Nonprofit Financial Statement of Activities, En Garde!
As you may remember from the last post, before learning how to properly run net assets on your lemonade stand, there was brief mention of the Nonprofit Financial Statement of Activities. As you were surely made insomniac by the mystery, fret no longer. It’s time to elaborate!
A Not-For-Profit’s Profit
The first step in understanding the nonprofit financial statement of activities is recognizing its for-profit counterpart: the statement of income. You’re then left asking the question, “What is the not-for-profit equivalent of… well… profit?”. We can resolve this paradox by realizing that a nonprofit’s primary goal is to provide programs that meet the needs of society. Thus, we have the statement of activities.
Using the income statement as a jumping point, it’s helpful to think about its purpose in a for-profit business. At a high level, the income statement serves to show change. It makes note of the starting balance, adds income, subtracts expenses, does some other prosaic accounting things, and marks the end result. The nonprofit financial statement equivalent merely seeks to accomplish the same end in a different context.
Fun Alert: Math En Route
Mathematically, the equation of the statement of activities may be written as follows:
Net Assets (final) = Revenues – Expenses + Net Assets (initial)
Pretty intuitive, huh? Now, it’s important to note that revenues will actually include revenues, gains, and releases from donor restrictions, like we talked about in the previous article (linked above). This little formula doesn’t tell the whole story though. It wouldn’t be nonprofit accounting without a twist!
The Nonprofit Financial Statement with an “Upside Down”
Unfortunately, this simple linear equation operates in two dimensions: with donor restrictions and without donor restrictions. For example, if some of your funds were released from donor restrictions, you have two values to adjust on your statement of activities. First, apply the negative amount of the release to your revenues with donor restrictions. It may be tempting to apply the positive amount to expenses instead.
Do NOT fall into this trap! There is a swath of events that fall under expenses, but a release is not one of them. After narrowly avoiding the nonprofit financial statement equivalent of the demogorgon, apply the positive amount of the release to revenues without donor restrictions. Voilà! You have successfully freed assets from the upside down all the while obeying the regulations of the new FASB update (and Stranger Things for that matter).
Expenses are the last piece of the puzzle for this non profit financial statement. Unlike revenues and net assets, it doesn’t have the “with donor restrictions” release to worry about, but it can still be tricky if you’re not careful. Expenses and losses are broken down as follows:
- Program Functions
- Support Functions
- Management and General
- Fundraising and Development
Let’s give some meaning to these buckets! Program functions are any amounts directly incurred by your not-for-profit carrying out its programs. Logically following that, support functions deal with the indirect expenses. Similarly, support functions are broken down the same way into internal and external support. It seems straightforward, but what would you do with a manager that spent half their time fundraising? Would you have known to put half of the total salary in each support category? If we’ve learned anything from Stranger Things, it’s don’t venture into the upside down alone.
Non Profit Accounting Solutions
Qbix was formed in 2008 in Macon, Ga, just south of Atlanta. Our goal is to provide the latest cloud accounting technology, while delivering real-time visibility into your nonprofit's financials 24/7. Numbers are our passion, but providing your nonprofit business 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.