This is one of the last documents to be prepared by a nonprofit organization but the first that we will take up here. This is because we want to have a bird’s eye view and this reverse engineering will exactly do that for us.
Simply put, a balance sheet is a statement of Assets and liabilities of an organization.
Liabilities are also called the ‘source of funds’
Assets are called ‘Uses of funds’
If a nonprofit organization receives a donation – it has to honor some performance in return to the donor. Thus donation is a ‘liability’ or a ‘source of fund’.
Now if the organization purchases a lorry out of the donation – it becomes the Asset of the organization and is therefore ‘Use of funds’
By common sense an organization (or for that matter any one) can only spend what it has got.
Thus ‘Source of Fund’ should always be equal to the ‘Uses of Funds’ + ‘Unused funds’ or
By accounting convention and to maintain homogeneity, ‘Source of funds’ is always written on the left side and ‘uses of funds’ is written to the right in the balance sheet.
Putting this in a tabular format we get the most preliminary balance sheet.
|Source of funds (Liabilities)||Uses of Funds (Assets)|
|Listing of all fund sources||Listing of all assets purchased out of those funds (if funds are used for a purpose other than for building assets – say for e.g funds used for salary etc.. they are not to be listed here but somewhere else.(discussed later)
What follows is a sample balance sheet of a typical nonprofit organization –
Balance Sheet for ABC Nonprofit as on 31st December, 2008
|Source of funds (Liabilities)||$||Uses of Funds (Assets)||$|
Long Term Debt
|Long term Assets
|Short-term Liabilities/ Sources
|Short Term Assets
Cash + Bank balance
U.S. Treasury bonds
Net Assets (unused funds)
The net effect – Sources of Funds = Uses of Funds + Unused funds (Net Asset)
Liabilities = Assets
Meaning of terms used here –
Balance Sheet Assets
Cash - Liquid funds or funds in the form of U.S. Treasury bonds or deposit in the bank.
Pledges/ Grants receivable - These are amounts committed by an external donor to the organization. Pledges or grants should be recorded as the amount the nonprofit expects to receive or the net realized value. Nonprofits should not report the full or gross amount because the line item could be overstated.
Prepaid expenses - These are expenses incurred in advance for receiving goods, services, or benefits for the nonprofit organization. The value of such assets decline over a period of time as and when the benefits are consumed by the organization.
Investments- Organization’s investment in stocks and bonds are mentioned under this category. The investments are recorded at their fair market value on the date of preparation of the financial statements. However, when filing the tax return, this can the amount can be the fair market value or historical cost whichever is lower.
Fixed assets - all property and equipment owned by the organization are mentioned under this category. Fixed asset are reported at the net book value of the assets and not at the fair market value of the asset because fixed assets are generally not sold.
The net book value is the historical cost of the long-term assets minus depreciation.
Balance Sheet: Liabilities
Accounts payable – Amounts payable to vendors and creditors for goods or services delivered to the organization are mentioned under this head.
Grants payable - These are grant/donations promised by the nonprofit organization to other organizations or individuals.
Deferred revenue /Refundable advance – This category includes those grants/donations that have been received but are still not considered or recognized as revenue because the donor’s conditions for the grant have not been met.
Dues to third parties - These are amounts payable to another organization where the nonprofit organization merely acts as a transfer agent collecting donations from the donor and disbursing the funds to another group. As the organization merely acts as an intermediary and does not have any power to change the recipient of the funds, such amounts are considered liabilities.
Long term debt – Debts taken for a period longer than one year and includes long term bank loans, publicly traded bonds, or privately arranged debt financing.
Balance Sheet: Net Assets
Net assets are simply the unused funds represented by the difference between the total assets and total liabilities of the balance sheet. As per legal reporting requirements all net assets must be classified into three categories –
Unrestricted Net Assets – Funds unrestricted by the donor as to its terms and condition of usage.
Temporarily restricted – Funds whose usage is limited by donor stipulations. These stipulations are temporary in the sense that the restrictions can either be removed by performing certain actions or can automatically expire over a certain time period.
Permanently restricted – Funds where restrictions do not get removed or expire over a period of time. For instance – Planned giving endowments which restrict the usage of the funds into perpetuity could be classified as permanently restricted.