Running a Not-For-Profit Organization (NPO) doesn’t relieve you from the responsibilities of a business owner. Not-for-profits do not have shareholders, nor do they have to be registered like charities, and they neither pay taxes like a for-profit business. All this might make you feel that NPOs do not need accounting. But they must prepare financial statements to maintain transparency with donors about the funds collected and spent. 

Why Do Non-Profit Organizations Need Financial Statements? 

An NPO might be for social welfare or civic improvement with no intention of profit, but it has salaried employees and pays rent and utilities like a for-profit business. As an organization, even a not-for-profit needs liquidity, funding, and government grants to perform its welfare functions and campaigns. And having accountability for spending and savings will help the not-for-profits continue to operate for a long time and organize more events. 

This article will discuss the type of financial statements a Not-For-Profit Organization (NPO) must prepare. 

Four Accounting Statements For Not-For-Profit Organizations (NPO)

Like any business, not-for-profits also need to prepare three standard financial statements; income statement, cash flow statement, and balance sheet. There is an additional statement of functional expenses unique to an NPO. 

Income Statement of a Not-For-Profit Organization (NPO)

Revenues – expenses = change in net assets

An income statement lists revenue and deducts expenses to arrive at a net profit and tax liabilities. As NPO has no profit, the terminology changes. The only source of cash inflow is donations and grants, which become revenue for an NPO and is written as gross receipts. 

The organization deducts all expenses like salary, utility, rent and more to arrive at the final balance. This balance is called a change in net assets and is transferred to the balance sheet. 

An income statement gives board members a better understanding of the organization’s fixed and variable expenses to ensure enough liquidity to keep the not-for-profit organization going. 

Balance Sheet of a Not-For-Profit Organization (NPO)

Assets = liabilities + net assets

A not-for-profit’s balance sheet differs from a for-profit’s in terms of net assets. As we said before, NPO does not have shareholders but donors. Hence, its balance sheet does not have owners’ equity but net assets, which includes the net change in assets transferred from the income statement. Sometimes. donors might give donations for a specific program. Net assets have to list these donations separately under restricted assets. 

Other assets include equipment, event supplies, cash, property, grants, copyrights, trademarks, and patents. Liabilities include salaries, mortgages, debt, accounts payable, and grants to other organizations. 

The balance sheet tells board members how much liquidity the organization has and what obligations it has to meet in the short and long term, and helps them plan goals accordingly. 

Cash Flow Statement of a Not-For-Profit Organization (NPO) 

A cash flow statement of a not-for-profit is similar to a for-profit, with three categories: 

• Operating cash flow includes cash inflow from donations, ticket sales, grants, and cash outflow in operating expenses. 
• Investing cash flow includes interest earned or payments made for investments, such as payments on buildings, land, and equipment.
• Financing cash flow includes loans and interest on loans earned and repaid. 

A cash flow statement tells board members the organization’s liquidity in different forms (liquid investment, loan facility, cash balance) at any given time. It gives them an estimate of regular outflows and inflows to help them maintain sufficient cash balance and time and fund major expenses accordingly. 

Statement of Functional Expenses

The statement of functional expenses is exclusive to NPOs. It is the complete breakup of expenses by programs, fundraising, and management. For instance, X NPO reported $125,000 in salaries in the income statement. The functional expense statement will give the salary bifurcation as $75,000 spent on programs, $30,000 on fundraising, and $20,000 on management. This bifurcation is for every expense. 

The functional expense statement ensures that the management is not giving itself hefty salaries but is spending the money on programs and fundraising. 

A professional accountant can help you prepare these financial statements to help get more donors and grants or take a loan to buy an asset. 

Contact Ford Keast LLP in London to Help You With Accounting Needs 

Talk to a professional accountant to help you collect all the necessary information, prepare financial statements and help you optimize your expenses. To learn more about how Ford Keast LLP can provide you with the best accounting and bookkeeping expertise, contact us online or by telephone at (519) 679-9330.