Statement of Financial Position: Reading a Nonprofit Balance Sheet

The organization is not officially dissolved until the dissolution papers are filed with the state, and other final steps, such as filing the final annual report (Form 990) with the IRS, are completed. There may be additional corporate actions that will need to be taken well after the last day of active operations. Dissolving an organization can be a difficult and emotional process, but there are steps you can take to ensure that the process of winding down your nonprofit is as smooth as possible. The IRS provides this handy questionnaire to help you figure out exactly which parts of the tax code apply to your organization, and which form you’ll use to apply for tax-exempt status. While tax-exempt status might be determined by the IRS and federal law, nonprofit status is determined by state law. Because of this, the IRS requires that you obtain nonprofit status from your state before applying for tax-exempt status.

• If an intermediary receives cash or other financial assets, the entity should recognize a liability to a specified beneficiary concurrent with the recognition of assets received from the donor.
• Filing for bankruptcy provides a legal framework to address debts in an orderly manner.
• In the accounting world, the asset is defined as an owned resource from which future economic benefits are expected.
• We also provide a free e-book on nonprofit budget creation to help your organization manage its finances effectively.
• In these circumstances, the organization should recognize a liability (not revenue) to the specified beneficiary concurrent with its recognition of cash or other financial assets received from the donor.
• It is important for nonprofit stakeholders to understand the significance of permanently restricted net assets.

For groups closing their doors before applying for tax-exempt status

• Because these assets are considered to be held in a public trust, the AG ensures they are not improperly used or wasted during the bankruptcy process.
• Their task is to propose a reorganization plan detailing how the organization will repay its creditors.
• A not-for-profit can, however, help maintain its financial sustainability by following prudent financial management standards and monitoring financial ratios.
• Additionally, it facilitates strategic planning and decision-making within the organization by providing reliable data on its financial status and resource allocation.
• If your organization never applied for tax exempt status but received an “EIN” (employer identification number), send a letter to the IRS requesting termination of the organization’s EIN account.

Again, one way to help avoid such consequences is to use online legal document services to document transactions properly in the corporate minutes and to make appropriate resolutions for the sale of property. Partner with the nonprofit accountants at Jitasa to create and interpret your statement of financial position. Depreciation is expensed out each year as a non-cash expense on the statement of activities also known as the statement of operations. Current assets are resources used up within one year, whereas fixed or non-current assets have a useful life of more than one year. Whether you’re new to the nonprofit world or just looking to brush up on your accounting knowledge, one of the first things you’ll need to understand is your organization’s Statement of Financial Position.

Impact of Financial Activities on Net Asset Classifications

Just like the statement of financial position, the statement of activities keeps net assets that have conditions and stipulations attached to them separate from unrestricted funds. Mergers are statutory functions; the merger must comply with each entity’s applicable state statute. Mergers are also shaped through an agreed-upon plan of merger, in which the future rights and responsibilities as between the surviving entity and the disappearing entity are set forth. Financial health is essential for nonprofits to fulfill their missions and sustain operations.

Dive deeper into restricted funds with our FREE course!

SFAS No. 136 provides a great deal of flexibility as to how the contributions are shown in the statement of activities. Open science code and datasets used in Urban’s interactive data tool on the financial risk of nonprofits losing government grants. To learn more about exactly which taxes your tax-exempt nonprofit might still be on the hook for, consult IRS Publication 557, or better yet, consult with a nonprofit https://nerdbot.com/2025/06/10/the-key-benefits-of-accounting-services-for-nonprofit-organizations/ tax specialist. They’ll have experience helping organizations like yours minimize their tax bill and make sure you aren’t breaking any tax code rules. Restricted net assets are donations that have certain terms and restrictions attached, have special accounting procedures, and must be kept separate from other net assets. When you reconcile your bank accounts, all you’re doing is comparing each transaction from your bank statement with the ones you have in your books.

Accounting for Net Assets

For example, you may find that while your net assets are lower than you’d like them to be, they’ve been steadily increasing over time, indicating growth and sustainability. You can also use your balance sheets to evaluate major financial decisions you’ve made by assessing statements from before and after the initiative and noting the impact on your organization’s overall accounting services for nonprofit organizations financial health and stability. As the needs and expectations of the nonprofit sector continue to evolve, CPAs will play an increasingly critical role in guiding these organizations through the complexities of modern asset management.

Restricted and unrestricted funds

• While there may be some legitimacy behind your concern, there’s no need to panic just yet.
• Solvency ratios provide insights into a nonprofit’s long-term financial stability and ability to meet long-term obligations.
• Each asset must be carefully accounted for, managed, and leveraged to support the nonprofit’s mission and strategic goals.
• The straight line method works just like it sounds; the value of the fixed asset is depreciated evenly over the life of the asset.

Adherence to standards such as those set by the Financial Accounting Standards Board (FASB) and the International Financial Reporting Standards (IFRS) ensures consistency and credibility across the sector. For instance, the FASB’s ASC 958 provides guidelines for nonprofit financial reporting, ensuring clarity in financial statements. Compliance with these standards builds confidence among stakeholders, who rely on accurate and transparent financial information to make informed decisions.