While non-profit organizations are not concerned about showing a profit for investors, these entities still must report financial activities to board members and local, state, and federal tax agencies. Just like for-profit businesses, non-profits use financial statements to report revenue generated and expenses incurred, although they may have different names.
For example, the traditional balance sheet format used by a car dealership or office supply store is used by non-profit organizations. They just call the report a Statement of Financial Position. And, the Income Statement becomes the Statement of Activities. The important thing to remember is that regardless of the financial report name, reporting must be organized in a way that follows Generally Accepted Accounting Principles (GAAP).
The Non-Profit Income Statement Explained
The non-profit income statement sometimes referred to as the Statement of Activities in this article, reports an organization's income and expenses for the current fiscal year. The main objective of the financial statement is to report net assets in three primary classes, or categories. These asset classes are 1) unrestricted assets, 2) temporarily restricted assets and 3) permanently restricted assets.
Unrestricted assets are simply donations that come without any rules or restrictions attached to them. The non-profit organization can use these funds for any purpose that furthers its mission. Restricted assets come with certain terms and conditions that limit the organization's use, and must be separated from the general operating funds and other assets. For instance, a donation may come with the stipulation that the funds will only be used for a specific project or activity. And, to complicate the accounting processes a bit further, restricted assets may be temporarily or permanently restricted.
Examples of Restricted Asset Donations
Examples of temporary restrictions include time-specific and project-specific conditions. For example, a donation identified as funds to add new staff members may be contingent upon the new hires working for the agency at least three years before the funds can be accessed. Or, a donation may stipulate that salary will be matched or paid in full for hours spent working on behalf of a specific project.
Permanently restricted donations are life-long. A good example is a donation of a building or land that may never be sold, but must be held and maintained in perpetuity. Many non-profit schools, including Whitman College, accept land gifts that allow them to grow crops and sell the harvest, which generates funding for scholarships and other expenses. A donor may designate land gifts as semi-permanent, permanent, or temporarily restricted.
Non-Restricted Donations & Term Limits
It is possible for a non-profit organization to apply self-imposed restrictions to certain donations. For example, a board may decide that contributions for some donors contributions receive different treatment. The board-designated funds must be identified and disclosed on the Statement of Activities until certain conditions are met. In the statement, these net assets may be identified as restricted for future use in the notes to financial statements documents.
Temporarily restricted net assets can be reallocated as unrestricted funds when the conditions and terms attached during the initial donation are met. For example, an endowment to a college may be considered restricted until a certain number of scholarships are awarded, or for a specific period of time, say five years, has passed since the donation was received.
Responsibilities of Non-Profit Organizations
The responsibility for properly managing donated funds falls on the receiving organization. When a non-profit receives and accepts, a donation in kind or in cash with restrictions, it must not be co-mingled with unrestricted assets. Doing so would present a false representation of the organization's financial position. Furthermore, descriptive information about each restricted asset must be clearly listed under a separate heading on the Statement of Activities and included in the financial statement notes.
Failure to properly administer donations, and accurately report an organization's management of these assets, could result in fines and other sanctions, including losing status as a non-profit organization ( NPO).
In conclusion . . .
The Statement of Activities reports the net income (or loss) of a non-profit organization based on actual income and expenses. Donations must be classified as unrestricted, temporarily restricted, or permanently restricted. And, each entry must have a descriptive note to explain any conditions or terms attached to certain donations.
Restrictions may have both purpose and time limitations attached by the organization's board or donors. Undesignated donations may be used for many purposes, including:
- Acquisition purposes
- Cash reserves
- Equipment or real property
- Long-term debt management
- Operating expenses
- Specific projects
- Paying for activities related to the organization's primary mission is deemed necessary by the board members.
The non-profit income statement accurately reflects a net income surplus or net income deficit in funding. Individual categories and line items may differ from a typical for-profit business. However, in the same way, a for-profit business calculates net income for their fiscal year, non-profits subtract all expenses from all revenue to reach the bottom line showing a net profit or a loss for the year.