Nonprofit Financial Statements Explained
Key Takeaways
Nonprofits are required to prepare four core financial statements: Statement of Financial Position, Statement of Activities, Statement of Cash Flows, and Statement of Functional Expenses.
The Statement of Financial Position shows your assets, liabilities, and net assets at a specific point in time, including funds with and without donor restrictions.
The Statement of Activities tracks revenue and expenses over a fiscal year and shows whether your organization ended the period with a surplus or deficit.
The Statement of Functional Expenses breaks down spending across program services, administration, and fundraising, and is required for Form 990 filers.
Your financial statements feed directly into your annual Form 990 filing and are reviewed by the IRS, your board, donors, grantmakers, and the public.
Nonprofit financial statements are the official records that show how your organization earns and spends money. This guide explains the four core statements every nonprofit should know, how to read them, and why they matter for compliance, donors, and long-term health.
Keeping track of your organization's finances can feel overwhelming when you're just starting out. But nonprofit financial statements don't have to be complicated. They're simply a set of documents that show where your money comes from, where it goes, and what your organization owns or owes.
Understanding these statements helps you stay compliant, build donor trust, and make smarter decisions for your mission. If you're still working through the steps to get your organization off the ground, the Nonprofit Compliance Checklist: What Every Founder Needs to Know is a good place to start.
What Nonprofit Financial Statements Are Required?
Quick Answer
Most nonprofits are required to prepare four core financial statements: the Statement of Financial Position, the Statement of Activities, the Statement of Cash Flows, and the Statement of Functional Expenses. The last one is required for voluntary health and welfare organizations and any nonprofit that files Form 990 with the IRS. Together, these four documents give a complete picture of your organization's financial health.
Statement of Financial Position
The Statement of Financial Position is the nonprofit equivalent of a balance sheet. It shows what your organization owns (assets), what it owes (liabilities), and what's left over (net assets) at a specific point in time.
Think of it this way: if your organization has $50,000 in a bank account and $10,000 in outstanding bills, your net assets are $40,000.
Net assets are divided into two categories:
- Without donor restrictions: Funds your organization can use for any purpose
- With donor restrictions: Funds that must be used for a specific purpose or time period set by the donor
This distinction matters for accountability. Donors and grantmakers want to know their contributions are being used as intended. The Financial Accounting Standards Board (FASB) sets the accounting standards that govern how nonprofits report these categories.
Statement of Activities
The Statement of Activities is similar to an income statement for a for-profit business. It shows your revenue and expenses over a specific period, usually a fiscal year.
Revenue includes donations, grants, program fees, and investment income. Expenses are broken into two categories:
- Program expenses: Money spent directly on your mission
- Supporting expenses: Administrative and fundraising costs
The difference between your total revenue and total expenses shows whether your organization ended the period with a surplus or a deficit. Neither is automatically good or bad, but understanding the trend over time helps you plan ahead. Good nonprofit bookkeeping practices make this statement much easier to prepare accurately.
Statement of Cash Flows
The Statement of Cash Flows tracks the actual movement of money in and out of your organization. Even if your Statement of Activities shows a surplus, your organization could still run into cash flow problems if donations come in slowly or expenses hit all at once.
This statement breaks cash activity into three areas:
- Operating activities: Day-to-day income and expenses
- Investing activities: Purchases or sales of long-term assets like equipment
- Financing activities: Loans received or repaid
Reviewing this statement regularly helps you avoid surprises and keeps your operations running smoothly. Pairing it with a solid nonprofit budget helps you anticipate cash needs before they become a problem.
Statement of Functional Expenses
The Statement of Functional Expenses provides a detailed breakdown of how your organization spends money across different functions. It separates costs into three columns:
- Program services
- Management and general (administrative)
- Fundraising
This statement is required for voluntary health and welfare organizations under FASB ASC 958. It is also required for any nonprofit that files Form 990 with the IRS.
Why does it matter? Because it shows donors and regulators exactly how much of your budget goes toward your mission versus overhead. A high percentage of program expenses is generally seen as a positive sign of efficiency. If you're unsure how to categorize your expenses, nonprofit recordkeeping habits can make this process significantly easier.
How These Statements Connect to Your Form 990
If your nonprofit has gross receipts above $50,000, you're required to file a Form 990 with the IRS each year. The financial data in your Form 990 comes directly from your financial statements.
Here's how they connect:
| Financial Statement | Where It Appears on Form 990 |
|---|---|
| Statement of Financial Position | Part X (Balance Sheet) |
| Statement of Activities | Part VIII (Revenue) and Part IX (Expenses) |
| Statement of Functional Expenses | Part IX (Statement of Functional Expenses) |
| Statement of Cash Flows | Supporting schedules |
Filing an accurate Form 990 depends on having well-organized financial statements throughout the year, not just at tax time. If your organization is small and has gross receipts under $50,000, you may qualify to file the simpler Form 990-N (e-Postcard) instead.
Who Needs to See Your Financial Statements?
Your financial statements aren't just for internal use. Several groups have a legitimate interest in reviewing them:
- Your board of directors: They have a fiduciary duty to oversee your finances and should review statements regularly
- The IRS: Through your annual Form 990 filing
- State agencies: Many states require financial reports as part of charitable solicitation registration or annual reporting
- Donors and grantmakers: Foundations and major donors often request financial statements before awarding grants
- The public: Form 990 is a public document, and many donors look it up before giving
Transparency is one of the most valuable things a nonprofit can offer. Keeping your financial statements accurate and up to date protects your organization and builds the trust you need to grow. For more on staying current with your obligations, the Nonprofit Compliance Checklist covers the key requirements in one place.
What Comes Next
Financial statements are one part of a broader picture of nonprofit health. Once you understand what each statement shows and why it matters, you're in a much better position to manage your organization responsibly and grow your impact over time.
If you're still in the early stages, start by building good bookkeeping habits from day one. Clear records make every financial statement easier to prepare and every audit or review less stressful.
And if you haven't yet completed your formation, the guide on How to Form a Nonprofit Organization in 8 Steps walks you through the full process, including incorporation, EIN registration, and applying for tax-exempt status. Beacon is here to help you move forward with clarity at every step.
Frequently Asked Questions
Most nonprofits need four core financial statements: the Statement of Financial Position, the Statement of Activities, the Statement of Cash Flows, and the Statement of Functional Expenses. The Statement of Functional Expenses is specifically required for voluntary health and welfare organizations and any nonprofit that files Form 990 with the IRS.
Not exactly. The Statement of Financial Position serves a similar purpose to a balance sheet, showing what your organization owns and owes. But nonprofits use different terminology and report net assets instead of equity, since they don't have shareholders or owners.
Your board of directors, the IRS, state agencies, donors, and grantmakers may all review your financial statements. Form 990, which draws directly from your financial statements, is also a public document that anyone can look up.
Small nonprofits with gross receipts under $50,000 may be able to file Form 990-N instead of the full Form 990, which reduces some reporting requirements. However, maintaining accurate internal financial records is still a good practice regardless of size.
The data in your financial statements feeds directly into your Form 990. The Statement of Financial Position maps to Part X (Balance Sheet), the Statement of Activities maps to Parts VIII and IX (Revenue and Expenses), and the Statement of Functional Expenses maps to Part IX as well.
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