Nonprofit Financial Statements: 4 Essential Reports to Know

Tuesday, April 21, 2026 by Jon Osterburg

If your nonprofit has a solid accounting system in place, you likely collect a lot of financial data on a daily basis. However, this data is only useful for improving your organization's operations if you can effectively analyze it, draw conclusions, and apply those insights to your everyday activities. This is where financial statements come into play!

In this guide, we'll walk through the basics of the major nonprofit financial statements, including:

• Nonprofit Financial Statements FAQ
• The 4 Core Nonprofit Financial Statements
• How to Create Financial Statements for Your Nonprofit

Before we dive into the specifics of each nonprofit financial statement, let's consider what these reports mean for your organization as a whole.

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Nonprofit Financial Statements: Frequently Asked Questions

What are nonprofit financial statements?

Nonprofit financial statements are reports that summarize financial data in different ways, providing unique, actionable insights into your organization's current situation. They include the statements of activities, financial position, cash flows, and functional expenses (we'll dive deeper into each statement later).

In addition to being a helpful management tool, financial statements are also essential for complying with reporting requirements for tax-exempt organizations. They hold your nonprofit accountable for its use of resources and serve as references when you file your organization's annual tax return via IRS Form 990, which are both critical for maintaining your 501(c)(3) status.

Why are financial statements important for nonprofits?

While the most obvious benefit of compiling nonprofit financial statements is compliance, these reports also provide an overview of your organization's financial health. With this knowledge, you can:

• Make data-driven decisions. These range from which revenue sources your nonprofit should include in its funding mix to when to launch certain projects and programs for effective resource allocation.
• Develop a long-term strategic plan. Your financial situation is a major factor in determining if and how much your nonprofit can grow, so it should influence your overarching goals and how you conduct multi-year initiatives.
• Improve your risk management strategy. Having a detailed yet understandable summary of your nonprofit's finances helps you identify potential financial risks and develop effective methods to prevent or mitigate them before they become crises.
• Be more transparent with supporters. Many nonprofits publish their financial statements on their websites or incorporate them into their annual reports. By taking these actions, you can show donors that you're using their contributions wisely and impactfully, which builds trust and makes them more likely to support you long-term.

At its core, nonprofit accounting is about accountability. Financial statements provide an organized system for reporting on your nonprofit's resources, so your organization is regularly held accountable to itself, its supporters, and its community. Consider developing a financial reporting policy to serve as an official reference for how your organization will create and distribute each of the four major statements.

If you decide to work with an outsourced accounting firm, ask them how often they typically compile these statements and how they'll help you make the most of the financial information within them before you begin your engagement.

Set guidelines for creating financial statements with our Nonprofit Financial Reporting Policy Template.

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How are nonprofit and for-profit financial statements different?

There are some parallels between nonprofits' financial statements and those of for-profit organizations because systematic reporting is required to comply with the Generally Accepted Accounting Principles (GAAP), which standardize financial practices across all organizations. However, your organization's reports will look different in certain ways because nonprofits are subject to some requirements that businesses aren't. Some key differences include:

• Statement types. Businesses don't have to report functional expenses like nonprofits do, so they don't create the corresponding financial statement. However, they typically compile a brief statement of shareholders' equity so stockholders or investors (which nonprofits don't have) can see how that business is performing.
• Report terminology. The terms "income statement" and "balance sheet" are more common in the for-profit world than "statement of activities" and "statement of financial position," which nonprofits tend to prefer, although the terms are basically interchangeable.
• Funding restrictions. Nonprofits need to note in their financial statements how much of their revenue donors and funders have restricted to specific initiatives to provide an accurate picture of their funding, whereas businesses have no such requirements.

These reporting differences are part of why it's important to tailor your accounting practices to nonprofits' specific needs. Choose accounting software that's either designed for nonprofits or can be easily configured for nonprofit use, and ensure that any financial professionals you hire or partner with thoroughly understand tax-exempt organizations' finances.

The 4 Core Nonprofit Financial Statements

Although there are countless ways to organize your nonprofit's financial information, most organizations compile four main types of reports. Since each of these core financial statements provides a different way to visualize the data you've collected, you can glean unique insights about your organization's financial health from all of them. Let's walk through the structure and purpose of each of these four reports in more detail.

1. Statement of Activities

The statement of activities is the nonprofit parallel to the for-profit income statement. Its purpose is to provide detailed information about your organization's transactions, showing how your expense allocation and revenue generation further your mission.

This statement is divided into three main sections:

• Revenue. This section is further broken down into your nonprofit's various funding sources, such as individual donations (both financial and in-kind), grants, earned income such as membership dues or fees charged for services provided, and investment returns.
• Expenses. Rather than organizing costs based on the nature of the payment made, nonprofits typically break down the expense section of this report based on the function of each cost as it relates to furthering their mission. Functional expenses will be covered in more detail later, but the three categories to know are program, administrative, and fundraising costs.
• Net Assets. To calculate your organization's net assets, simply subtract your total expenses from your total revenue. Most nonprofits also include their net assets at the beginning of the fiscal year in a separate row so they can compare that number to their change in net assets during the year.

When you combine these sections into a single report, your nonprofit statement of activities should look something like this:

Not only is the revenue section broken down into categories by funding source in this example, but a distinction is also made between unrestricted and restricted funds. Your nonprofit is required to use restricted funds for a specific purpose, usually based on an agreement made with the major donor or grantmaker who provided the funding. Meanwhile, unrestricted funds can be allocated toward any type of expense. This distinction allows you to understand how flexible your nonprofit's funding is in addition to how much you have.

Additionally, the line items in your organization's statement of activities should match those in the operating budget you created at the beginning of the fiscal year. By comparing these two documents, you can evaluate your planned versus actual expenses and revenue generation. Then, you can reference your statement of activities to make more accurate predictions when you develop a new operating budget for the coming year.

2. Statement of Financial Position

The nonprofit statement of financial position is also known as a balance sheet, which is what for-profit organizations usually call their equivalent statement. It provides a snapshot of your organization's financial health, meaning it plays an especially important role in nonprofit financial audits.

Similar to the statement of activities, the balance sheet also has three main sections:

• Assets. This section describes everything your nonprofit owns, such as cash, accounts receivable, prepaid expenses, property, and equipment. From top to bottom, these categories are listed in order of liquidity—i.e., how easy they are to convert into cash. Cash comes first because it's already liquid, and property and equipment come last because your organization would have to sell them for them to become liquid.
• Liabilities. This term refers to everything your nonprofit owes, including accounts payable, debt, lease obligations, and any other deferred payments. These are usually organized by due date. For example, invoices from vendors that you'll repay within the year would be listed above larger debts that will take multiple years to pay back.
• Net Assets. Subtract your total liabilities from your total assets to calculate your net assets for your statement of financial position. Make sure to separate restricted net assets from unrestricted ones on this report as well.

With all of the different assets and liabilities your nonprofit might have, your statement of financial position can quickly become complex. However, to give you an idea of what this report could look like, here is a basic example:

Note that this example contains information from two different years: the current fiscal year and the previous year. This allows you to compare your assets and liabilities year over year to see whether your financial health is improving over time.

This statement can also help your nonprofit plan for growth. If you want to expand your organization, you'll need to have enough cash on hand to cover your usual operating costs and take on additional expenses. The data in your balance sheet can help you figure out the total amount of cash and other liquid assets you have available so you can determine whether your nonprofit has enough financial flexibility to grow.

3. Statement of Cash Flows

Both for-profit and nonprofit organizations use the term "statement of cash flows," and the report it describes looks fairly similar between the two. This statement shows how cash moves in and out of your organization on a regular basis, so it's usually pulled monthly, rather than annually like the other three core statements.

This report shows your organization's cash flows as they relate to:

• Operating activities. This section encompasses the revenue and expenses associated with most of your nonprofit's day-to-day activities, including fundraising, contracting, and employee salary payments.
• Investing activities. This information is related to your nonprofit's long-term assets. For example, if you purchase new office equipment or open a brokerage account that earns interest, those would fall under investing activities.
• Financing activities. This section covers your nonprofit's long-term liabilities, such as the borrowing and repayment of debts and the establishment of endowment funds.

On a basic level, a nonprofit statement of cash flows looks like this:

In addition to the net cash flows from each of the three types of activities, this example includes a summary section comparing the organization's increase in cash during the month to the amount they already had on hand. This information aligns with the main purpose of a cash flow statement: monitoring your organization's spending and fundraising from month to month. When you know this information, you can more effectively stay on track with your budget throughout the year and ensure you don't accidentally overdraft any of your nonprofit's accounts.

4. Statement of Functional Expenses

As mentioned previously, the last of the four essential financial statements, the statement of functional expenses, is unique to nonprofits. In most accounting systems, expenditures are recorded as natural expenses, which are based on the nature of the payment. For-profit organizations generally stop there, but nonprofits go one step further and reorganize their costs based on how each expenditure furthers their mission.

The statement of functional expenses is a matrix-style report with natural expense categories listed on the horizontal axis and functional expense categories on the vertical axis. While the natural expenses included in this statement will vary by organization, the three standard categories of functional expenses are:

• Program costs. These are also unique to each nonprofit based on its mission, but the category covers any expenses that are directly cause-related. For example, an environmental conservation organization may include the costs of hosting educational workshops on natural resource protection and coordinating beach cleanup days among its program expenses.
• Administrative costs. These expenses are necessary to keep your organization running day-to-day. They include staff compensation, rent, utilities, and office equipment, among other expenditures.
• Fundraising costs. Bringing in revenue for your nonprofit often comes with upfront expenses. Spending on event planning, marketing, specialized software, and fundraising consulting fees would all fall into this category.

Keep in mind that some natural expenses may need to be divided across multiple functional expense categories, as they are in this example:

While the term "overhead expenses" doesn't appear on this statement, it's often referenced in the context of functional expenses because it refers to your nonprofit's administrative and fundraising costs combined. You may have heard of the 65/35 rule, which states that nonprofits should put at least 65% of their funding toward program expenses and spend no more than 35% on overhead. But in reality, this breakdown will look different for every nonprofit.

It's best to treat the 65/35 "rule" as a guideline for allocating as much funding as possible to cause-related work without sacrificing essential overhead. When reviewing your statement of functional expenses, look for ways to reasonably reduce overhead and put more funding toward your programs in the future.

If you're ready to determine whether your nonprofit is running on a healthy ratio of program costs to overhead, you can input the numbers from your last statement of functional expenses (or your upcoming operating budget) into the calculator below!

Nonprofit Expense Ratio Calculator

Determine whether your nonprofit has struck a healthy balance between program expenses and overhead.

Total Annual Program Expenses*

Total Annual Administrative Expenses*

Total Annual Fundraising Expenses*

Calculate Expense Ratio

Your Expense Breakdown

Program Expenses

Overhead

Total Expenses

Pro Tip: Working with nonprofit financial professionals like the experts at Jitasa is the best way to find and stick to a healthy expense ratio for your organization.

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How to Create Financial Statements for Your Nonprofit

Because all of the information that goes into the four major nonprofit financial statements should already be stored in your accounting software, there are two main ways to compile these reports. First, you could have someone at your organization pull the data you need and format it using one of the many financial statement templates available online. However, this method takes a lot of time and effort, especially when it comes to ensuring the templates are structured in a way that aligns with your nonprofit's financial situation.

The best way to create accurate, useful financial statements for your organization is to work with a nonprofit accountant. Since many nonprofits don't have a full-time accountant on staff, consider outsourcing your accounting needs to a nonprofit-specific firm like Jitasa.

The experienced team at Jitasa has compiled, distributed, and analyzed financial statements for organizations of all sizes. Plus, Jitasa works exclusively with nonprofits, giving you access to the expertise necessary to correctly craft these reports and glean applicable insights from them.

Proper reporting is a key aspect of effective nonprofit financial management. Compiling the four major financial statements for your organization benefits your internal operations, external compliance, and overall level of accountability from year to year. As you begin creating your statement of activities, balance sheet, cash flow statement, and functional expense report, don't hesitate to reach out for expert assistance to ensure accuracy and help you apply the conclusions you draw to your organization's operations.

To learn more about how your financial statements fit into the larger picture of nonprofit accounting, check out these resources:

• What Is Fund Accounting? A Guide to Basics & Best Practices. Explore the nonprofit-specific system of fund accounting that forms the backbone of the four financial statements.
• Nonprofit Chart of Accounts: How to Get Started + Example. Discover the main resource for tracking the data that goes into your nonprofit's reports: your chart of accounts.
• Working With a Nonprofit Accountant: What to Expect. Dive deeper into the various responsibilities of a nonprofit accountant and learn more about what it's like to partner with one.

Work with the accounting experts at Jitasa to compile and analyze your nonprofit financial statements.

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