Statement of Activities: Reading a Nonprofit Income Statement

By contrast, for-profit organizations can often categorize expenses in broad buckets like Sales, General and Administrative (SG&A), and Cost of Goods Sold (COGS) across several product lines. Although there are similarities in profit-and-loss elements, nonprofits must follow different rules and reporting structures. One of the key documents to help you make that call is the statement of activities. Nonprofits have a unique way of operating, and nowhere is this more apparent than when you do your financial reporting.

Mission and Ownership, Tax-Exempt Status

Unlike for-profit businesses that exist to generate profits for their owners, nonprofit organizations exist to pursue missions that address the needs of society. Nonprofit organizations serve in a variety of sectors, such as religious, education, health, social services, commerce, amateur sports clubs, and the arts. No matter what option you choose, you need to gather all your financial information before you can create a nonprofit statement of activities. This includes things such as your non-profit’s bank statements, tax returns, and investment statements. Once you have all of this information, you can start creating your statement of activities. Effective utilization of this reporting structure is paramount for responsible financial stewardship within the nonprofit sector.

Action Items for Nonprofit Boards

Without that, the SOA can misrepresent the financial health of the organization and lead to future funding issues. The statement also provides a snapshot of your organization’s liquidity and flexibility. Knowing how much cash you have available at any given time is important for maintaining stability in your finances. Understanding your finances and resources is extremely important to a nonprofit, because it provides insight as to whether or not you have the required resources to fulfill your mission.

Why Should you Distinguish Between Restricted and Unrestricted Revenue in the Statement of Activities?

Accurate reporting of these elements is essential for maintaining the trust of donors and regulatory bodies. To avoid this mistake, organizations must develop robust systems for tracking and reporting on restricted versus unrestricted funds. This involves clear communication with donors about the terms of their contributions and meticulous record-keeping to ensure that funds are used according to donor restrictions.

• Another important aspect of revenue recognition in nonprofit accounting is the treatment of pledges.
• In this article, we’ll cover how to read a nonprofit statement of activities.
• Your organization must also list expenses on your Statement of Activities report.
• Engaging in monthly or quarterly reviews, aided by financial management software, helps identify and rectify discrepancies to ensure the integrity of financial reports.
• These statements collectively provide a comprehensive overview of your nonprofit’s financial position, performance, and cash flow.
• Plus, this publicly available information can provide current and prospective donors with the context they need to decide whether they’d like to support your nonprofit based on how it employs its funds.

Meanwhile, unrestricted revenue can be allocated toward projects, operations, and other expenses as chosen by the nonprofit itself. The largest nonprofits in the US can accumulate annual contributions totaling billions of dollars, but the statement of activities breaks the figure down into just a few lines. By “function” they mean the reason any expenses were incurred, such as management fees, or the costs of providing program services and fundraising activities. Fees from rendering services, donor restricted contributions, gains & losses on investments, member dues, program fees and fundraising events. Revenues should be reported on a gross basis, but investments can be reported on a net basis. You can use unrestricted funds for any mission-oriented purpose, including paying general operating expenses and salaries.

• Unlike for-profit businesses that exist to generate profits for their owners, nonprofit organizations exist to pursue missions that address the needs of society.
• All of the vital accounting statements that you pull together to draw conclusions from are pulled from your nonprofit chart of accounts.
• Revenues should be reported on a gross basis, but investments can be reported on a net basis.
• Temporarily restricted funds that must be held for a short period will be unrestricted eventually, but they must be listed under restricted funds until then.
• You can also manage donors, send them automated donation receipts, add offline donations, let donors login and manage their accounts themselves, and more on Donorbox.

Many of these statements are similar to what for-profit businesses file, but some significant differences exist. Instead, you’ll be reporting on net assets and how you use funds to advance your mission. Sharing these financial statements with donors is one of the best ways to ensure transparency and build trust. https://nerdbot.com/2025/06/10/the-key-benefits-of-accounting-services-for-nonprofit-organizations/ Conversely, a decrease in net assets, particularly unrestricted ones, can be a warning sign of financial distress, indicating that the nonprofit may be spending more than it is taking in.

• To read and understand a nonprofit financial report, you first need to familiarize yourself with the Statement of Activities.
• Financial statements also give donors a better understanding of how the organization is doing.
• The statement also provides a snapshot of your organization’s liquidity and flexibility.
• Such analysis is indispensable for strategic planning and ensuring that the organization continues to effectively fulfill its mission.
• Generally, nonprofits will report all their revenue into two categories – without donor restrictions and with donor restrictions.
• If a grant-maker or a donor gives you money that is dedicated for specific programs, or that you need to use by a specific date, it’s still an asset.

Nonprofit Financial Statements: The Complete Guide with Examples

And internally, by analyzing revenue sources and spending patterns you can identify which programs are thriving, which areas need more funding, and where you have inefficiencies. Separating each stream by source also clarifies whether different donor conditions are applicable (e.g. unrestricted, temporarily restricted, or permanently restricted). If that’s the case, your stakeholders (donors, grantors and regulators) will appreciate being able to see how each of those sources contributes to the mission.