Financial Statement Series
Throughout this series, we’ve established that FASB Statement 117 sets the minimum reporting standards for nonprofit organizations. The balance sheet is not part of those requirements, but is still a useful statement. The nonprofit version is the statement of financial position which is a balance sheet with net assets reported by restriction. We will look at the specifics of the statement of financial position next time. Looking at the balance sheet first will be a good primer.
Smile for the Camera
A balance sheet is a snapshot of an organizations assets, liabilities, and net assets. Because the statement is looking at different accounts than the revenue statement or the statement of activities, a different format is required. The key principle is that the statement represents totals as of the date issued, not a range of time. A balance sheet for December 31 reports on the financial position that date.
In its simplest form, the balance sheet lists assets and liabilities and subtracts the two to calculate total net assets. The balance derives its name from a basic accounting equation:
Assets=Liabilities + Equity
The equation always balances.
Like the other statements, the balance sheet will have a heading and a body. Some balance sheets are laid out in a side-by-side manner with assets on one side and liabilities and equity on the other. This makes it easy to see that both sides equal, or, yes, balance.
A vertical layout is another choice with assets listed first, then liabilities, then net assets or equity.
Assets are the things you own or what is owed to you. Assets are listed in order of liquidity. Liquidity is how close the asset is to cash, with cash, of course, being the most liquid. Securities that can be converted to cash very quickly are more liquid than a building and slightly less liquid than cash. Current assets are those assets which can be converted to cash within one full reporting cycle, most likely one year.
Next down the list would be less liquid assets such as accounts receivables or inventory. Long term assets are property, plant, and equipment as well as goodwill and long-term investments.
Liabilities are listed next. Liabilities are what you owe. They are listed in the order in which they come due. Just as for assets, liabilities are short-term and long-term.
Finally, the equity is listed. In the for-profit world, shareholder equity is the term used. Since there are no shareholders in the not-for-profit world, we use the term net assets. The simplest calculation is assets less liabilities equal net assets. It has to work out that way. It is a balance sheet, after all. Refer to the basic equation above. You get the math.
The Final Note
The balance sheet reports the financial position of the whole organization at a point in time. Readers can see what the organization owns and what it owes. These amounts may be used in financial ratios for further analysis. No one financial statement tells the entire story. The balance sheet is just part of the package. Next time we’ll look at the statement of financial position and its importance to a nonprofit organization.
Click here to read the previous article in this series.