Quick answer: Nonprofits use four main financial statements: the statement of financial position, the statement of activities, the statement of functional expenses and the statement of cash flows. Together they show what the organization has, what came in and went out, and how much went to programs versus administration and fundraising.
Nonprofit financial statements use different names than business statements, but they answer the same questions: what do we have, what came in, what went out and where did it go. Here is how to read each one.
Statement of financial position
This is the nonprofit version of a balance sheet. It lists assets, liabilities and net assets at a point in time. Net assets are split into two groups:
- Without donor restrictions: money the board can use for any purpose
- With donor restrictions: money that must be used for a specific program or time period, or held permanently
Statement of activities
This is the nonprofit version of an income statement. It shows revenue, expenses and the change in net assets for the year, with restricted and unrestricted activity shown separately. When restricted money is spent as the donor intended, it moves from restricted to unrestricted on this statement.
Statement of functional expenses
This statement shows expenses by nature, such as salaries and rent, and by function:
| Function | Examples |
|---|---|
| Program services | The work of your mission |
| Management and general | Accounting, insurance, administration |
| Fundraising | Events, donor outreach, appeals |
Donors and watchdog groups often look at the share of spending that goes to programs, so allocate shared costs like rent and salaries carefully and consistently.
Statement of cash flows
This shows where cash came from and where it went during the year, divided into operating, investing and financing activities.
Restricted vs unrestricted funds
Getting restrictions right is the most important part of nonprofit reporting. Record a gift as restricted only when the donor sets the condition in writing or the appeal clearly states it. Release the restriction when you spend the money as promised. Our nonprofit bookkeeping guide covers how to track it month to month.
What to show your board each month
- Statement of financial position
- Statement of activities with budget versus actual
- Cash on hand and how many months of expenses it covers
- Status of each restricted grant
Nonprofit Financial Statement FAQs
Does every nonprofit need a statement of functional expenses?
Under current accounting standards, all nonprofits that prepare GAAP statements must show expenses by both nature and function. That can be a separate statement, part of the statement of activities or a note.
How often should a nonprofit board review financial statements?
Monthly is best, and quarterly at a minimum. Regular review helps the board spot cash shortfalls and grant spending problems before they grow.
How much in reserves should a nonprofit have?
There is no legal requirement. Many nonprofits aim for three to six months of operating expenses in unrestricted reserves, depending on how steady their funding is.
What is the difference between Form 990 and financial statements?
Financial statements are reports for your board, donors and auditors. Form 990 is the annual IRS return, and much of its financial data comes from those same books.
What does a change in net assets mean?
It is the nonprofit version of profit or loss for the year. A positive change means revenue exceeded expenses, though part of it may be restricted to future use.
Clear statements, every month
We prepare monthly financial statements for nonprofits across Northern Virginia, DC and Maryland. Learn more about our nonprofit accounting service.
This article is general information and not tax advice for your situation. Tax rules change, so talk with a qualified professional before making decisions.
