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Jul 17 2018

Nonprofit Net Assets and Statement of Financial Position Explained

The Statement of Financial Position of net assets presents current revenue, assets, and liabilities for nonprofits. This is the key difference between for profit vs nonprofit accounting.

 

Net Assets and Liabilities: Statement of Financial Position

The presentation of assets and liabilities is the same for both for-profit and nonprofit businesses, except for the balance sheet. For-profit businesses show owner’s equity, which is made up of retained earnings and stock. Nonprofits do not have owners, therefore, there is no owner’ equity. The difference between the total assets and total liabilities is called net assets. This is presented in the Statement of Financial Position.

Net assets in nonprofit accounting are what your organization has, what is owed, what is invested and what is deposited. Liabilities are what your organization owes to others or holds on behalf of others.

The calculation of retained earnings and net assets is essentially the same. It is the cumulative difference between revenue and expenses. For nonprofits, revenue must be assigned as either net assets without donor restrictions, or net assets with donor restrictions.

Net assets represent the net worth of the organization and can be either fixed, liquid (cash), long term, tangible and intangible.

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Explanation of Nonprofit Net Assets

As of 2018, there are now only two new classes required for nonprofit financial statements. The two new classes replace the older classes of: unrestricted funds, temporarily restricted funds and permanently restricted funds

Net assets with donor restrictions combine the temporarily restricted and permanently restricted classes. Net assets without donor restrictions replace the unrestricted funds class. The new classes are determined by donors at the time of their donations. Donor imposed restrictions are classified as without donor restrictions. The nonprofit can use the donation for whatever purpose it needs to fulfill its mission. Donor imposed restrictions are classified as with donor restrictions and must be used for a designated purpose.

  • When a donor does not specify restrictions on their contribution, the donation is recorded as an asset and revenue. This type of revenue will result in an increase in the total net assets without donor restrictions.
  • When a donor imposes restrictions on their donation, the revenue is recorded as donor restricted contribution revenue. This results in an increase in net assets with donor restrictions.

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New Classes Simplify Reporting

The new classes simplify the treatment of assets in the Statement of Financial Position. It now focuses on the existence or absence of donor imposed restrictions instead of the types of restrictions.

The new treatment of assets in accounting have improved reporting in the following ways:

  • Reduces complexity in net asset grouping
  • Clarifies information regarding liquidity and availability of resources
  • Demonstrates transparency in reporting of financial performance
  • Shows consistency in reporting expenses
  • Utilizes the statement of cash flows

Since nonprofits exist to fulfill its mission, they are required to issue a Statement of Activities report. This replaces the income statement issued by for-profit businesses. It now presents revenue and expenses according to the two classes of net assets.

If a donation has no restrictions, it is classified as without donor restrictions. The nonprofit can use the donation for whatever purpose it needs to fulfill its mission. If a donation has restrictions, it is classified as with donor restrictions and must be used for a designated purpose.


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Bottom Line

Recognizing net assets with donor restrictions on financial statements help decision makers be aware of obligations in the future. Changes in net assets without donor restrictions shows whether an organization operated with a gain or a loss. This provides a birds eye view the nonprofit’s cash flow.

The debt to equity ratio measures liquidity and shows how much debt versus net assets is being used. The new financial statement presentation of net assets provides improved information for donors, grant makers and other funding sources. It also reduces the complexities and costs of financial reporting.

True fund accounting for nonprofits track assets and comply with restrictions imposed by donors. However, they are no longer required to distinguish between temporarily and permanently restricted net assets. Nonprofit leaders need to communicate and understand these calculations over time to gain insight into their financial trends.

Read More

  • What is Fund Accounting: Guide to Proper Stewardship of Funds
  • Why Using Spreadsheets for Nonprofit Financials Spell Danger
  • Financial Leadership for Nonprofits: How to Build a Solid Foundation
  • 3 Key Advantages of Fund Accounting Software for Nonprofits
  • Nonprofit Financial Statements: How To Generate Compliant Reports
  • Why Quickbooks Does Not Follow Nonprofit Accounting Guidelines
  • Guide to the Nonprofit Statement of Financial Position Report
  • GAAP for Nonprofits Sets New Standards for Financial Statements
  • Restricted Donations: Real World Answers on Expenses

Did you find this article useful? We welcome your thoughts and comments.

Written by Joseph Scarano · Categorized: Nonprofit Fund Accounting · Tagged: Accounting Software for Nonprofits, Nonprofit Accounting, Nonprofit Accounting Software, Nonprofit Financial Statements

About the Author

Joseph Scarano is the CEO of Araize, Inc., developers of cloud-based FastFund Online Nonprofit accounting, fundraising and payroll software solutions to help your nonprofit become more transparent, accountable and sustainable.

Reader Interactions

Comments

  1. Angie Anderson says

    December 4, 2020 at 2:18 pm

    For assets of a heritage center, do we have to value our individual artifacts or just property and buildings? If so, do we hire and appraiser to do that? Seems overwhelming. Thank you!

    Reply
    • Joseph Scarano says

      December 4, 2020 at 2:26 pm

      Yes, it would be necessary to value each of your artifacts for capitalization for assets on your balance sheet. You will also need this valuation for insurance purposes.

      Reply
  2. char says

    June 9, 2021 at 11:13 am

    Is church building considered both Fixed Asset and NET Asset?

    Reply
    • Joseph Scarano says

      June 9, 2021 at 1:11 pm

      No, the Church Building a Fixed Asset, not a Net Asset. Net Assets is the cumulative excess or deficiency of a fund’s income and expenses from the beginning of the organization to the current date.

      Reply
  3. Roger Real says

    June 11, 2021 at 3:15 pm

    For non profits are Net Assets and Retained Earnings the same thing?

    Reply
    • Joseph Scarano says

      June 11, 2021 at 5:55 pm

      Roger,

      Technically, the calculation to arrive at Retained Earnings and Net Assets is the same. It is the cumulative Income over Expenses for the life of the organization. But, a nonprofit does not have retained earnings, since they are nonprofit. That is why it is called Net Assets. There are no earnings that can be distributed to owners, since there are no owners. Also, Net Assets must be classified as either Without Donor Designations, or With Donor Designations.

      Joe

      Reply
  4. Prenthis Aguilar says

    November 8, 2021 at 12:48 am

    How do you record a loan from officers/director to the non-profit on the 990-PF balance sheet (part II)? It is a covered exclusion.

    Reply
    • Joseph Scarano says

      November 8, 2021 at 2:12 pm

      Prenthis,

      Any payable from officers, directors, trustees and other disqualified persons should be listed on Line 20 of the Balance sheet (Part II).

      Joe Scarano

      Reply

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