A Break Down of the Nonprofit Balance Sheet (+ Free Template)
A balance sheet, also known in the nonprofit world as a "Statement of Financial Position" is one of the core nonprofit financial statements. This document is often complemented by a statement of activities (the nonprofit version of an income statement), statement of retained earnings, and statement of cash flows. They must all be prepared by an organization at various times. Knowing the purpose behind this document, what information it must contain, and how that information is organized is central to effective bookkeeping and financial planning for nonprofit leaders.
By properly preparing this document, you’ll stay compliant with any applicable laws and regulations. Most importantly, it will help you understand your financial situation better, allowing you to make better informed strategic decisions. Not sure where to start? Hold off on calling your accountant for now. This article will explain the primary points to prepare the statement, and give you a free template so that you can get going right away!
Here’s what we’ll cover in this article:
- What is a Nonprofit Balance Sheet?
- Assets Further Explained
- Liabilities Explained
- Net Assets Explained
What is a Nonprofit Balance Sheet?
As previously mentioned, the nonprofit version of a balance sheet is called a "statement of financial position." In order to better understand, let’s talk about what a balance sheet is.
Balance Sheet Basics
The balance sheet is one of the four most common financial statements produced by nonprofits and for-profits alike.
The balance sheet is a snapshot containing this basic accounting equation: Assets (what you have or are owed) minus liabilities (what you owe), which equals your net assets.
To put it more simply: Assets - liabilities = net assets. For example, if your organization has $100,000 in a bank account from various revenue streams but owes $20,000 for merchandise inventory and $30,000 in other unpaid expenses, your net assets calculation would be $50,000.
-$ 20,000 (liability)
-$ 30,000 (liability)
$ 50,000 (net assets)
The statement of financial position provides the most comprehensive view of an organization's financial position. You will need to prepare it before filing an IRS 990 form as you are setting up and registering your nonprofit. To do so properly, let’s dig into how it differs from a balance sheet.
Pro Tip: Before filling out your IRS 990 Form, be sure that your chart of accounts and nonpofit general ledger are up to date. Doing so before beginning tax proceedings will not only save you time, but will also prevent any avoidable errors when filing.
Tristan is excited to learn about nonprofit balance sheets!
Balance Sheet vs Statement of Financial Position
The information presented in these two statements varies given the distinct organizational structures between for-profit and nonprofit organizations. The two main differences between a for-profit’s balance sheet and a nonprofit’s statement of financial position are what is included and how assets are recorded.
What is Included
The main difference is that a balance sheet for a for-profit would include information like shareholder equity. This does not apply to nonprofits, since there are no owners.
The amount of revenue a company receives and the equity that shareholders hold in a for-profit company is an important part of what is owed and owned. For nonprofits, the term in the equation is "net assets" rather than shareholder equity.
How Assets Are Recorded
The main difference between for-profit businesses and nonprofits with regard to the method of recording assets is whether any assets are restricted in nature. A statement of financial position allows the proper recording of donations with "strings attached."
When making a calculation of net assets, they were historically divided into 3 categories:
Unrestricted: can be used for any purpose, at any time. Cash in your checking account, for example, can be used at any time.
Temporarily restricted: the use of these assets is restricted now, but may become unrestricted in the future. The donor might say they must be used for a particular purpose for a period of time, but after a certain year, they can be used for any reason. For example, a local businessperson donates $50,000 to a school located next to their home. The donation comes with the provision that at least $1,000 every year must go towards payment for a gardener to keep up the landscaping. After 10 years, the school can use the remaining funds in any way they wish. Those funds are considered temporarily restricted.
Permanently restricted: these funds can only be used for a specific purpose, forever. The permanent restriction of funds can only be designated by the donor. Using our local school donation example, perhaps the local businessperson donates $50,000 to a school located next to their home with the provision that it must be used towards maintaining the exterior of the building and related grounds. Those funds would be considered permanently restricted.
This categorizes assets according to the limits that are placed on the spending of the funds. To reduce the complexity of these accounting principles, the Financial Accounting Standards Board (FASB) eliminated the distinction between temporarily and permanently restricted assets. Instead, nonprofit asset disclosures fall into one of the following two types:
Net assets without donor restrictions
Net assets with donor restrictions (which covers all restrictions, regardless of the time period involved)
Pro Tip: Our team at Springly knows how difficult nonprofit accounting can be, and we want to help! Discover all of our free excel templates for nonprofit accounting that include program-based budgets, annual reports, income statements, and more.
Start here by taking a look at this free template. You can customize this page however you need, but the basic structure will get you started right away!
Assets Further Explained
Simply put, an asset is something of value that you are either already in possession of, or you are owed by another party or entity. For example, you may have been awarded a grant, but the funds are considered "pledges receivable," meaning that assets for those pledges will not be transferred until a later date. Additionally, you may have been awarded a grant earlier this year and the funds are already in your bank account. In both cases, you can record these funds as assets, even for the grant where you do not yet possess the money.
Salma is ready to take control of her assets and liabilities!
Typical examples of assets classifications include:
Current assets: cash and other assets that are expected to be converted to cash within a year e.g., inventory bought for future use.
Fixed assets: assets purchased for long-term use, which are unlikely to be converted to cash in the near-term e.g., property and equipment.
Long-term investments: an investment that an organization intends to keep for a period greater than one year e.g., stocks or bonds.
Intangible assets: an asset that is not physical in nature e.g., patents, trademarks, or copyrights.
Note that when you are formulating your nonprofit statement of financial position, you should list your assets in order of liquidity. In other words, put the assets that either are already cash or can be easily converted to cash first, then proceed down in increasing order of less liquidity. View the example below from The CPA Journal to see an example of how this may look.
Source: CPA Journal
The inverse of assets is liabilities. These are the expenses your organization owes to other parties or entities. These are important because even though you might have an asset on the books now, another party is legally entitled to it, so it cannot be counted as an asset.
For example, roofing repairs were made to your organizational headquarters. A price was agreed upon, items were purchased, the work was done, and you are preparing to pay the invoice. You still have the funds, but they will soon be transferred to the contractor, who is legally entitled to them.
Liabilities usually fall under the following categories:
Current liabilities, for example, accounts payable to the roofing company mentioned above.
Long-term liabilities, for example, long-term debt associated with the mortgage that just received a new roof. These long-term liabilities will usually be paid off over a term of years.
Note that when listing liabilities, order them by their due date, with those coming due first being placed at the top. In the above list, you can see how current liabilities are above long-term liabilities.
Net Assets Explained
Your net assets are simply the remainder of after liabilities have been subtracted from your list of assets. As stated above, it is vital that when you prepare your statement of financial position, the net assets are broken down by the restrictions placed on them.
Trish is feeling confident after reading about nonprofit balance sheets!
Restrictions can come in two forms:
Time restrictions: these specify that the asset must be used according to a predetermined schedule. It may be delayed into the future, or possibly must be used prior to a certain date. For example, the government may provide Arizona State University (ASU) a grant to investigate the weather impacts on a certain migratory bird; perhaps the grant specifies that all funds must be spent over the next calendar year with a final report due the first quarter of the next calendar year.
Purpose restrictions: these legally require that the fund be used for a certain purpose, and no other. For example, a private nonprofit school received private contributions which were restricted to the purpose of building and maintaining a flower garden behind the school. That is the only thing those funds can ever be used for, in perpetuity.
Essentially, this leaves you with 2 categories of assets:
Net assets with donor restrictions or Restricted (by time or purpose)
Net assets without donor restrictions or Unrestricted
It is very important to break asset amounts down in this way so you have an idea of what funds are available to you as of today, and when other funds will become available. Without doing this, it can be difficult to understand your true cash flow situation. Once broken down by restriction, these assets can even be broken down further by liquidity.
When you look at your "deconstructed" list of assets, the reader can make strategic decisions and solve problems from a position of knowledge. This is a top GAAP accounting framework that will allow you to be able to plan to address current and future needs based on what you currently and will have available.
Pro Tip: A detailed breakdown of net assets leads to an accurate financial analysis as well as greater insight into the functioning of your organization.