How to Record Net Assets in Nonprofit Accounting
Knowing the proper procedures and where (the nonprofit balance sheet) to record your net assets will allow you to stay organized by providing a complete picture of your organization’s current cash-flow situation, financial health, and stability. It will also prove useful when it comes time to perform tax records.
In addition, proper net assets in nonprofit accounting can enhance transparency to fulfill legal requirements while building trust with future donors and grantmakers.
Without further ado, let’s jump right into it!
- What Are Net Assets?
- The Statement of Financial Position
- The Two Classes of Net Assets
- How to Calculate Your Net Assets
- Final Thoughts
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What Are Net Assets?
Net assets (also called "equity") are essentially everything that belongs to the organization, all its investments, money, and other valuables valued together with all liabilities (expenses) subtracted. That means what you have remaining after all the bills are paid. As an equation:
assets - liabilities = net assets
Let’s make all this jargon easier to understand with an example.
If your organization raised $10,000 dollars in a given month, you have $100,000 dollars combined among your nonprofit equity accounts, and all of your property and possessions are appraised at $350,000, that means your gross assets are:
$10,000 (fundraising revenue)
+$100,000 (bank account balance)
+$350,000 (physical assets)
$460,000 gross assets
Pro Tip: Gross assets means what you have before you take into account any expenses.
Now, let’s assume with all your various expenses (utility payments, expenditures for office items, and salaries) total $30,000 during this time period. We need to subtract these expenses from our gross assets.
$460,000 (gross assets)
- $30,000 (liabilities)
$430,000 net assets
Thus, during the given time period, your organization has $430,000 of net assets to work with for the budget and goal of carrying out your mission.
The Two Classes of Net Assets
Generous donors help to fund nonprofit missions that are split between two potential categories. As contributions are gifts, sometimes they are intended for a specific purpose within the scope of your organization’s service. If the donor provides you with funding with "strings attached", that is called a restricted donation.
Sadie is having a good think on the two classes of net assets.
For example, if funds were provided that can only be used for a specific program, that would make those funds restricted. Conversely, if the donor leaves the decision around how best to use the funds, that is considered an unrestricted donation.
Net Assets with Donor Restrictions
As donor restrictions limit the usage of funds, it’s important to keep a detailed account of what limitations are placed on this type of funding. Whether the donation is money, property, stock, goods, or something else, the donor will provide disclosure notes in these situations which will designate how the donation is to be allocated.
Whether that relates to a specific timeframe of use, location, method, or purpose is at the donor’s discretion, but in order to fulfill those requirements, it is imperative to keep an accurate record that denotes the criteria for usage.
Net Assets Without Donor Restrictions
Non-restricted donations are useful for general and day-to-day operations of your nonprofit since they are left into your organization’s hands to decide where the funds can provide the optimum benefit.
Having up-to-date and detailed accounting can help you determine exactly where those areas are. In addition, you will need to keep a careful record of where your funding goes to maintain transparency. This also allows your donors to see that you are using funds efficiently, and for your mission.
Pro Tip: Even if your board decides to dedicate some portion of these unrestricted net assets to the funding of a specific project, it is still considered unrestricted and should be classified accordingly. Only when the donor places that designation on the funding is it required to be classified as restricted.
The Statement of Financial Position
Net assets are recorded in a document called the nonprofit statement of financial position.
This is the nonprofit version of the balance sheet. Because nonprofits are not looking to acquire profit for owners/ shareholders, this name helps to differentiate between the two organizational types. That means there is no owner's equity.
The purpose of the statement of financial position is to provide a snapshot of a nonprofit’s cash flow situation at a specific moment in time, which serves as a statement of your organization’s financial health. Having significant net assets typically indicates that your organization is performing well and has more opportunities than if that number is low or even in the red.
The statement of financial position serves as a detailed listing of assets and liabilities and shows how those numbers determine your net assets at a specific time. See our related article for more details, along with a great nonprofit balance sheet example.
How to Calculate Your Net Assets
Calculating your restricted and unrestricted assets does not have to be complicated. In fact, you can perform the process in a few simple steps:
List all of your nonprofit organization’s assets, whether it is money from income, petty cash, savings accounts, investments, goods, or property
Calculate the total of those assets to get your "gross assets"
List all of your liabilities, which is any outflowing money used to pay off expenses or debts and any depreciation
Calculate the total of your liabilities to see your total debt
Subtract the total liabilities from the total assets to determine your net assets
Record your total amount of donor restrictions, then subtract that number from your net assets, to get the unrestricted total; organize each into its own category
Thea is feeling confident in her calculation!
For example, if your total net assets were $50,000 and $15,000 of that was made up of restricted donations, the difference between the two amounts, $35,000, would be unrestricted.
$50,000 (net assets)
-$15,000 (restricted donations)
$35,000 (unrestricted donations)
Once you have your net assets, your accounting journey is just beginning. In addition to accounting for every dollar that makes up unrestricted and restricted donations, you also need to properly document expenses. Doing so will keep you legally compliant, helping with the information required for tax purposes (the IRS Form-900), and general accountability that will assist when looking to apply for future grants.
It can be an overwhelming prospect, especially if your organization is just getting off the ground. However, there are resources available to make your accounting tasks considerably easier.
For example, accounting software like Springly offers an integrated all-in-one process that can make it a breeze for users to create detailed accounting reports and save a whole lot of time in the process.
There are also varieties of accounting software such as Quickbooks which can simplify the process and offer templates and automated processes to reduce the risk of human error.
Many organizations find themselves in situations where they are not sure how to organize these documents. If you find yourself in this boat, or are unsure which are required, there are tons of services that can help. Many even offer that support at a reduced cost for most nonprofits, which can be a great help while you build a solid understanding of the requirements, define your policies, and get a few more years of experience under your belt!
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