Since nonprofit organizations don’t profit from the money they make, the accounting processes for nonprofits look somewhat different than for-profit companies. And one of the key differences is that nonprofits talk about net assets rather than net income or equity.
Net assets aren’t a complex topic to understand. It’s mostly a difference in terminology in nonprofit accounting vs. for-profit accounting. But it’s not a term that most non-accountants are familiar with, and there are a few differences in how it’s reported. So we thought a quick explainer was in order.
How to Calculate Net Assets
The formula to calculate net assets is the same as used to calculate equity in a for-profit company. It looks like this:
(Assets – Liabilities = Net Assets)
In this equation, your assets are anything you own that has value to your organization, such as cash, investments, or physical property (e.g., buildings, land, equipment).
On the other hand, your liabilities are everything you owe to other people, like credit card balances, loans, mortgages, lines of credit, accounts payable, and more.
Understanding Nonprofit Net Assets
As shown above, Net Assets are simply the value of what you own (Assets) versus what you owe to others (Liabilities).
So another way to think of it is that your Net Assets are the amount of money you’d have left if your organization sold all of its assets and paid off all debts it owes to anyone else.
On the for-profit side of things, this left-over balance is called equity because it is how much money shareholders and partners would split after the debt is settled. But since there aren’t any shareholders in a nonprofit, this balance of value is called “Net Assets” instead.
Generally, liabilities are categorized based on due dates. So, if an organization has liabilities it expects to pay off within the year, these are classified as current liabilities. Long-term liabilities, as the name implies, are those with due dates further in the future (more than one year away).
What Are Restricted Net Assets?
Because nonprofits often receive gifts or funds that are earmarked for a specific purpose, they must show their Net Assets in more detail.
Every nonprofit must show two categories of Net Assets on its Balance Sheet: Net Assets with Donor Restrictions and Net Assets without Donor Restrictions.
Restricted net assets are those with donor restrictions, which combine temporarily and permanently restricted classes. When a donor specifies a designated purpose for their contribution, the organization must use the donation toward that particular purpose.
For example, suppose Daniel Donor gives a $10,000 donation designated to go towards expanding the food bank warehouse downtown. In that case, the nonprofit must use those funds towards its efforts to expand the downtown food bank warehouse. Those funds cannot be used in the general fund for other purposes.
So, when your nonprofit receives a donation with restrictions, it must record it as donor-restricted contribution revenue and report it accordingly on its financial statements.
What Are Unrestricted Net Assets?
Unrestricted net assets are assets with no specific restriction on how you can use them. So your organization can use these assets for any purpose that aligns with fulfilling the organization’s mission.
Net Assets on the Statement of Activities
Most conversations about Net Assets revolve around the Balance Sheet or Statement of Financial Position. This is where you’ll find the balance of Net Assets that shows the accumulated financial reserves of your organization.
But you’ll also see the term Net Assets pop up on your Income Statement, or Statement of Activities. Here it will take the form of “Change in Net Assets.”
Your Change in Net Assets is the difference between the revenue you have recorded and the expenses incurred during a given period. It’s essentially what a for-profit company would call Net Income or Profit.
For instance, if you collect $500,000 in revenue and record $450,000 in expenses in a given month, your Change in Net Assets will be +$50,000. Conversely, if you register more expenses than revenue, your Change in Net Assets will be negative.
As the term “Change in Net Assets” implies, that $50,000 gain will flow through directly to the Balance Sheet. So your Total Net Assets on the Balance sheet will be $50,000 higher than at the previous month’s close.
Need Help Navigating Your Nonprofit’s Finances?
At Charity CFO, we understand the complexity of nonprofit accounting. Our dedicated team (including five former nonprofit auditors) focuses solely on nonprofit organizations to help navigate the complicated maze of accounting.
We’ve helped 200+ nonprofits around the country optimize their bookkeeping, create consistent monthly reporting, and strengthen the finances of their organizations. So if you’re looking for reliable and talented financial assistance for your nonprofit, we’re here to help!
Contact us to schedule a free consultation today.