What financial statements does a nonprofit need to prepare?

Nonprofits prepare four primary financial statements under generally accepted accounting principles (GAAP). The terminology and structure differ from what for-profit businesses use, and getting them right matters for compliance, grant reporting, and your Form 990.

The Statement of Financial Position is the nonprofit equivalent of a balance sheet. It shows your assets, liabilities, and net assets as of a specific date. The key difference from a for-profit balance sheet is that instead of owner’s equity, you report net assets in two categories: those without donor restrictions and those with donor restrictions. This distinction is critical because it shows funders and your board how much of your resources are available for general use versus earmarked for specific purposes.

The Statement of Activities functions like an income statement. It reports your revenue, expenses, and change in net assets over a period. Revenue gets classified based on whether it comes with or without donor restrictions. When you receive a restricted grant and later fulfill its conditions, you report a release from restriction that moves money from the restricted column to the unrestricted column. This is where board members and funders look to understand whether the organization is operating sustainably.

The Statement of Functional Expenses breaks down all your expenses into three functional categories: program services, management and general, and fundraising. This is unique to nonprofits and gets a lot of attention from donors and grantors. They want to see that a reasonable percentage of spending goes directly to programs rather than overhead. The statement also cross-references expenses by their natural classification (salaries, rent, supplies) against those functional categories, creating a matrix that shows exactly where every dollar goes.

The Statement of Cash Flows works the same way it does for any organization. It shows how cash moved in and out during the period, broken into operating, investing, and financing activities. This statement is often overlooked by nonprofit leaders but it tells you something the Statement of Activities cannot: whether you actually have cash available, not just net assets on paper.

These statements work together to give a complete picture of your organization’s financial health. You’ll need them for your annual audit or review if one is required, for grant applications and reporting, and for preparing your Form 990 accurately. Many grantors ask for audited financial statements before they’ll fund you, and state registration requirements for soliciting donations often require them as well.

If your books aren’t set up to track restricted versus unrestricted funds from the start, producing accurate statements at year end becomes a painful reconstruction project. The chart of accounts, fund tracking, and expense allocation methods all need to be configured with these reporting requirements in mind. Working with someone who understands nonprofit accounting and financial strategy from the beginning saves significant time and avoids the kind of errors that raise questions during an audit or grant review.