Statement of Financial Position: Reading a Nonprofit Balance Sheet

By My Soul Market Manager
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Bookkeeping
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Sep 19 , 2023

As such, net assets are not merely a financial metric; they are a reflection of the organization’s accountability and commitment to its mission-driven goals. It represents the residual interest in the organization’s assets after deducting liabilities. In simple terms, it is the organization’s net worth or the value that would be left if all debts were paid off.

Managing Restricted Funds

When viewing your balance sheet, your assets are your organization’s unrestricted income. Nonprofit balance sheets list your organization’s assets, liabilities, and net assets. Nonprofits must provide this information when filing Form 1023 to apply for 501c3 tax exemption with the Internal Revenue Service (IRS).

However, there are nonprofits that qualify as tax-exempt but their donors’ contributions do not qualify as charitable deductions (although they may qualify as business expenses).
Understanding these categories and managing them wisely is fundamental to both meeting legal obligations and achieving strategic objectives.
A high operating reserve ratio (for example, maybe a ratio of 100% or 12 months for an organization funded by a reliable source of revenue) may indicate that the organization is in good financial shape.
Your nonprofit’s fundraising efficiency ratio shows the amount of money generated in comparison to the amount of money spent to raise it.
The strategic management of net assets is essential for ensuring the ongoing sustainability of nonprofit organizations.

Fundraising Efficiency Ratio

Having an endowment ties up cash that is not accessible to the organization for operations or program delivery. It is far more advisable for small and midsize nonprofits to build working capital cash and to fund an operating reserve before attempting to create an endowment. If a small or midsize nonprofit does have an endowment, the donor often requires that the income generated from the gift be used for operations or for a specific purpose. While a separate cash or investment account does not need to be established, the accounting records should include a calculation and entries to showing how this restriction has been met. Likewise, for-profit businesses and nonprofit organizations both prepare financial statements showing assets and liabilities.

Related AccountingTools Courses

Just as you likely have a savings account with a certain amount of money set aside for any personal emergencies, your nonprofit should also maintain a certain amount of money in your account as a contingency fund. Net assets without donor restrictions that are designated by the board for a specific use should be disclosed either on the face of the financial statements or in a footnote disclosure. This should make that method more appealing because it reduces the complexity in preparing the statement, as well as its overall length.

What are net assets with donor restrictions?

This article shares what you should include in a nonprofit balance sheet and provides a sample of how to write your own. If you’re looking for an easier way to get accurate and on-time financial reports, consider outsourcing your nonprofit bookkeeping and accounting to The Charity CFO. Discover essential financial ratios that drive nonprofit success and learn how to benchmark them effectively for sustainable growth. Effective accounting services for nonprofit organizations management of these assets ensures that nonprofits can continue to operate efficiently, expand their services, and make a lasting impact. A 501(c)(3) organization may be more concerned with your program expense ratio than a 501(c)(6) organization.

It turns out that Todd, our board member who wants to understand the organization’s liquidity, needs to understand the entire balance sheet. Also it may not be desirable to sell the property and equipment your organization uses in its operations. Even if you did sell, you’ll likely get sale proceeds different than the $50,000 carrying value. Net assets refer to the disparity between what https://nerdbot.com/2025/06/10/the-key-benefits-of-accounting-services-for-nonprofit-organizations/ a nonprofit organization owns and owes. Unlike for-profit businesses, nonprofits have no owner’s equity or retained earnings.

Liabilities, on the other hand, represent what the organization owes, such as loans, accounts payable, and other obligations.
To do this effectively, organizations should configure their accounting software to create separate ledger accounts for each category.
To determine your organization’s target benchmark or goal, use a risk assessment, trend analysis or benchmarking with comparable organizations.
Get our FREE guide to nonprofit financial reports, featuring illustrations, annotations, and insights to help you better understand your organization’s finances.
These entries ensure that the financial records reflect the true state of the nonprofit’s finances.
Proper division between unrestricted, temporarily restricted, and permanently restricted funds ensures that resources are allocated correctly for various programs and operational needs.

A listing of the titles of the general ledger accounts is known as the chart of accounts.
The number of accounts in a nonprofit’s general ledger could range from 30 to 1,000 or more.
These standards ensure that organizations accurately report their financial position and adhere to donor restrictions.
The Statement of Activities is the Income Statement of a nonprofit organization.

The operating activities section of the SCF reports the changes in cash other than those reported in the investing and financing sections. A listing of the titles of the general ledger accounts is known as the chart of accounts. If you use cash-based accounting, you’ll only record cash deposited into your bank during the reporting period. The Statement of Activities further breaks down your revenue and expenses according to any restrictions limiting how or when you may use them. Here’s an example of a Statement of Activities that was a part of the organization’s audited financial statement in 2021 (page 5).