One of the key differences between for profit and nonprofit accounting is the presentation of net assets on the balance sheet. In the nonprofit world, it is not called a balance sheet, but a Statement of Financial Position.
Nonprofit Net Assets Explained
The presentation of assets and liabilities is the same for both types of businesses, but the balance sheet for a for profit businesses shows Owner’s Equity which is made up of Retained Earnings and Stock. But, since a nonprofit doesn’t have owners, there is no Owner’ Equity. So, the difference between assets and liabilities is called Net Assets.
The calculation of Retained Earnings and Net Assets is essentially the same – The cumulative difference between revenue and expenses. But, the nature of nonprofit revenue requires that revenue be designated as either without donor restrictions, or with donor restrictions.
Two New Classes of Net Assets
These two classes of net assets must be presented on a nonprofit’s financial statements starting in 2018.
Before, there were three classes of net assets:
So the new With Donor Restrictions net asset classification combines the two restricted net assets.
The new presentation of the Statement of Financial Position is meant to simplify the treatment of net assets by focusing on the existence or absence of donor imposed restrictions, as opposed to the types of restrictions.
In nonprofit accounting, if a donation is made that has no restrictions, it is classified as Without Donor Restrictions and the nonprofit can then use the donation for whatever purpose it needs to fulfill its mission.
But, for donations that are made for a specific purpose, such as a donation to purchase equipment for a medical clinic, the revenue is classified as With Donor Restrictions.
Simplifies Reporting of Net Assets
As a nonprofit accountant, you will still have to track net assets and comply with any restrictions imposed by donors; however, there is no longer a requirement to distinguish between temporarily and permanently restricted net assets.
The new financial statement presentation will provide better information to donors, grantmakers and creditors, plus it will reduce the complexities and costs of financial reporting.
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Also published on Medium.