Stakeholders in nonprofit organizations require annual financial statements to evaluate the progress of the organization for a reporting period. These financial statements communicate the activities the nonprofit engaged in throughout the period and the financial position of the nonprofit at the end of the period. The nonprofit reports income and expenses on the statement of activities.
Statement of Activities
The statement of activities communicates all of the revenue earned by the nonprofit and all of the expenses incurred during the period. The statement of activities lists the revenues first and calculates a total. The expenses come next and are totaled. The total revenue minus the total expenses determines the change in net assets, or the excess of assets over liabilities. The nonprofit adds the change in net assets to the beginning balance of net assets and calculates the ending net asset balance.
Income received by a nonprofit includes several categories, such as contributions, membership dues, fundraising or grants. Contributions are funds donated from individuals or corporations. Membership dues refer to money received from individuals who join the nonprofit in exchange for the services offered by the organization. Fundraising events bring income to the organization. Grants bring money from the government and private entities to the nonprofit. Nonprofit income may be classified as support, revenues or reclassifications. Reclassifications refer to changes in the status of certain net assets. For example, nonprofits hold certain net assets for a predetermined purpose. When the restriction of using these net assets for this purpose lifts, the net assets convert to unrestricted net assets and are reported as income.
Expenses refer to the funds used to manage the program and provide services. Program or service expenses are the expenses incurred to provide benefits for the clients of the nonprofit. For example, a pregnancy counseling service includes the wages of its counselors as a program expense. Funds used to manage the program, also called supporting service expenses, refer to the administrative costs necessary to manage the nonprofit. For example, the cost of hosting a fundraising event is a supporting service expense.
Change In Net Assets
Nonprofits do not report a net income the way for-profit businesses do. These organizations focus on furthering their missions -- not growing profits. However, nonprofits do need to increase their income to meet the financial cost of servicing their clients. These organizations report a change in net assets, which represents the increase in funds available to meet the financial burden of the organization.