How to Use Nonprofit Balance Sheets & Other Related Questions

Clear and careful financial planning and documentation in your nonprofit organization is a bedrock of its long-term financial security and sound financial decision-making, and your nonprofit balance sheet is one of the most important financial statements you’ll prepare. 

A nonprofit balance sheet, similar to a statement of financial position, is a list of your organization’s assets, liabilities, and net assets (“net assets” is used rather than “owner’s equity” in a nonprofit balance sheet). This information represents the total of all of the annual surpluses and deficits your organization has declared over its history, and its liquidity.

As well as serving as a gauge of the financial position of your organization, an accurate and up-to-date nonprofit balance sheet is an essential part of applying for 501(c)(3) tax exemption status. So, how do you create a balance sheet and use it to its full advantage?

How to Create a Balance Sheet

Creating and maintaining a balance sheet is a key part of nonprofit bookkeeping and accounting and one that requires frequent attention. Each nonprofit may have its own method to stay on top of its financial position, but the main thing is to use a method that works for your organization.

For new nonprofits, software such as QuickBooks Online can help with the process. You can also find excellent free templates online to help you start, or use third-party bookkeeping services to ensure that your finances are always up to date.

What Are the Essentials of a Balance Sheet?

Your organization's balance sheet reflects the current situation of the nonprofit’s:

• Assets (what the organization owns)

• Liabilities (what the organization owes)

• Net Assets (your organization’s equity or capital)

To be balanced, the nonprofit balance sheet must conform to the rule: Assets - Liabilities = Net Assets. Your net assets will equal your total assets minus liabilities. However, you will still specify your net assets according to their source and any restrictions placed on their use to ensure that contributions are spent in the right manner.

Assets

Start with the organization's assets: what the organization receives or will be paid. This is split into three subsections:

• Current assets

• Fixed assets

• Other assets

Current Assets

This subsection includes:

• What is in your bank account

• Your investment accounts

• Petty cash

• Prepaid expenses

• Merchandise you own for future use

Fixed Assets

The following are included in the fixed assets subsection:

• Furniture and equipment owned by the organization

• Improvements made to a facility

• The accumulated depreciation of assets you own

Other Assets

• Long-term investments: both unrestricted and temporarily restricted funds

Liabilities

Liabilities must be listed in terms of priority. There are two types:

• Current liabilities

• Long-term liabilities

Current Liabilities

Current liabilities involve your everyday operational costs.

• Your organization's accounts payable: raw materials, energy bills, leases, licenses, and subcontracting

• Accrued expenses: salaries, rent, and interest owed on loans

• Deferred revenue: startup costs, advertising, and insurance

• Refundable advances: grants or donations that must meet certain conditions (such as donor restrictions) before they are considered revenue

• Lines of credit

• Loan payments

Long-Term Liabilities

Long-term, in this case, means expenses that aren't due within the next twelve months. Long-term liabilities include:

• Bonds

• Mortgages

• Loans with a duration of more than one year

Net Assets

The net assets section (also referred to as retained earnings, equity, or fund balance) needs to be divided into:

• Unrestricted funds

• Temporarily restricted funds

• Permanently restricted funds

Unrestricted Funds

Unrestricted funds are those that can be spent however the organization sees fit.

Temporarily Restricted Funds

Temporarily restricted assets or funds are those that are earmarked by the donor for a specific purpose and cannot be used for anything else. Sometimes, temporarily restricted funds are subject to a time limit; after this time has elapsed, funds become available to spend freely.

Permanently Restricted Funds

These typically relate to a large donation that is given to the organization to generate interest, though the original sum of the donation isn't to be spent. The interest earned on the donation can be spent on whatever the organization decides.

How To Keep Your Balance Sheet Up To Date

Keeping your balance sheet updated is one of the most important daily tasks in your nonprofit organization. To ensure an accurate and updated balance sheet:

• Make a bookkeeping checklist that includes your daily, weekly, monthly, and yearly obligations, and stick to them.

• Consider hiring an expert to help with accounting.

• Use accounting software such as QuickBooks to automate and simplify accounting functions, including the Balance Sheet Report. QuickBooks training can help to get your team off to a great start.

FAQs: Nonprofit Balance Sheets

Here are answers to some of the most frequently asked questions about nonprofit balance sheets.

Q: How can a balance sheet help a nonprofit in its financial planning?

A: A balance sheet can help a nonprofit get a clear idea of its cash flows and financial position, allowing for better financial planning. This, alongside your nonprofit operating budget, will help you plan for a sustainable financial future.

Q: Do you need to file your balance sheet with your annual nonprofit return?

A: A balance sheet must be included when filing a Form 990, and must be included in your annual reports.

Q: What can I use a nonprofit balance sheet for?

A: You can use a nonprofit balance sheet for filing taxes, applying for grants, when speaking to potential donors, and for keeping board members and donors informed.

Q: Do I need a balance sheet to apply for tax exemption?

A: Yes, your nonprofit is legally required to keep financial books and records—such as a balance sheet—to apply for tax-exempt status under Section 501. The form that you’re required to submit depends on the nature of your nonprofit organization:

• Form 1023, for exemption under Section 501(3): forcharitable, religious, and educational nonprofits

• Form 1024-A, for exemption under Section 501(4): for social welfare nonprofits

• Form 1024, for exemption under Section 501(a): for other nonprofit or tax-exempt organizations

Tax laws may be different from state to state. Whether your nonprofit is located in Jacksonville, Florida, or Seattle, Washington, you need to be aware of your own state’s tax rules when you apply for tax-exempt status and for all other finance-related matters.

Q: Does the IRS or Financial Accounting Standards Board have access to a nonprofit's balance sheet?

A: The IRS needs a current or projected idea of your financial status when applying for tax exemption status. Your balance sheet will also be required when filing the 990 tax form.

Nonprofit Balance Sheets: A Non-Negotiable for Sound Financial Planning

Whether you choose to complete your balance sheet by hand, using QuickBooks, or with the help of an accountant, an accurate and up-to-date balance sheet is a key part of your organization’s financial planning. A balance sheet should be seen as not only a legal obligation but as a tool to help you plan your organization’s financial future the best you can.

Though free templates exist that can help you in creating your first balance sheet, when in doubt, turn to an expert, or try out an accounting software that takes care of calculations and reports. Once your balance sheet is set up correctly and you have a system for keeping it up-to-date, you’ll have a much clearer idea of where your organization’s finances stand and can focus on moving forward with your mission.