We have often faced questions from our nonprofit accounting clients regarding how they can define Net assets for their financial accounting. What should we count as an asset or liability, and how can we calculate our Net Assets? So here we are writing the basics of financing Non-profit accounting, which is net assets. Let’s understand what it is. 

What is Net Asset?

Net assets are essential factors in measuring your nonprofit organization’s financial value. Gaining financial visibility for your nonprofit accounts is a must. How can you know about it? Well, you have to ask these questions to define your organization’s net assets. 

• What assets do you have?
• What liabilities do you have?
• What is your net worth?

By answering these questions, you should be able to make informed decisions and plan your future effectively. Here below, we will explain these questions in detail.

What assets do you have?

Assets are defined as things your nonprofit organization holds. They include tangible items such as cash, investments, furniture, and real estate property. You also have to count on intangible items as accounts receivable, such as donations and unpaid invoices. To learn not-for-profit organization accounting, first, you need to understand your assets! Let’s learn more about accounts receivable.

What liabilities do you have?

Liabilities are what you owe, including unpaid bills, accounts payable, and other financial obligations like credit card payments, loans, mortgages, tax withholding, and so on. As a nonprofit organization, you should look for liabilities and better understand them to manage cash flows and long-term financial stability! Now, you might be wondering about accounts payable. Let us help you know it.

What is your net asset?

Net asset is your net worth. To calculate your net assets, deduct the liabilities from your assets: 

Net Assets = Assets – Liabilities 

It represents a clear image of your organization’s financial worth. But hey, is it the same for Nonprofits? Let’s differentiate this. 

Understanding net assets in Nonprofit Vs. For-Profit

In simple words, in for-profit organizations, net profit is distributed amongst the shareholders as equity, whereas in nonprofits, the remaining balance is reinvested in noble causes to expand their work and continuous impact.

How to categorize Net Assets for Nonprofits?

Net assets can be categorized for nonprofits in two ways: With restrictions and without restrictions.

• Net Assets With Restrictions

Obviously, it is easy to understand that with restrictions, these assets abide by the specific donor conditions on how they can be used. For instance, if a donor says I want this donation to be used on this particular project, it will fall under this category! 

Restricted net assets are further divided into two subcategories:

• Temporarily Restricted Net Assets: These assets are restricted for a specific period or purpose. Once the restriction is met (e.g., the project is completed or the time has passed), the assets become “unrestricted.”
• Permanently Restricted Net Assets: These are funds that must be maintained in perpetuity. Often tied to endowments, only the income generated from these assets can be spent, while the principal must remain intact.
  
  

Key Characteristics of Restricted Net Assets:

• Purpose-Driven: Restricted funds must be used according to the donor’s specified purpose. Misuse of these funds can result in legal consequences and a loss of donor trust.
• Time or Project Bound: Some restrictions expire after a certain time, or when the funds have been used for their designated purpose.
• Transparency: Nonprofits must carefully track restricted funds and ensure accurate reporting to donors and regulatory bodies.
• Net Assets Without Restrictions

It is clear that these net assets have no stipulations or conditions on their receipt from the donors. They can be spent however the organization wants. This flexibility is crucial to meeting general operating expenses and responding to unexpected needs. 

Key Characteristics of Unrestricted Net Assets:

• Flexibility: Nonprofits can allocate these funds wherever they are most needed. This flexibility is vital for covering operational costs or addressing unforeseen challenges.
• Operational Stability: Unrestricted net assets can act as a financial buffer, ensuring that the organization can continue its work even when faced with fluctuating income from donations or grants.
• Revenue Sources: Unrestricted net assets typically come from general donations, program revenues, fundraising events, or investment income that is not subject to donor restrictions.

How Net Assets are Reported on Form 990, Part XI :

Form 990 is the annual information return that tax-exempt organizations file with the IRS. It provides a detailed snapshot of a nonprofit’s financial activities, including revenue, expenses, and net assets. Part XI of Form 990, titled “Reconciliation of Net Assets” focuses specifically on the reconciliation between the nonprofit’s financial statements and the reporting of net assets.

Part XI: Reconciliation of Net Assets:

Part XI provides a step-by-step calculation to reconcile the changes in net assets or fund balances from the beginning to the end of the year. This ensures consistency between the nonprofit’s financial statements and the data reported on Form 990. Here’s how it works:

1. Revenue (from Part VIII, Line 12)

This line captures the total revenue of the organization for the year, as reported in Part VIII, Line 12 of Form 990. This includes contributions, grants, program service revenue, investment income, and any other revenue streams the nonprofit has during the year. It is the starting point for understanding how much income the organization generated.

2. Expenses (from Part IX, Line 25)

This line reflects the total expenses incurred by the nonprofit throughout the year, as reported in Part IX, Line 25. It includes program expenses, management and general expenses, fundraising costs, and any other expenditures. This amount is subtracted from the total revenue to calculate net income or net loss for the year.

3. Revenue Less Expenses (Net Income)

This is the result of subtracting total expenses from total revenue. It shows whether the nonprofit had a surplus (positive number) or a deficit (negative number) for the fiscal year.

4.Net Gains or Losses on Sales of Assets

This line captures gains or losses from the sale of assets, which are not considered part of regular operational revenue but still affect the organization’s net assets. If the organization sold any investments, property, or equipment at a gain or loss, those amounts are reported here.

5. Other Adjustments

This section allows for reporting of other adjustments that affect net assets but don’t directly fall under revenue or expenses. Examples may include:

• Changes in accounting policies or methods
• Corrections of prior period errors
• Adjustments due to mergers or restructuring

This line ensures that the reported changes in net assets are as accurate as possible.

6. Net Assets or Fund Balances at the Beginning of the Year

This line shows the net assets at the start of the fiscal year, typically carried over from the prior year’s Form 990. It includes the total of unrestricted, temporarily restricted, and permanently restricted net assets.

7. Net Assets or Fund Balances at the End of the Year

This line reports the net assets at the end of the fiscal year after all changes (revenue, expenses, gains, losses, and adjustments) are factored in. It shows the final financial position of the organization at year-end, which is also reported on the Statement of Financial Position in the nonprofit’s financial statements.

The sum calculated on Line 7 represents the nonprofit’s total net assets at year-end, comprising both unrestricted and restricted funds. It must match the corresponding figures on the nonprofit’s financial statements to ensure consistency between IRS reporting and internal financial records.

Financial position Statement

Now comes the conclusion, where your organization’s assets, liabilities, and net assets can be declared as a statement of financial position. This statement represents the overall scenario of your nonprofit organization’s financial health at a certain point in time.

What does a Change in net assets mean?

When you refer to the statement of activities, you might come across the line item “Change in Net Assets.” It shows the difference between your income and expenses for a specific period. For-profit organizations, this is known as “Profit.” Knowing this at certain times is a challenge when assessing your nonprofit’s financial performance in a timely manner. 

Net assets for nonprofit organizations

By understanding the points mentioned above, you fully understand that Net assets are a fundamental indicator for nonprofit organizations. Knowing your assets, liabilities, and net assets, you can make informed decisions supporting the organization’s mission and long-term goals. One should regularly review these financial statements and monitor them to navigate the organization through any financial challenges and identify growth opportunities. If you are a busy nonprofit organization finding it hard to keep an eye on the statements, manage accounts, or are feeling frustrated, we hear you. Ask any questions related to nonprofits, and we will put our hats on for your duty! Explore Nonprofit accounting here.