This guide teaches the basics of reading and understanding a nonprofit Statement of Activities. But, since auditable nonprofit financial statements, we’ll talk about accrual accounting practices in this article. That means your revenue will also include any donations pledged in the period (whether you collected the cash or not) and any receivables (for services rendered but not yet paid).

Understanding Nonprofit Statements of Activities

All revenue https://nerdbot.com/2025/06/10/the-key-benefits-of-accounting-services-for-nonprofit-organizations/ sections from your organization must also be split between unrestricted and restricted funds. This article will discuss what a statement of activities entails and why nonprofits need them. Nonprofits can use this report to file Form 990 with the IRS and provide donors with transparency and trust in the organization. You should look at your Statement of Activities every month and compare to previous periods. Identify trends and changes in sources of revenue, expenses, and changes to net assets. In the for-profit world, they call the difference between revenues and expenses net income (or profit).

How does a Statement of Activities differ from an income statement?

• Your report will typically be created using information from your organization’s chart of accounts, hence the need for an organized accounting system and department.
• It provides information on the organization’s financial performance and the sources and uses of funds.
• The statement is prepared in accordance with Generally Accepted Accounting Principles (GAAP) and provides a comprehensive view of the organization’s financial activities.
• Regularly reviewing this and other financial statements will help you make well-informed decisions.
• It gives insight into the organization’s financial performance and whether it is generating enough revenue to cover its expenses.
• Yes, nonprofit organizations follow certain accounting rules and regulations while preparing the SOA.

While financial statements are required for reporting purposes, there is much more to it than that. The financial statements can help you assess how your business performed for the period. With these goals in mind, you can look at each of your financial statements and see whether or not you’re on track to achieve them. Managing your nonprofit’s finances is no small task, but there are four standardized financial statements that provide clear benchmarks to help you make decisions. Without them, it’s nearly impossible to assess your organization’s performance or plan for the future. Not only are they important for your audit, but they are also they are powerful tools that illuminate how your resources are being used and what adjustments can drive greater impact.

How to Format a Statement of Activity for Nonprofits

It gives insight into the organization’s financial performance and whether it is generating enough revenue to cover its expenses. To present the liabilities in a structured manner, a Markdown table can be used. The table can include columns for the type of liability, the amount owed, and the due date. This provides a clear overview of the organization’s financial obligations and helps stakeholders make informed decisions. In the Statement of Financial Position, the assets section is typically presented in order of liquidity, with cash and cash equivalents listed first. This section includes items such as accounts receivable, inventory, and property.

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It also aids in evaluating the effectiveness of these programs by comparing the resources allocated to them with the outcomes achieved. A Statement of Activities (SOA) reveals the income and expenses of nonprofit organization over a reporting period. A nonprofit organization is driven more by a mission or a service than financial success.

Statement of Functional Expenses

• It includes details about significant accounting policies, potential risks and uncertainties, and other relevant information that may impact the organization’s financial position and operations.
• First, they provide transparency and accountability to stakeholders, including donors, board members, and the public.
• Apart from a donor’s request, there are other reasons funds might be restricted.
• Generally accepted accounting principles dictate that these two categories must be clearly delineated and recorded differently.

The nonprofit statement of activities is one of the core accounting documents that your organization creates. It allows you to see how your organization uses its funding to advance its mission and allocate resources. In addition, your income statement can be used to determine how sustainable your organization’s finances are so you can make informed decisions for the future. Temporarily restricted net assets are funds that have donor-imposed restrictions but will become unrestricted after a certain period or upon the occurrence of a specific event. Organizations often use these funds to support specific programs or initiatives that align with the restrictions imposed by the donor. Nonprofits must carefully track and report on the utilization of temporarily restricted net assets to ensure compliance with donor intent and legal requirements.

The way expenses are categorized and reported in the Statement of Activities is not merely a matter of financial recording but a reflection of the nonprofit’s operational priorities and efficiency. This section of the Statement of Activities plays a crucial role in how the organization is perceived by external parties and how it manages its internal operations to maximize impact on its mission. The statement of activities can also help you assess your organization’s ability to service debt. By understanding where your money is coming from and going, you can make informed decisions about future expenditures.

Financial statements of nonprofits

Nonprofits can use the information in the statement to evaluate the financial viability of different programs and initiatives. This helps them allocate resources effectively and make informed strategic decisions. Secondly, the statement provides transparency and accountability to the organization’s stakeholders, such as donors, board members, and the general public. It demonstrates how the organization is utilizing its resources to achieve its mission and goals. Tyler’s extensive background in accounting, tax, and financial consulting set the foundation for Velu’s outsourced accounting solutions for nonprofits and small businesses.

In this section, it is crucial to pay attention to the debt and accounts payable. These are key indicators of the organization’s financial health and its ability to manage its obligations. It is important for nonprofit organizations to carefully monitor and manage their liabilities to ensure long-term sustainability. Nonprofit organizations play a crucial role in addressing societal needs, often relying on donations and grants to fund their missions. Unlike for-profit entities, nonprofits must adhere to specific accounting standards that ensure transparency and accountability to donors, grantors, and regulatory bodies. Out of the four most common financial statements in a nonprofit, the Statement of Activities, also known as the Profit & Loss (P&L), is the broadest.

What are nonprofit financial statements?

The nonprofit Statement of Cash Flows reports on the cash flowing in and out of your organization over a certain period of time. It classifies cash as stemming from either investing, financing, or operating activities, just as the for-profit version of this document would. Between fundraising, marketing, and keeping your programs afloat, your nonprofit team likely collects a variety of financial data. This information is crucial in making informed decisions about resource allocation and setting your organization up to prosper for years to come. The statement of cash flows for an organization is typically prepared by a CPA at the close of a financial audit, but some entities prepare the report internally annually.

Exploring The Statement of Activities: A Beginner’s Guide

While nonprofit financial statements have some overlap with these, there are key differences. The Statement of Activities is similar to an income statement in the for-profit world and helps nonprofits track their financial performance over a specific period, typically a fiscal year. This document highlights how your organization generates revenue and allocates expenses, ultimately revealing the change in net assets. External users of the statement of activities may include Grantmakers, financial auditors, donors, members, or partnering organizations.

Are income statements and Statements of Activities the same?

This statement is crucial because it provides insight into what your organization owns and owes. In this section, you can find information about the cash generated from the sale of goods or services, as well as any cash payments made for operating expenses such as salaries, rent, and utilities. It also includes cash flows from activities such as grants, donations, and program-related revenue.

These restrictions can be temporary or permanent, affecting how and when the revenue is recognized and reported. Another critical aspect of the Statement of Activities is the presentation of changes in net assets. This section highlights the difference between total revenues and total expenses, indicating whether the organization has a surplus or deficit for the period. It also reflects any adjustments due to gains or losses on investments, grants, or other financial activities.

• However, if $15,000 of your revenue is restricted, you’re actually $5,000 in the red and should cut expenses to maintain a sustainable organization.
• Board members and other leaders can use this statement for better insight into how much is available to pay expenses.
• By monitoring and evaluating the performance of their investments, nonprofits can make informed decisions to optimize their financial resources.
• Common expenses include administrative expenses, fundraising, and program services.
• Restricted net assets are funds that must be used for specific purposes as dictated by the donor.
• Nonprofits must carefully manage and steward these funds to ensure their long-term sustainability and impact.

Donor Restrictions

Consider working with a nonprofit accounting expert at JFW Accounting Service today to get your entity on the right financial track. Unrestricted funds often make up the majority of donations for small nonprofits. So you can use this money for any organizational need that aligns with your legally declared mission. As a nonprofit, you have to share your profitability, revenue streams, expense reports, and net assets with many different people, including the general public. And fund accounting ensures that you’re maintaining the degree of transparency required of you.

• It’s important to note that nonprofit financial statements are not just for internal use.
• That might mean using cash-basis accounting, tracking your gains or losses at the program level, or more.
• Consider working with a nonprofit accounting expert at JFW Accounting Service today to get your entity on the right financial track.
• Permanently restricted net assets are funds that have permanent donor-imposed restrictions.
• An organization’s liabilities include any money that is owed to another party.

For example, if a donor pledges a large contribution in April, but the check doesn’t arrive until August, you’ll want to make sure you can still pay your bills in the meantime. It’s not uncommon for a nonprofit’s cash flow to fluctuate, with positive cash flow around annual events or fundraising drives, and negative cash flow at other times of the year. Your Statement of Cash Flows helps ensure that your organization always has enough liquid cash on hand. If you don’t keep up with the latest rules for recognizing revenue, you may report your organization’s income wrong on your Statement of Activities. Often, this leads to large audit adjustments, budget vs actual reporting difficulties, and other funding challenges.

Segregates Financial Activity

It automates and facilitates these comparisons, allowing for more efficient monitoring and decision-making. Encouraging a culture of regular financial review within the team will also help you catch discrepancies and address them promptly. Each of these statements serves a different purpose, but together they provide a clear picture of your organization’s finances. This report can help you explain to your board why you have less cash even after a great fundraising month (maybe you invested in some much-needed equipment).

7 Restricted and unrestricted funds

It provides insights into how the organization raises capital and manages its debt and equity. It provides information about the organization’s capital expenditures and acquisitions. Now you know the basics of the five essential financial reports that every nonprofit needs. Even though you don’t have to pay federal taxes, almost all nonprofit organizations (the few The Key Benefits of Accounting Services for Nonprofit Organizations exceptions are listed here) must file an IRS Form 990 each year.

However, there are also some drawbacks to using this technique, including the need for well-trained staff and the potential for errors. To simplify it, the CIP account is just an account that records all the different expenditures during a construction project. Construction-in-progress accounting, when aligned with GAAP standards, is a powerful tool for managing large-scale projects.

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It simplifies tracking so you can confidently manage budgets and ensure accurate, reliable financial records — all while focusing on successful project delivery. CIP accounting keeps construction expenses organized and distinct from daily operating costs. This organization allows project managers to assess financial health at each stage and make informed decisions.

Additional Costs

Every construction project tells a story – one that sees the power of human creativity turn nuts, planks, & bolts into impressive tools and structures. However, teams that forget to correctly account for those fixed assets, their usage, etc. will quickly see the financial side of that story spin into a mystery novel. The CIP account usually contains information for multiple fixed assets under construction. For example, Planyard automatically updates what is cip in accounting budgets as costs are recorded, ensuring real-time accuracy without the need for redundant data entry. These features help businesses stay on top of their financials and maintain profitability throughout the project lifecycle.

How to Record Entries for CIP Accounts

Accounting construction in progress plays a critical role in financial reporting by having the costs of a construction project accurately reflected in the company’s financial statements. Construction projects often involve significant investments and can take months or even years to complete. During this time, companies need to keep a close eye on their finances to ensure that the project stays on budget and that costs are accurately tracked. Accounting construction in progress plays a crucial role in the process by allowing companies to record the costs of a project as they are incurred, rather than waiting until the project is completed. The purpose of capitalizing assets in progress, commonly referred to as CIP, is to accurately reflect the costs and value of long-term projects in the financial statements.

Why Choose PVM Accounting for CIP Accounting

This information is crucial for management to make informed decisions about resource allocation and project continuation. The appropriation of revenues and expenses should be made in the relevant accounting period according to the work’s percentage completion. It also dictates which revenues and costs related to a construction contract should be recorded and when to record. Accounting for construction in progress when it is for an asset to be sold is slightly more complicated. This is a method that attempts to match revenues to the expenses required to generate them. Construction of certain assets – naval ships, for example – can take several years.

• Because the expansion is complete and in service, the equipment in this example will begin depreciating as other fixed asset accounts do.
• A construction contract is a specific contract negotiated to build a fixed asset or group of interrelated assets.
• Construction in progress includes all the costs that company spends such as material, labor, and others.
• Construction projects require a specialized approach known as Construction in Progress (CIP) accounting.
• When a project is complete, the cumulative CIP balance transfers to a fixed asset account, and depreciation begins.
• A construction work-in-progress asset is any asset that is not currently usable, such as assets that are undergoing testing or that a company is building.

Progress Vs. Process

Organizations use these CIP accounts when constructing a new facility, expanding an existing one, or building new machinery or equipment. The journal entry is debiting unbilled accounts receivable and credit construction revenue. On https://www.bookstime.com/blog/difference-between-daybooks-journals-ledgers the other side, the transaction will impact the accounts receivable as the customers may not yet make payment. The progress of payment will depend on the contract which may be related to the specific result.

Once the project is completed, transfer the total CIP balance to the appropriate fixed asset account. Effectively managing construction-in-progress assets is critical for accurate capitalization, financial transparency, and audit readiness. The following examples illustrate standard transactions throughout a construction project lifecycle, ensuring costs are properly recorded in net sales compliance with accounting standards.