Financial Statements of Nonprofits are Different
|Concerned about nonprofits’ financial statements? You’re not alone. Many seasoned accountants get confused when they start working with nonprofits, also known as not-for-profit or tax=exempt organizations. On the surface, both nonprofits and for-profits look the same, but there are significant differences between these two to require different reports.||
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A common misconception is that nonprofits are simple and not that important overall in our economy. But let’s look at the facts – as of June 2016 we have 1,571,056 tax-exempt organizations in the US. As of 2010, nonprofits were responsible for 9.2% of all wages and salaries. “Nonprofit share of GDP was 5.3% in 2014” (National Center of Charitable Statistics). So, this sector cannot be ignored and sooner or later you may find yourself involved with a nonprofit and its idiosyncrasies.
“A nonprofit is a corporation or an association that conducts business for the benefit of the general public without shareholders and without a profit motive” (Legal Dictionary online). Based on the principle that profits are not relevant, nonprofit organizations operate to provide goods and services to a community. Examples are the Red Cross, food banks and welfare organizations. They can be big and small with many nonprofits having operations in foreign countries. Regardless of its size, most nonprofits are organized in three general areas, reflected on financial statements:
Program is the most important area of a nonprofit. Without program, there’s no reason for the nonprofit to exist. The program area is closely connected to the nonprofit mission statement. It’s where most of the revenue received should be spent. The other areas exist to provide support for programs.
Administration area, also known as “Management” or “G&A,” is the backbone of the organization, including accounting and human resources departments. It’s often also considered overhead. This is the area where most money is usually spent after programs.
Fundraising is the marketing department of the nonprofit. Fundraisers are in charge of getting money in and could be involved in grant writing, special events and other activities designed to attract donors. This area typically spends the least amount of money.
Using the three areas as basis for reporting, a nonprofit organization often releases financial statements that contain some similarities with for-profit company reporting. They are:
- The Statement of Financial Position – similar to the for-profit’s Balance Sheet.
- The Statement of Activities – similar to the for-profit’s Income Statement.
- The Statement of Cash Flows — similar to the for-profit’s Cash Flow Statement (ASC 230 is specific to this report).
- The Statement of Functional Expenses — unique nonprofit report, showing details of expenses.
Note a few items of interest in all financial statements
- There is no equity or retained earnings --- instead “Net Assets” are presented, accumulating information throughout the years.
- Most official financial statements contain notes
Learn more about financial statements of nonprofits and earn CPE credit