Nonprofit Financial Statements: What to Produce and How (2026)
TLDR
Nonprofits must produce four financial statements under FASB ASC 958: Statement of Financial Position (balance sheet equivalent), Statement of Activities (income statement equivalent), Statement of Functional Expenses (expense breakdown by function and type), and Statement of Cash Flows. These differ structurally from for-profit statements — using net assets instead of equity, and requiring functional expense classification that for-profit statements do not.
Why nonprofit financial statements are different
A for-profit business produces three financial statements: balance sheet, income statement, cash flow statement. A nonprofit produces four — and all four differ structurally from their for-profit counterparts because of one concept: donor-imposed restrictions.
When money comes with conditions, the financial statements must show those conditions and whether they are being honored. FASB ASC 958 formalizes this requirement. Understanding the structure of each statement is necessary both for producing accurate statements and for reading them correctly as a board member or executive.
Statement of Financial Position
The nonprofit balance sheet. Key line items:
| Assets | Liabilities & Net Assets |
|---|---|
| Cash and cash equivalents | Accounts payable |
| Grants receivable | Accrued expenses |
| Pledges receivable | Deferred revenue |
| Prepaid expenses | Line of credit |
| Investments | Total liabilities |
| Property & equipment (net) | Net assets without donor restrictions |
| Net assets with donor restrictions | |
| Total assets | Total liabilities & net assets |
The net assets section must show both classes. Notes disclose the nature and balance of each donor restriction.
Statement of Activities
The nonprofit income statement. Revenue is presented by class:
| Without Donor Restrictions | With Donor Restrictions | Total | |
|---|---|---|---|
| Grants and contributions | $XX | $XX | $XX |
| Program service fees | $XX | — | $XX |
| Investment income | $XX | $XX | $XX |
| Net assets released from restrictions | $XX | ($XX) | — |
| Total revenue | $XX | $XX | $XX |
| Program expenses | ($XX) | — | ($XX) |
| Management and general | ($XX) | — | ($XX) |
| Fundraising | ($XX) | — | ($XX) |
| Change in net assets | $XX | $XX | $XX |
The “net assets released from restrictions” line moves amounts from restricted to unrestricted when conditions are met. It nets to zero across the two columns.
Statement of Functional Expenses
The most complex statement — and the most useful for management and compliance. A partial example:
| Expense type | Program A | Program B | M&G | Fundraising | Total |
|---|---|---|---|---|---|
| Salaries | $XX | $XX | $XX | $XX | $XX |
| Employee benefits | $XX | $XX | $XX | $XX | $XX |
| Professional fees | $XX | — | $XX | — | $XX |
| Occupancy | $XX | $XX | $XX | $XX | $XX |
| Total | $XX | $XX | $XX | $XX | $XX |
Expenses shared across functions are allocated using a documented method. This statement feeds Form 990 Part IX directly.
Form 990 alignment
The investment in clean financial statements pays off at Form 990 time. Part X is the Statement of Financial Position. Part IX is the Statement of Functional Expenses with 25 expense rows. Part VIII is the Statement of Revenue.
Organizations that produce FASB-compliant statements throughout the year can complete Form 990 by pulling figures directly from those statements. Organizations that have not maintained functional expense allocation spend weeks at year-end reconstructing which expenses belong to which function.
Audit preparation
Audited financial statements require all four statements plus notes. The notes must disclose each donor restriction and its remaining balance, the liquidity and availability of financial assets (how much is available for general operations within the next 12 months), endowment policies, and other FASB-required disclosures.
Fund accounting software that maintains fund-level balances throughout the year produces audit-ready reports in hours, not days. The audit trail — showing each transaction’s fund assignment and any restriction releases — is the primary documentation auditors test.
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- Statement of Financial Position
- The nonprofit balance sheet equivalent. Lists assets, liabilities, and net assets (split into with and without donor restrictions) at a specific date. Required under FASB ASC 958-205. Must show both net asset classes on the face of the statement, with details about donor restrictions disclosed in the notes.
DEFINITION
- Statement of Activities
- The nonprofit income statement equivalent. Shows changes in net assets over a period, presenting revenue by restriction class and expenses by functional category. The bottom line is change in net assets (increase or decrease), not profit or loss. Required under FASB ASC 958-225.
DEFINITION
- Functional expense allocation
- The process of distributing expenses across program services (by program), management and general, and fundraising based on actual use. Expenses that directly benefit one function are assigned to it. Shared expenses — rent, a salary covering multiple roles — must be allocated using a documented, reasonable method. Required for the Statement of Functional Expenses and Form 990 Part IX.
DEFINITION
- Net asset release
- The accounting transaction that reclassifies amounts from net assets with donor restrictions to net assets without donor restrictions when a restriction is satisfied. For example, when a time-restricted grant's period ends or a purpose-restricted donation is spent on the designated program. The release appears on the Statement of Activities as both a decrease in restricted net assets and an increase in unrestricted net assets.
DEFINITION
Q&A
What financial statements does a nonprofit need to produce?
Under FASB ASC 958, nonprofits must produce four financial statements: Statement of Financial Position (showing assets, liabilities, and net assets by restriction class), Statement of Activities (showing changes in net assets by restriction class and expenses by function), Statement of Functional Expenses (a matrix of expense types by functional category — required for voluntary health and welfare organizations and recommended for all nonprofits), and Statement of Cash Flows. Audited financials also require notes to the financial statements.
Q&A
How is a nonprofit balance sheet different from a for-profit balance sheet?
The structure is similar — assets on one side, obligations on the other — but the owner's equity section is replaced by net assets, which must be split into two classes: without donor restrictions and with donor restrictions. A for-profit balance sheet shows how much the owners own. A nonprofit Statement of Financial Position shows how much of the organization's resources are available for general use versus obligated to donor-specified purposes. This distinction is fundamental to nonprofit accountability.
Q&A
What is the statement of functional expenses?
The Statement of Functional Expenses is a matrix that shows every major expense type (salaries, benefits, professional fees, supplies, occupancy, etc.) allocated across functional categories: each program service individually, management and general, and fundraising. It is the most granular nonprofit financial statement and is required by FASB ASC 958 for voluntary health and welfare organizations. For other nonprofits, FASB strongly encourages it. Form 990 Part IX is structured identically, so the statement feeds directly into the annual IRS filing.
What are the four nonprofit financial statements?
How often should a nonprofit produce financial statements?
What financial statements does Form 990 require?
Want to learn more?
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