Have you ever attended a presentation of financial information and not been familiar with the jargon the presenter was using? Have you been uncertain whether you are the only one with questions? Maybe you’re the accountant or treasurer for your organization and you’re met with blank stares? Nonprofits have their own set of financial terminology that can be unfamiliar and confusing. Whether you’re a nonprofit accountant, board member, volunteer, or curious potential donor, getting to know the lingo used in nonprofit accounting can be important and helpful as you review financial information.
Let’s get to know a few of the terms regularly used in the nonprofit financial reporting world!
We’ll start with the Statement of Financial Position. For-profits usually refer to this statement as the Balance Sheet. The Statement of Financial Position shows an organization’s assets, liabilities, and net assets. The statements look at these items at a specific point in time, usually the end of a month or year.
Assets – The items held by the nonprofit with monetary value. Assets would include cash, investments, property, receivables, and anything else with value.
Liabilities – What the organization owes other parties in the future that will be transferred from its assets. Accounts like mortgages, accounts payable, and accrued expenses are common liabilities found in the Statement of Financial Position.
Current – Often the Statement of Financial Position shows headings for current assets and current liabilities (this isn’t required but many organizations present this way). When something is classified as current, it means an event that would trigger a conversion to cash or payout of cash could occur within one year. For example, take a loan on a building with monthly payments. The 12 payments that are due in the next year would be classified as a current liability. Anything that isn’t current is classified as long-term. By making the distinction, it’s easier to tell which assets are available for operations, and which liabilities will need to be paid soon.
Net Assets – What’s left when you subtract liabilities from assets? Net assets, or ‘equity’ as it’s commonly referred to in the for-profit world. Net Assets change all the time as income and expenses affect the assets and liabilities. Net assets are made up of two different classifications, with and without donor restrictions. These were updated in 2016 by the Financial Accounting Standards Board and became effective this year. We have provided further information on this update in our article, “Changes to Financial Statements for Nonprofit Entities, Are You Ready?”.
Net Assets with Donor Restrictions – When a donor makes a gift for a certain purpose, those assets are restricted, until the restriction is met by the organization. For example, if you give a $1,000 check to a nonprofit and tell them it’s for buying a new table for their office, the nonprofit is obligated to use those funds to buy a table. Until they purchase the table, the nonprofit would report $1,000 of net assets with donor restrictions. Once the table is acquired (and the entire gift spent), the restriction is deemed “released” and the asset of the table becomes part of net assets without donor restrictions. Only a donor can impose restrictions on net assets, those designated as ‘restricted by the Board or management’ are not classified as restricted on the financial statements.
Net Assets without Donor Restrictions – These are net assets that are available for the organization to use for any purpose and can be used as management sees fit. There is no donor stipulation that mandates use for a certain purpose. Generally, net assets without donor restriction is accumulated income from previous periods. In this way, it is similar to retained earnings on a for-profit balance sheet.
Designations – Sometimes management or the Board may want to place a restriction on funds, either to use for a certain purpose, or to use in the Organization’s endowment. Doing so can be very useful for budgeting and operating as planned. However, these types of restrictions are internal restrictions only; they do not affect net assets with donor restrictions. Management or governance could change their viewpoint and do something different with designated funds in the future. They are often classified as a subheading under net assets without donor restrictions, and management can describe the designated purposes in the notes to the financial statements.
At TDT, we understand not everyone is familiar with nonprofit financial reporting lingo, which can make it challenging to understand of your nonprofit’s financial situation. You are important to your Organization’s success and we want to provide the tools you need to make informed decisions. If you have any questions about the meaning of these or any other financial reporting terms, we’re glad to help clarify them. Stay tuned as this information will be expanded with more terms as the year goes on.
Ross Van Laar, CPA, and Manager at TDT discusses the terminology used when discussing financial information in nonprofits. With eight years of experience, Ross specializes in audits of nonprofits, small businesses, and employee benefit plans.