Is a snapshot of organizational assets and liabilities?
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. Show
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:
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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 BasicsThe 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. $100,000 (assets) -$ 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. Tristan is excited to learn about nonprofit balance sheets! Balance Sheet vs Statement of Financial PositionThe 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 IncludedThe 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 RecordedThe 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:
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:
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 ExplainedSimply 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:
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 Liabilities ExplainedThe 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:
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 ExplainedYour 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:
Essentially, this leaves you with 2 categories of assets:
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.
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FAQ🧲 What is a balance sheet for a nonprofit organization? The nonprofit version of a balance sheet is called a 'statement of financial position' and has some subtle differences when compared to its for-profit counterpart. Find out more. 🔒 What is the difference between a balance sheet and a statement of financial position? One of the main differences is that for-profits include 'shareholder equity' in the balance sheet, whereas this does not apply to nonprofit's since they have no owners. Instead, nonprofits refer to this as 'net assets'. Other differences tend to relate to the way that information is recorded. Find out more. 👪 What are net assets? Net assets are simply the remaining value that is left once you subtract all your liabilities from your assets. Find out more. Is a snapshot summary of assets liabilities and equity of your business at a particular point in time?The balance sheet is a snapshot of the company's financial position at a point in time. There are three elements of a balance sheet: what the company owns (assets) and owes (liabilities), as well as the amount invested by shareholders (equity).
Which financial statements are snapshots?The Balance Sheet is a "snapshot" : it represents, at a moment in time, the financial position of the business entity. It needs to be compared to other "snapshots" to provide meaningful information on changes in financial position. For that reason, the balance sheet from the preceding year is usually provided.
Why is the balance sheet called a snapshot?Overview: The balance sheet - also called the Statement of Financial Position - serves as a snapshot, providing the most comprehensive picture of an organization's financial situation. It reports on an organization's assets (what is owned) and liabilities (what is owed).
Is a balance sheet a snapshot?A balance sheet provides a snapshot of a firm's financial position at a specific point in time, while an income statement – also known as a profit and loss statement – measures performance over a period of time. Accounting software helps to manage both of these financial statements.
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