Every nonprofit needs accurate financial statements to operate effectively. These documents are required for grant applications, IRS reporting, and maintaining donor trust and confidence.
Nonprofit financial statements show what your organization owes, earns, and spends, so you can track progress and adjust strategies.
In this guide, we will explore what nonprofit financial statements are and why they matter. Then, we will examine how they can be prepared and how to utilize them to amplify your nonprofit's mission and message.
Nonprofit financial statements are official documents that explain how a nonprofit organization manages its funds. They detail your assets, liabilities, income, and expenses. Prepared annually, these statements are required for compliance with the Internal Revenue Service.
Unlike for-profit businesses that report profits to shareholders, nonprofits report how effectively they manage donated funds. Your statements classify assets by donor restrictions and show the percentage of spending on programs versus fundraising and administration.
These statements serve multiple purposes:
Without accurate financial statements, you can't determine if your nonprofit is operating efficiently or heading toward overspending.
They provide the foundation for sound financial management and help your programs remain sustainable. Board members rely on these reports to assess risks and confirm that the organization's mission remains financially viable.
Four financial statements form the basis of nonprofit financial statements. Together, they present a complete picture of your organization's economic health. Each has a unique function but works as part of the entire system of nonprofit financial reporting.
Why It Matters: Shows your organization’s financial stability and ability to meet obligations.
This statement is a nonprofit version of a balance sheet. It shows what the organization owns (assets), what it owes (liabilities), and the remaining balance, known as net assets. Net assets are broken into categories like unrestricted net assets and temporarily restricted net assets.
Assets might include office equipment, accounts receivable, or prepaid expenses. While loans, accounts payable, or unearned revenue would be liabilities.
The statement of financial position enables you to view your current financial situation at a glance. It also determines whether you have sufficient assets to cover your debts.
Why It Matters: Tracks whether your organization operates within budget and advances its mission.
This statement is similar to a business income statement that is common for profit businesses. It breaks down total income and financial expenses over a specific period. It explains changes in net assets, categorized by whether funding is restricted or unrestricted.
Revenue sources include donations, program fees, and grants. At the same time, expenses are categorized into program costs, administration, and fundraising initiatives.
This nonprofit statement shows whether your organization is within its budget and spending money on mission-related activities.
Why It Matters: Prevents cash shortages that could disrupt operations and payroll.
This report shows all of the cash flowing in or out of the organization. It's divided into three parts: operating, financial, and investing activities. While the other statements provide totals and categories, this statement addresses actual money movement in real-time.
Even if you've received big grants, you may not be able to access all of that cash immediately. The cash flow statement enables you to anticipate these issues in advance.
This financial information allows your staff to forecast so that you can pay bills and meet payroll. It also helps programs to run smoothly without disruptions in funding.
Why It Matters: Demonstrates accountability by showing how much goes directly to programs versus overhead.
This statement breaks down expenditures across various functions. It reports financial expenditures both by type, such as salaries, and by purpose, including program expenses and fundraising activities.
The majority of nonprofits use this statement to illustrate transparency and effectiveness. Some funders require it, while others will use it to gauge financial discipline. It provides a comprehensive overview of resource use and the percentage allocated to your primary purpose.
Creating nonprofit financial statements starts with accurate bookkeeping. Every transaction, such as grants, service fees, and utility bills, must be recorded correctly.
These records form the foundation for your financial reports. Without organized, accurate data, you can’t produce reliable statements.
Create a chart of accounts that lists all financial categories your nonprofit uses.
Include revenue streams like donations and membership dues, plus expense categories like office supplies and rent. Track restricted and unrestricted funds separately, as these distinctions appear in your statement of financial position and statement of activities.
You will also need to apply fund accounting, an accounting method that tracks money based on its purpose. It distinguishes between general operating funds and restricted donations, which are used for specific programs.
Good nonprofit accounting ensures that grants, gifts, and earned income are all properly recorded and reported.
Once your accounts are set up, record journal entries for all of your transactions. These entries will be added to the general ledger.
From the general ledger, you can prepare a trial balance, which ensures your credits and debits are balanced. After adjusting for prepaid expenses, deferred revenue, or depreciation of office equipment, you're ready to build your four basic statements.
Financial software can streamline these processes. The majority of nonprofits use software designed specifically for nonprofit financial reporting. This software allows them to allocate revenue by the donor and restrict and categorize expenses by function.
This setup enables clean reporting and facilitates the retrieval of data for your financial reports.
Accuracy is essential when reviewing financial details. Always double-check everything for mistakes or omitted entries before finalizing the statements. If possible, involve a nonprofit accountant or do an internal check with your board members.
Larger organizations may need to hire an independent auditor. The auditor is required to review the numbers and ensure that they are by Generally Accepted Accounting Principles (GAAP).
It's also a good idea to align your reporting cycle with your fiscal year. Most nonprofits report once annually, but some report monthly or quarterly. Select a timeline that aligns with your funding infrastructure and board monitoring requirements.
Once you're done, your nonprofit financial statements are dynamic documents. They guide choices, raise funds, and protect your organization's good reputation. Regular updates ensure you're always cognizant of your organization's financial health each year.
Understanding theory is one thing, but seeing it in action is another. Below are sample forms and explanations to give you a picture of what each major report should resemble (real-life formats will vary).
A proper statement of financial position lists cash, grants receivable, office equipment, and prepaid rent as total assets. At the same time, liabilities include accrued expenses and unearned revenue.
After subtracting liabilities from assets, the remainder is divided into unrestricted and temporarily restricted net assets.
The format provides an overview of your organization's operations, enabling board members and auditors to assess the organization's financial activities and capabilities.
This financial statement shows revenue sources and functional expenses over the reporting period. Columns often separate restricted and unrestricted funds. Line items include donations, grants, program fees, and fundraising expenses.
This table shows how revenue supports and functional expenses support an organization's financial stability.
A simplified version can have three financial activities: Operating Activities, Investing Activities, and Financing Activities.
This table provides a detailed view of cash flows, enabling you to stay on top of real-time liquidity.
This financial statement typically presents a tabular analysis of total expenses, categorized by both natural classification and functional category.
This level of detail is required to respond to challenging questions from funders and boards. It shows precisely how funds are spent in support of the organization's activities.
A nonprofit must prepare four financial statements: a statement of financial position, a statement of activities, a statement of cash flows, and a statement of functional expenses. Together, they give a complete picture of your financial situation.
Start with good bookkeeping. Use fund accounting to separate restricted and unrestricted income. Keep a close eye on your program expenses, administrative costs, and fundraising expenses. Then, prepare each statement from your financial data. Some nonprofits utilize accounting software for nonprofit financial reporting to ensure compliance.
Yes. Typically, financial statements, particularly annual reports, need to be made available publicly to retain tax-exempt status. Donors and grantmakers frequently request this data to assess your nonprofit's financial health and transparency.
For-profit businesses report profits and returns to shareholders. Nonprofit financial statements highlight how money supports programs and mission-related activities. Instead of retained earnings, nonprofits track net assets, which show how much they can spend on their activities.
It varies. Some states and funders mandate an audit, particularly if your budget is sizable. An independent auditor will keep your numbers accurate and in compliance with GAAP. Even if not mandated, many nonprofits still choose to undergo one voluntarily. A clean audit enhances the credibility of your financial reports and may assist in obtaining grants.
An annual report usually has a message from leadership and a program summary. It also features a donor highlight and a financial section with charts and your nonprofit statement summaries. These sections often reference your financial statement of activities and statement of functional expenses.
Yes, nearly all nonprofits are required to make basic financial data available, including IRS Form 990 and, often, the statement of financial position. Transparency strengthens the purpose of your organization by building public trust.
For a nonprofit based in the U.S, you are required to keep ledgers, bank statements, invoices, receipts for donations, and payroll. Additionally, you must maintain records of all program services and fundraising activities. Keep records of your financial data, including receipts for office supplies, event planning records, and grant agreements.
Apart from the standard statements, such as the balance sheet, nonprofits often include other financial statements alongside the annual reports, including internal budget reports or donor-specific fund summaries. These additional records provide readers with a comprehensive view of the organization's financial operations.
A good grasp of nonprofit accounting provides a detailed accounting of everything the organization owes, owns, and spends—a standard report, such as a balance sheet, shows the organization's financial health. The statement of functional expenses gives funders and stakeholders a clear picture of how resources are allocated.
Nonprofit financial statements build trust and demonstrate accountability. They show donors, board members, and the public how you manage funds and create impact.
Accurate reporting maintains your tax-exempt status and supports long-term sustainability. Invest time in clean, prompt financial statements, and your nonprofit will gain long-term trust, one number at a time.
Want financial statements that are clear, accurate, and board-ready?
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