’s file Form 990.

Statement of Activities

Nonprofits review changes to their net assets using the Statement of Activities. This report also shows the annual accounting revenue and expenses.Net assets need to be categorized correctly with GAAP and IFRS. They can further be categorized as restricted or unrestricted.The main difference between a nonprofit and a for-profit filing a Statement of Activities is gross receipts. 

Nonprofits use gross receipts, while gross sales is used by the latter as revenue. Net assets is the nonprofit's revenue after the expenses have been deducted.Nonprofits have two options when it comes to recording revenue and expenses. They can either use cash or the accrual method, of which most use the latter as this method lets organizations record revenue when it's earned.

Statement of Functional Expenses

The statement of Functional Expenses provides donors with detailed information on how the nonprofit spends its funds. When filing nonprofit Form 990, this statement is required by the IRS.These reports can also be used to rate your organization, in fact, there are online websites that do just that- Guidestar and Charity Navigator. 

All nonprofit expenses need to be classified as natural and functional.These expenses are then separated into the categories of management, programs, and fundraising. Each of these categories are further categorized by events, salaries, administrative costs, and so on.

Statement of Cash Flow

The Statement of Cash Flow shows how much money moves in and how much money moves out of a nonprofit.This statement can be used by board members and leaders for better insight into the nonprofit’s financial availability to pay for expenses.

What is Included in the Statement of Activities for Nonprofits?

The organization's statement of activities for nonprofits is divided into distinct sections. Vertically, it is categorized into revenue, expenses, and net assets. Horizontally, it’s separated into unrestricted and restricted revenue sections.

Revenue

Nonprofits obtain revenue from a number of different sources, all of which are necessary to aid the organization pursue its goals. Most of this revenue will be recorded as gross in your Statement of Activities. Yet, your investment returns need to be recorded as net. Several of the income sources that need to be recorded in the nonprofit Statement of Activities consist of the following:

Monetary Contributions

When nonprofits raise money from corporate partners, major supporters, and individual donors, these are all considered monetary contributions.

Donated Products

In-kind contributions are frequently made to not-for-profit organizations in support of their goals and objectives. While these might be a lot more intricate to record in your financial systems, it's still crucial to acknowledge these presents in your financial statements.

Non-Monetary Contributions

When donors transfer their assets to your nonprofit (like land and stocks), these contributions still have monetary value, yet they don't quite fall under the "Monetary Contributions" category.

Grants

Whether you're obtaining money from a private foundation, or from the state and federal governments, you are required to record your grant income in your Statement of Activities.

Program Charges

Numerous organizations obtain a significant part of their funding in the form of program fees charged for their services. As an example, associations require participants to pay certain charges in order to get the benefits provided through the organization.

Financial Investment Returns

Nonprofits can invest their funds in order to gain a rate of interest and increase their revenue, equally as individuals can. Nonetheless, any kind of financing generated through this approach needs to be reported on the Statement of Activities.

Lastly, among the categories typically listed as revenue on your Statement of Activities is your net assets which are unrestricted. These are the funds that might have been restricted in the past, but are currently available to make use of by your nonprofit. Due to the fact that restrictions on revenue are a crucial element to be recorded in your Statement of Activities, we'll go ahead and explore them in further detail.

Difference Between Revenue With Restrictions vs. Unrestricted Revenue

Occasionally, revenue obtained by nonprofit organizations is subject to specific conditions set by the funding source. For instance, grant-giving entities may stipulate that the funds allocated must be directed toward a particular service or purpose.

Restricted revenue is earmarked for a specific intended purpose, while unrestricted revenue can be allocated to operations, projects, and other expenses at the nonprofit's discretion.

Additionally, within restricted revenue, there may be temporarily restricted funds. These funds are constrained for a specific period, after which they can be released from restriction and utilized as deemed appropriate by the nonprofit.

The Nonprofit Statement of Activities segregates revenue with and without restrictions, allowing organizations to assess the flexibility and the total amount of their funding.

Expenses

Every expense your organization incurs should align with its mission, whether it supports daily operations or specific projects relevant to your mission's objectives.

As mandated by FASB 117, you must categorize expenses by functional classification, typically dividing them into administrative, fundraising, and program costs.

Operational expenses your organization may encounter include:

• Salaries and wages
• Insurance
• Rent and utilities
• Legal services
• Accounting services
• Supplies and equipment
• Retirement compensation
• Fundraising
• Program expenses, on the other hand, can vary significantly among nonprofits. 

For instance, an animal shelter may have program expenses like:

• Medical supplies for animals
• Leashes, collars, toys, and crates
• Food for the animals
• Training expenses

Nonprofits typically strive to minimize operating expenses to reduce overhead. However, balancing reducing overhead to support your mission and allocating sufficient funds to operational activities for organizational growth and expansion is essential.

Net Assets

The net assets displayed on your nonprofit's statement of activities represent the result of deducting your expenses from your revenue.This calculation indicates the equity of your nonprofit entity and its capacity to cover expenses, thereby establishing a sustainable organization.

It's crucial to focus on the net assets accessible to your organization under the "without restrictions" category of your statement of activities when assessing its sustainability. Failure to consider restrictions might lead to a misleading sense of security if you only subtract total expenses from total revenue.

GAAP Compliance in Nonprofit Accounting

The Generally Accepted Accounting Principles-otherwise referred to as GAAP-provide a framework of accounting standards for reporting and recording an organization’s financial information.

Their objective is to ensure comparability and consistency in financial reporting across all organizations in the US, both for nonprofit and for-profit organizations.In addition to the general GAAP principles, nonprofits are subject to specific rules tailored to their operations:

Labeling Net Assets

Assets within a nonprofit's financial statement should be marked according to whether they are restricted—either by donors or grant conditions—or unrestricted.

Describing Cash Flow

Beyond the quantitative data on the financial statement, nonprofits must offer qualitative insights into managing their liquid resources to meet everyday expenses. Specifically, nonprofits must indicate any limitations or restrictions that affect their cash flow.

Investments

While nonprofits should be mindful of any investment management fees, they are not required to report these separately. Instead nonprofits must report investment income net of related external and internal expenses.

Donations

Your accountant or accounting staff must closely monitor and record donations according to GAAP. Promises of future donations should be recorded upon receipt of the pledge rather than when the donation is received.

FASB in Nonprofit Accounting

The Financial Accounting Standards Board (FASB), functioning as an independent nonprofit organization, is responsible for setting the accounting standards within nonprofits and forprofits in the US. 

The FASB follows Generally Accepted Accounting Principles (GAAP).They establish guidelines to govern how audits should be conducted, covering both restricted and unrestricted net assets, as well as requirements for disclosing liquidity and functional expenses- these standards became applicable to nonprofit organizations after December 2017.

In nonprofit accounting, it's essential to follow two key standards set by FASB back in June 1993. These standards comprise Statement of Financial Accounting Standards No. 116 (SFAS 116) and Statement of Financial Accounting Standards No. 117 (SFAS 117).

SFAS 116 primarily deals with the recording and reporting of contributed revenue and pledges, while SFAS 117 requires nonprofits to present the four specified financial statements, including statements of:

• Financial Position
• Cash Flows
• Activities
• Functional Expenses (applicable to certain organizations)

Taxes for Nonprofits

While nonprofits are commonly exempt from federal taxes they often still have to submit an informational tax return to the IRS.Section 501 of the tax code outlines which organizations are exempt from federal taxes though the determination of nonprofit status is made at the state level. 

Some organizations exempt under Section 501 may still need to file Form 990.This form provides a breakdown of the nonprofit’s revenues, expenses and changes to net assets.

Frequently Asked Questions About the Statement of Activities

Is the Statement of Activities the same as an Income Statement?

Nonprofits must file four financial reports, one of which is the Statement of Activities. The Statement of Activities is the nonprofit equivalent of the for-profit Income Statement.

Why do nonprofits need a Statement of Activities?

Nonprofits need the Statement of Activities in order to file Form 990 with the IRS. This financial report is also important as it provides foundations, donors, and corporations with transparency. There are also websites that use the Statement of Activities to share how your nonprofit uses its revenue, one such website is GuideStar. It’s good practice to include the Statement of Activities in your annual report. 

What is the difference between funding that’s unrestricted and funding that’s restricted in the Statement of Activities?

When nonprofits receive donations, they are sometimes required to use the funds on specific expenses or programs- in this case, the money is considered restricted. There’s also such a thing as temporarily restricted funds, which are also listed on the Statement of Activities as restricted- a good example of temporarily restricted funds is those being held until matching funds are raised. On the other hand, any other donations that are raised without a designation is considered unrestricted.

Final Words: Nonprofit Statement of Activities

The Statement of Activities is one of the four accounting documents nonprofit organizations need to compile. This financial report gives you an insight into how your nonprofit is using funding to allocate resources and to advance its mission. Additionally, the Statement of Activities can be used to determine the sustainability of your nonprofit’s finances which guides you into making long-term informed decisions. If you would like to learn more about nonprofit accounting, specifically the financial statements you need to compile, check out our blog.