The statement of financial position, also known as the balance sheet, shows your organization’s assets, liabilities, and net assets. Assets are anything you own and can use to run your programs, such as cash, accounts receivable, vehicles, equipment, and buildings. Liabilities are anything you owe to other people or organizations, such as mortgages, loans, and accounts payable. The amount by which assets exceed liabilities is your net assets.
A nonprofit’s statement of financial position differs from its for-profit equivalent in 2 significant ways. One is the terminology of net assets instead of owner’s equity, since nonprofits are not owned by anyone. Secondly, net assets are broken out into 3 categories – unrestricted, temporarily restricted, and permanently restricted.
These categories are based on restrictions that donors may or may not put on contributions they make to your organization. Unrestricted assets have no strings attached to them and you have full discretion of how to use them. Temporarily restricted assets typically must be used for a specific purpose or in a certain time frame. With permanently restricted assets, you can spend the income the assets produce, but not the principal of the assets. The income produced may be unrestricted, or temporarily restricted. There is new guidance taking effect later this year for how nonprofit financial statements are presented. Under the new guidance, your statement of financial position will have 2 categories – net assets with donor restrictions and net assets without donor restrictions.
Assets are shown in order of liquidity, how quickly they can be turned into cash. The most common assets are:
- Cash on deposit at the bank
- Pledges and grants receivable: contributions a donor has committed to make, but has not yet given you.
- Prepaid expenses: costs that are paid in advance of being used, such as an annual insurance policy. These are reduced, and converted to an expense, as the benefit associated with the cost is consumed.
- Investments: stocks and bonds, reported at the fair market value on the date of the financial statements.
- Fixed assets: property and equipment that last more than a year and are depreciated over time. This may include vehicles, buildings, land, equipment, etc. Fixed assets are shown are their book value, net of depreciation, except for land. Land doesn’t depreciate over time, and is reported at its historical cost.
The order of liabilities is not as structured as assets, though current and short-term liabilities are generally shown before long-term liabilities. Common examples of liabilities are:
- Accounts payable: amounts owed to vendors for goods and services that have been provided but not yet paid for.
- Deferred revenue: income you have received but not yet earned, such as a grant you have received but not met the conditions of, or an advance payment on a contract. Since you haven’t earned the income, you must either provide the goods or services expected, and recognize the revenue, or return the money.
- Long-term debt: principal and interest owed to creditors, such as a mortgage or line of credit.
Whereas the statement of activities and statement of cash flows show your organization’s financial performance over time, the statement of financial position shows information at a specific point of time. You’ll prepare it at least annually, and the end of your fiscal year, but it will be beneficial to use in conjunction with other statements when you do monthly or quarterly analysis.