Nonprofit Financials: Find the Hidden Lemon
People are often under the misconception that for-profit financials and nonprofit financials operate the same. Even a quick look at the accounting process in both will show that this cannot be the case.
Don’t Call It a Balance Sheet
One of the major differences between for-profit and not-for-profit accounting is the Balance Sheet, or rather, the Statement of Financial Position. At first glance, the difference appears to be nominal, but there’s some subtler forces at play here. Specifically, nonprofits don’t have equity! Without this key piece to the for-profit puzzle, assets are calculated differently on nonprofit financials. Therefore, total assets is the summation of liabilities and net assets. That’s easy enough to grasp, but net assets bring along its own set of complications.
The Two Flavors of Net Assets
You may classify net assets as one of the following:
- Net Assets without Donor Restrictions
- Net Assets with Donor Restrictions
That’s all well and good, but what does it mean? Net Assets without donor restrictions operate much how you might expect on your nonprofit financials. Given:
Assets = Liabilities + Net Assets
Your assets will increase if you receive a donation. To balance out your equation, you simply add the same amount to unrestricted contribution revenues found on your Statement of Activities (more on this here). In turn, this is reflected in your net assets and all is right with the world.
Donor restricted net assets work similarly to those without restrictions on their way in, but they can be a tad tricky on their way out. This can wreak havoc on your nonprofit financials if you’re not careful! You must remember to transfer net assets with donor restrictions to net assets without donor restrictions after use. A hypothetical might be helpful here.
Nonprofit Financials: Let’s Talk Lemonade
You’re running a not-for-profit lemonade stand, and you are in desperate need of lemons. Your mom gives you $5 restricted to purchase lemons, and your grandfather has given you $20 restricted only by the condition that “you don’t tell your mother”. These donations will be considered with and without restrictions respectively. You buy $10 worth of lemons, and you want to update your Statement of Financial Position appropriately because you’re a clever young entrepreneur and realize diligent accounting is vital to a healthy nonprofit.
Consequently, you note that you converted $10 of cash to lemons on the assets side of the equation. This is no different than how you would update your balance sheet in your for-profit mowing business. The change comes with net assets. You need to show that your net assets are no longer restricted. Therefore, you decrease your net assets with restrictions by $5 and increase net assets without restrictions by $5. Impressed with your effective bookkeeping, your donors are inspired and pledge even more!
When Life Gives You Lemons, Take Inventory
Sadly, accounting work on your nonprofit financials is not as easy as making lemonade. There’s a wealth nuance to financial reporting in nonprofits, and when that finally gets familiar, things will get shaken up with an update! All this being said, many nonprofit organizations do not prioritize accounting and even delegate the task to untrained staff or volunteers. Do they know the intricacies of how to appropriately update your nonprofit financials? It’s time you take inventory of your accounting solutions so you can more effectively make lemonade.
Non Profit Accounting Solutions
Qbix's goal is to provide the latest cloud-based accounting technology while delivering real-time visibility into your nonprofit's financials 24/7. Numbers are our passion, but providing your nonprofit with the financial expertise needed to facilitate growth and profitability is our top priority. And because no two organizations are the same, Qbix offers the flexibility you need to accomplish your nonprofit's goals.
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