Understanding Financial Report Terminology

Small organizations may not have a staff member who has training in financial accounting. Whether you have a staff member/volunteer who is the bookkeeper and coordinates with an outside accountantfinance issue image for web for reporting or you use outside expertise for all bookkeeping and reporting functions, you may not be familiar with some of the language you see in financial reports or how they can be helpful in informing your planning.

A statement of financial activities report provides information about income and expenses. The idea of this report is to give an overview of how money is moving in and out of your organization over a particular period of time. It can be any time period that’s useful to you: a month, a quarter, or even the six weeks that are important for one of your programs. You can track the transactions separately for each program, as well as for administrative and fundraising activity, so you can see more clearly how each area of work in your organization is functioning.

A statement of financial position report provides a look at how an organization is doing overall regarding financial stability. This report is like a snapshot of one moment in time rather than an accumulation of activity over time. It breaks that moment down into assets, liabilities, and net assets. Assets account for things like the money an organization has in the bank, the value of their furnishings or equipment, and promised income that hasn’t arrived yet. Liabilities show how much an organization owes to others due to unpaid bills, credit card balances, loans, and payroll taxes, for example. Finally, net assets looks at what’s left once the liabilities owed to others are taken into account. So let’s look at a very simple example: if an organization had $10,000 in assets and owed $2,000 in liabilities, their net assets would be $8,000.

The net assets figure is a combination of retained earnings and net income. Net income is a current fiscal year figure referring to the total of income minus expenses and must match what is shown on the statement of financial position for the same date. Retained earnings are the accumulation of net income from previous years.

Another important aspect of net assets is whether the money is restricted in any way. Typically the restriction is due to a grant or contract that is given for a specific program or a specific time period. Organizational planning needs to keep those restricted assets available for their required purpose. On the other hand, unrestricted assets (what’s left after subtracting the restricted assets from the net assets) allows you to think about where that money could be put to best use.

Together, the two reports can give a complete picture of how your organization stands financially, both as a whole and program by program. From there, you can make informed plans about how to best use your net assets to carry out the important work you do.