Nonprofit Statement of Activities: Comprehensive Guide, Template, and Tips for Success

Charity runs on finances, and finances run on accounting. For those new to nonprofit funding, the world of financial accounting can feel overwhelming. But breaking it into smaller, manageable pieces is the key to making sense of it all. Today, we’re diving into one of the most essential pieces: the nonprofit statement of activities. Let’s simplify it together!

What Is a Nonprofit Statement of Activities?

A typical nonprofit sees plenty of financial activity during a fiscal year—grants are awarded, fundraisers are hosted, donations are received, and expenses are paid. The nonprofit statement of activities serves as a financial summary, capturing all these monetary actions for a specific period, usually the fiscal year.

The statement of activities is a key financial report used by nonprofit organizations to provide an overview of their financial performance over a specific period. It is like an income statement for for-profit businesses but is tailored to the unique needs and structure of nonprofits.

What Should a Statement of Activities Include?

Revenue

First things first, a statement of activities needs to include information about all the revenue of the nonprofit. Revenue will generally include the following categories:

• contributions from donors;
• grants;
• investment income;
• program fees;
• membership dues; and,
• any other revenue sources.

When addressing revenue, it is critical to account for donor restrictions. Generally, nonprofits will report all their revenue into two categories - without donor restrictions and with donor restrictions. 

What’s the difference? Well, revenue that is without donor restrictions refers to funds that the nonprofit can use freely for absolutely any purpose related to the organization’s mission. These funds are free from any external restrictions and available for general use. Sources of unrestricted funds include revenue from general donations, membership fees, or grants that came without specific instructions. 

Revenue with donor restrictions refers to any funds that donors have designated to specific initiatives, which the nonprofit can’t use as freely. Apart from a donor’s request, there are other reasons funds might be restricted. It could be based on time — for example, a grant that is restricted to only a two-year program — or this could refer to endowment funds, where the principal can’t be spent, only the investment income. 

Generally accepted accounting principles dictate that these two categories must be clearly delineated and recorded differently. The nonprofit should also make it clear that funds are only being spent per the wishes of the donor.

Expenses

With revenues invariably come expenses. In a statement of accounts, expenses are generally organized into three broad categories:

• Program Expenses: These consist of any costs related to delivering programs. This could include paying for staff, materials, supplies, facility rentals, etc. 
• Fundraising Expenses: As expected, this refers to any funds spent in setting up a fundraiser. This could be anything from hosting events, paying fundraising staff, or buying donor tracking software.
• Management Expenses: The rest goes into management expenses. This refers to all the expenditures needed to keep the nonprofit itself operational, including items such as management salaries, accounting costs, legal fees, insurance expenses, etc. 

Change in Net Assets

The next component is the change in the organization’s net assets. This amount reflects whether revenue exceeded expenses (surplus) or fell short (deficit) for the year. 

Net Assets

Finally, information is provided about the organization's overall financial position at the beginning of the year and at the end of the year.

You can find the full example to review right here. 

Developing Insights from a Nonprofit Statement of Activities

Some might presume that the main reason to prepare a nonprofit statement of activities is simply to keep the IRS happy. That is an important reason. However, they also serve an incredibly important function within the nonprofit itself. Well-kept nonprofit accounting records help provide insights on the financial health of its own operations and help board members and leadership make strategic decisions. 

Revenue Diversification 

By homing in on the revenue section, the nonprofit can determine just how stable and secure revenue streams are. If a nonprofit realizes that it’s getting the majority of its revenue from just one source, it might be a good idea to start diversifying revenue. A diversity in revenue sources indicates greater resiliency. This information can also help a nonprofit determine which revenue strategies are their most and least effective. 

Expense Allocation

The section on expenses can be just as illuminating as that on revenues for a nonprofit. As we mentioned, expenses tend to be divided into programs, fundraising, and management. It’s good bookkeeping to check that high expenses in a particular area are intentional. These should also be compared to revenue - if high amounts of money are being put into fundraising, with minimal returns, a different strategy may be in order. 

Net Assets and the Surplus (Or Deficit) 

Investigating the net assets over a specific period of time is an important part of planning the operating activities of a nonprofit. Determining how much surplus you have is essential for gaining insight into what your options are for adding resources into programs or fundraising. A deficit, meanwhile, suggests there may need to be a hunt for new sources of funding or a reduction in costs. However, not all surpluses need to be spent— a prudent nonprofit can save them away for the proverbial rainy day. It’s also important to note that some assets may have more liquidity than others, which is good to keep track of in case of an emergency. 

Donor Restrictions

Since the statement of activities distinguishes unrestricted funds and restricted funds, you can get an idea of just how flexible your funding streams are. If most of your funding is restricted, you may want to either negotiate less restrictive terms or consider new forms of donations. 

Strategic Decision-Making 

There’s also the “big picture” to consider when you take into account multiple statements of activities. Over time you can start to chart trends. Has fundraising become more and more expensive over time? Are you drawing most of your revenue from a shrinking pool of donors? Paying closer attention to the statement of activities can help you spot problems early—and opportunities! 

Best Practices for Nonprofit Financial Statements

There are some best practices to keep in mind:

1. Regular Review and Updates

Since the statement of activities only needs to be prepared annually for the IRS, it's tempting to forget about it until tax season comes around. However, a lot can change within the year. It’s a good idea to revisit the statement of activities every quarter, or even every month, for an update. The main reason for this is that it can help identify discrepancies or errors as they happen, rather than scrambling at the end of the year. 

2. Staff Training and Education

It’s important that you make sure that all relevant staff are well educated in how to prepare a nonprofit statement of activities. It’s essential they understand how the IRS prefers statements to be prepared—the IRS won’t accept forms without all the proper information. Well put together statements are also essential for reassuring donors and other interested parties as to the competency of your organization.  

3. Implementing Internal Controls

It’s essential that you set up some sort of internal control of the statement of activities to avoid tampering and error. No one wants to admit to making a mistake, so it’s better that you head off that possibility. These internal controls can take a few forms. One of the best is to segregate the duties to ensure there is always double checking. This could mean one person enters the financial data, while another reviews it. Or, one person could be responsible for handling fundraising cash, while another takes charge of bank statements. These are all excellent ways to ensure accuracy and compliance—for both your organization and stakeholders.

4. Utilize Automation and Technology

A job is always more difficult if you’re not using the best tools. Thankfully, there are plenty of tools out there to smooth the process of accounting for the modern nonprofit. Accounting software programs like QuickBooks or Sage Intacct can make gathering, organizing, and presenting information a much more straightforward process. Your goal is to try and automate as much as you can of revenue tracking, expensive categorization, and report generation, so that you can produce more consistent statements.