Nonprofit entities contribute large amounts of time, effort and money to support a myriad of causes. Donations from individuals, governments and businesses help sustain these organizations so they may continue to do good works. To make sure funds are handled appropriately, nonprofits must maintain financial records, including a balance sheet to record all of their assets and liabilities and have a supportable record of their equity.
Several differences exist between for-profit and nonprofit companies. Some advantages of nonprofit organizations are tax exemptions and deductions for qualified charities based on IRS guidelines. Limited liability and the ability to solicit donations to support their projects are some of the other benefits.
Some disadvantages of nonprofit business structures include the necessity of keeping diligent tax records for donation receipts and expenditures, and the lack of control by the founder(s) since nonprofits may be required by state law to have a board of directors. Nonprofits must also be held to certain rules and regulations, and financial statements must be made available for the public to review and scrutinize.
Balance Sheet Differences
The balance sheet of a nonprofit entity is called a "statement of financial position." Additionally, since a nonprofit organization has no owners, the owner’s equity or shareholder’s equity is instead called "net assets."
The accounting equation of assets minus liabilities equals net assets applies to nonprofits, as it does in for-profit companies. In other words, when a nonprofit subtracts all its liabilities from its total assets, whatever remains are the entity’s net assets.
Net assets are divided into three categories for nonprofits, designated by the person or entity making the donation. The first category is unrestricted assets, which can be spent or used for any expenses or projects the nonprofit chooses. Temporarily restricted assets may be reserved for use under specific conditions, such as during a certain time period, and permanently restricted funds are designated for specific projects and not available for any other use.
Assets and Liabilities
The assets and liabilities of a nonprofit are not much different from those of a for-profit company. Typical assets of a nonprofit entity include buildings, land, cars, furniture and office or other equipment. Additionally, inventory, cash, accounts receivable, security deposits and investments are other asset types that may be found on a nonprofit entity’s statement of financial position.
Some typical nonprofit liabilities include accounts payable, accrued expenses such as payroll, installment payments for equipment, short- or long-term loan balances including mortgages, and unearned revenue for services yet to be performed.