Nonprofit financial statements include the Statement of Financial Position, Statement of Activities, Statement of Cash Flows, and Statement of Functional Expenses. Together, they show what an organization owns and owes, how money comes in, and how it is used.
If you lead a nonprofit or serve on its board, you are responsible for money that other people trusted you to use well. Most executive directors and board members are not accountants, and few get much guidance when the finance packet lands in front of them.
Financial statements can feel intimidating simply because the language is unfamiliar. A balance sheet becomes a Statement of Financial Position. Profit becomes change in net assets. And donor restrictions show up in ways you would never see in a for-profit report. When a term trips you up, our nonprofit accounting glossary has a quick definition.
This guide walks through each one in plain English. By the end, you should be able to read each statement, understand how they connect, and know what to look for when the next board packet arrives.
Key takeaways
- Nonprofits use four core statements: the Statement of Financial Position (balance sheet), Statement of Activities (income statement), Statement of Cash Flows, and Statement of Functional Expenses.
- A Form 990 is an IRS information return, not a set of financial statements. The numbers can legitimately differ between the two.
- The IRS does not require audits. Audit requirements come from funders, state law, and federal award spending: for example, California requires an audit at $2 million or more in gross revenue, and expending $1 million or more in federal awards triggers a single audit.
- The fastest board check takes two numbers: months of cash on hand and the trend in net assets without donor restrictions.
Why Financial Statements Matter for Your Nonprofit
Financial statements do two jobs. First, they show leadership how much money is actually available to spend. Second, they show donors, funders, and other stakeholders that the organization can be trusted with the money it receives.
“Good financial statements should make it easier to run the organization. If the board can’t tell what’s available, what’s restricted, or where the money is going, the reports aren’t doing their job.”
Van Haas, CEO of Accountix
Clear reporting, backed by solid nonprofit accounting, gives donors and funders a clearer reason to trust how your organization manages its money.
The Four Core Nonprofit Financial Statements
Most nonprofits that prepare GAAP-basis financial statements produce four core reports. Each answers a different question, and each has a rough for-profit cousin, which makes the set easier to learn than it first appears. The rest of this guide walks through them one at a time.
| Nonprofit statement | For-profit equivalent | The question it answers |
|---|---|---|
| Statement of Financial Position | Balance sheet | What do we own and owe right now? |
| Statement of Activities | Income statement | Did we gain or use up resources this year? |
| Statement of Cash Flows | Cash flow statement | Where did cash actually come from and go? |
| Statement of Functional Expenses | No direct equivalent | How much went to programs vs. administration vs. fundraising? |
1. The Statement of Financial Position
The Statement of Financial Position is your nonprofit's version of a balance sheet. It shows what you own (assets), what you owe (liabilities), and what remains (net assets) on a specific date.
If you have ever looked at a for-profit balance sheet, the top half will feel familiar: cash, receivables, equipment, payables, debt. The difference comes at the bottom. A company reports owner's equity; a nonprofit reports net assets.
Under current GAAP, specifically FASB ASU 2016-14, nonprofits report net assets in two categories: with donor restrictions and without donor restrictions.
The idea is pretty straightforward. If a donor gives $10,000 and says, "use this for the after-school program," that money stays restricted until you use it for that purpose. If the same donor gives $10,000 with no restrictions, you can use it for rent, salaries, or whatever else the organization needs.
One thing to watch: money your board sets aside for a project is board-designated, not donor-restricted, so it still falls under net assets without donor restrictions, but should be separated out to maintain clarity. Our guide to tracking designated and restricted funds explains how to keep the two straight.
2. The Statement of Activities
The Statement of Activities is the nonprofit version of an income statement. It shows the revenue that came in, the expenses you incurred, and the resulting change in net assets over a period of time.
Like the Statement of Financial Position, it separates activity with donor restrictions from activity without them. A restricted grant, for example, appears as revenue in the with-restrictions column when it is awarded.
Then comes the part that confuses a lot of new board members: releases from restriction. When you spend restricted money for its intended purpose, or a time restriction expires, that amount moves from the with-restrictions column to the without-restrictions column. No new money came in. It is simply being reclassified because the restriction has been satisfied.
Two other things are worth knowing. First, these statements use accrual accounting, so a written pledge may show up as revenue before the cash arrives. Second, a surplus is not a bad thing. A positive change in net assets helps build the reserves that can carry your organization through a slow fundraising year, and healthy nonprofits plan for that.
3. The Statement of Cash Flows
The Statement of Cash Flows answers the question: where did the cash actually come from, and where did it go?
You need this statement because the Statement of Activities does not tell the whole cash story. A pledge can count as revenue before the check arrives. A restricted gift can count as revenue even though you cannot use it for operations yet. Depreciation shows up as an expense even though no cash actually left the organization.
The statement is divided into three sections. Operating activities cover everyday cash from contributions, program fees, payroll, and bills. Investing activities cover cash used to buy, or received from selling, long-term assets like equipment and investments. Financing activities cover borrowing money and paying back debt.
For most small nonprofits, the operating section is the one to watch most closely. If it stays negative month after month, the organization is spending cash faster than it is bringing it in, no matter what the Statement of Activities says.
4. The Statement of Functional Expenses
The Statement of Functional Expenses shows what your spending supported, not just what you bought. It breaks expenses down two ways at once: by natural category (salaries, rent, supplies) and by functional category (the purpose that spending served).
The three functional categories are program services, management and general, and fundraising. The grid lets you see, for example, how much of your total salary expense supported programs versus administration or fundraising.
One detail that often gets missed: GAAP does not require every organization to prepare this as a standalone statement. What FASB ASU 2016-14 requires is an analysis of expenses by both natural and functional classification in one place: on the Statement of Activities, in a separate statement, or in the notes. For many organizations, a separate statement is simply the easiest way to present it clearly.
One thing to keep in mind during board discussions: rules of thumb like "80% must go to programs" are not regulatory requirements. Reasonable spending on administration and fundraising is part of running a healthy organization. Ratios can be useful context, but they are not a pass-or-fail test.
5. How the Four Statements Tell One Story
The four statements work together, not separately. Following one gift through each statement makes that relationship much easier to see.
Say a foundation awards your organization a $50,000 grant restricted to your youth program:
- Statement of Activities. The full $50,000 appears as revenue with donor restrictions in the period the grant is awarded, assuming it is unconditional.
- Statement of Financial Position. The money shows up as cash, or as a grant receivable if payment comes later, and net assets with donor restrictions grow by $50,000.
- Statement of Functional Expenses. As you spend, say, $20,000 on youth program staff and supplies, those costs land under program services. Back on the Statement of Activities, that $20,000 is released from restriction.
- Statement of Cash Flows. The cash appears under operating activities in the month it actually arrives, which may not match the month the revenue was recorded.
Now the cautionary version. Imagine a nonprofit with $300,000 in the bank. The Statement of Financial Position looks strong, until you notice that $250,000 of net assets carry donor restrictions, leaving $50,000 for payroll and rent.
The reverse happens too. We have written about a deficit that was not really a deficit, where an organization appeared to be losing money because restricted revenue had been recorded in an earlier year. Totals can hide the story, which is exactly why the restriction columns exist.
6. Financial Statements vs. Form 990: Not the Same Thing
A Form 990 is not the same thing as a set of financial statements. It is an annual information return that most tax-exempt organizations file with the IRS, while financial statements are prepared under GAAP for boards, funders, lenders, and other readers.
Because they follow different rules, the numbers will not always match exactly. One common example is donated professional services, which may appear as revenue in GAAP financial statements but are generally not reported the same way on the 990.
While it is not a financial statement, the 990 still plays an important role. Organizations that fail to file a required Form 990-series return for three consecutive years automatically lose their tax-exempt status. It is also public, which means donors, journalists, and others can read it. Just do not confuse filing a 990 with having financial statements.
7. When Does a Nonprofit Need an Audit?
The IRS does not require nonprofits to get an audit. Instead, audit requirements usually come from one of three places: funders, federal award spending, or state law.
Funders are often the first trigger. Many foundations and grantmakers require audited financial statements before they will award a grant, and some lenders do the same.
Federal awards are another trigger. If your organization expends $1,000,000 or more in federal awards during a fiscal year, it generally needs a single audit. That threshold applies to fiscal years beginning on or after October 1, 2024, up from the previous $750,000. The important word here is expended, not received. If you receive a multi-year award, it counts as you spend it.
State law can also require an audit. California's Nonprofit Integrity Act, for example, requires charities with $2 million or more in gross revenue to obtain an audit from an independent CPA, with certain government grants excluded from that threshold. The rules vary quite a bit by state, so it is worth checking the state law nonprofit audit requirements anywhere your organization is registered or fundraising.
If a full audit is not required, there are lighter options. A review provides limited assurance at a lower cost, while a compilation puts your numbers into financial statement format without providing assurance. Each option costs less than an audit, but it also carries less weight with funders.
8. What Your Board Should Look For
A board member does not need to read every line of the finance packet. Five quick checks catch most problems while they are still small:
- Months of cash on hand. Divide cash available for operations by average monthly expenses. In a Nonprofit Finance Fund survey cited by Independent Sector, about one-third (32%) of nonprofits reported less than three months of cash on hand, and at least three months is a widely used minimum.
- The trend in net assets without donor restrictions. This is your flexible cushion. A steady decline across several quarters is an early warning, even when the totals look fine.
- Reliance on a single funding source. The average nonprofit funding mix in 2024 was 50% private funding, 28% government, and 18% earned revenue, and concentration carries real risk: 33% of nonprofits reported at least one government funding disruption in early 2025.
- Receivables aging. Pledges and grants that sit uncollected for 90 days or more deserve a question at the next meeting.
- Timeliness. Financial reports should arrive on a predictable monthly schedule. Chronically late reports are a finding in themselves.
Good board-ready financial reporting makes these checks fast, because the answers sit on the first page instead of hiding in a spreadsheet. For a real-world example, read how WEV moved from manual accounting to strategic finance and gave its leadership numbers worth acting on.
How Accountix Helps Nonprofits
Accountix works with nonprofits every day, and financial statements are where all that behind-the-scenes work starts to show. Clean statements depend on clean books, so our nonprofit bookkeeping support focuses on getting restrictions, grants, and functional allocations right from the start.
From there, our outsourced accounting for nonprofits covers monthly close, financial statement preparation, restricted fund tracking, and reports your board can actually understand. If you are getting ready for a first audit or a major grant application, we can also help you put the GAAP basics for nonprofits in place before year end gets hectic.
The goal is simple: give the executive director a clear handle on the numbers and give the board confidence in what they are seeing.
FAQs About Nonprofit Financial Statements
What financial statements does a nonprofit need?
Most nonprofits that prepare GAAP-basis financial statements use four: the Statement of Financial Position, the Statement of Activities, the Statement of Cash Flows, and an expense analysis by function, often shown as a Statement of Functional Expenses. Organizations that do not need GAAP statements may use simpler internal reports, but this is the set funders and auditors typically expect to see.
Is a Form 990 the same as financial statements?
No. A Form 990 is an annual information return filed with the IRS, while financial statements are prepared under GAAP for boards, funders, and lenders. The numbers do not always match, and that can be perfectly normal because the two follow different rules.
What is a Statement of Activities?
The Statement of Activities is the nonprofit version of an income statement. It shows revenue, expenses, and the change in net assets over a period of time, with activity separated based on donor restrictions.
What are net assets with donor restrictions?
Net assets with donor restrictions are funds a donor has limited to a certain purpose or time period, such as a gift that can only be used for scholarships. Once that restriction has been satisfied, the amount is released and can be used more broadly.
Does a small nonprofit need an audit?
Not simply because it is a nonprofit. The IRS does not require audits, but a funder might, state law may set a threshold, or an audit may be required if the organization expends $1,000,000 or more in federal awards during a fiscal year. Many smaller nonprofits can meet funder requirements with a less expensive review or compilation instead.
What is a Statement of Functional Expenses?
It is a grid that shows expenses in two ways: by natural category, such as salaries, rent, and supplies, and by function, such as programs, management and general, and fundraising. GAAP requires this natural-by-functional breakdown somewhere in the financial statements, and a standalone statement is one common way to show it.
What should board members look for when reviewing financial statements?
Start with cash on hand and the trend in net assets without donor restrictions. Then look at whether the organization depends too heavily on one funding source, how old its receivables are, and whether financial reports arrive consistently each month. Those few checks can tell you a lot very quickly.
Final Thoughts
Nonprofit financial statements are easier to understand once you know what each one is trying to tell you. Together, the four reports answer four basic questions: what do we own and owe, did we gain or use up resources, where did the cash go, and how did our spending support the mission?
A good way to get comfortable with them is to follow one restricted gift from start to finish. After that, it mostly comes down to repetition. Read the packet each month, ask questions when something does not make sense, and treat clear financial reporting as part of running the organization well.
This article is for general education and does not constitute legal, tax, or accounting advice.
Want financial statements your board can actually understand? Accountix helps nonprofits keep clean books, produce clear reports, and feel confident in the numbers.
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