Level Up the Net Assets Portion of Your Balance Sheet

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Accounting software will come “out of the box” with at least two accounts within the Equity (or Net Assets, in nonprofit terminology) section of your Statement of Financial Position (also called the balance sheet): Retained Earnings and Net Revenue. In a nonprofit context, Retained Earnings might be renamed Unrestricted Net Assets. None of the day-to-day bookkeeping entries, whether logging a ticket sale, a donor pledge, the collection on that pledge, an artist’s fee payment, the theater rental fee, or using a company credit card to buy stamps to send donor thank you letters, will involve selecting either of those accounts from the dropdown menu in the bookkeeping workflow.

The balance of these accounts is influenced by the aggregation of all those daily bookkeeping transactions. All those sales, donations, and payments lead to the proverbial “bottom line” on the Statement of Activities, as in the sample below for a recent fiscal year.

Anytown Theater Company
Statement of Activities
August 1, 2022 – July 31, 2023
REVENUE
Box Office  $250,000
Giving  $400,000
Grants  $150,000
Total Revenue  $800,000
EXPENSES
Compensation  $175,000
Artistic Production  $300,000
Marketing  $75,000
Development  $25,000
Office & Admin Expense  $200,000
Total Expenses  $775,000
Net Revenue  $25,000

We see that that same number is the Net Revenue on the sample Statement of Financial Position.

Anytown Theater Company
Statement of Financial Position
July 31, 2023
ASSETS
Cash  $110,000
Receivables  $25,000
Other Current Assets  $25,000
Fixed Assets  $50,000
Total Assets  $210,000
LIABILITIES
Payables  $25,000
Deferred Revenue  $75,000
Total Liabilities  $100,000
NET ASSETS
Unrestricted Net Assets  $85,000
Net Revenue  $25,000
Total Net Assets  $110,000
Liabilities + Net Assets  $210,000

So what is the Unrestricted Net Assets line? That is the sum of all previous years’ Net Revenue. If we were to look at Anytown Theater Company’s balance sheet for one day later on August 1, 2023 (the first day of the new fiscal year), we would see Unrestricted Net Assets as $110,000, as the $25,000 in Net Revenue from FY23 would roll over into Unrestricted Net Assets.

Expended Usage of This Section

Those “out-of-the-box” accounts are only the start of how an organization can use the Net Assets section of its balance sheet. Suppose your Board of Directors implements a reserves policy that requires year-end operating surpluses of up to $20,000 be put into an interest-bearing money market account. In our sample balance sheet above, we would add two accounts. The first, under Assets, would be that money market account itself, which would tie to the monthly statement from the financial institution that holds the account. The second, under Net Assets, shows that instead of simply rolling accumulated year-end surpluses into Unrestricted Net Assets, our sample organization intentionally reserves some. Here’s an updated balance sheet with those new lines.

Anytown Theater Company
Statement of Financial Position
July 31, 2023
ASSETS
Checking Account  $90,000
Money Market  $20,000
Receivables  $25,000
Other Current Assets  $25,000
Fixed Assets  $50,000
Total Assets  $210,000
LIABILITIES
Payables  $25,000
Deferred Revenue  $75,000
Total Liabilities  $100,000
NET ASSETS
Unrestricted Net Assets  $65,000
Reserve Fund  $20,000
Net Revenue  $25,000
Total Net Assets  $110,000
Liabilities + Net Assets  $210,000

Funding the reserves is a different kind of bookkeeping entry in that it doesn’t represent money moving into (a sale, a donation) or out of (payroll, rent payment) our organization, and doesn’t touch the Statement of Activities (and so the sample Statement Activities above wouldn’t change in this example). Thus, we would use a journal entry to adjust the balances:

Date: 07/31/2023
Account Debit Credit
Unrestricted Net Assets  $20,000
Reserve Fund  $20,000

Whereas merely having the additional bank account listed under Assets meets all the basic bookkeeping best practices, having this additional representation within Net Assets will make financial reporting more reflective of the organization’s financial situation; in this example, showing the implementation of the reserves policy.

About Eric Joseph Rubio

AvatarEric Joseph Rubio is a nonprofit and arts management professional originally from Chicago, and now based in Washington, DC. He has served in staff and leadership roles with churches, schools, and arts organizations in the Chicago, South Florida, and Washington, DC areas. Eric is a proud alumnus of the Wheaton College (IL) Conservatory of Music, and is an occasional freelance writer across a variety of platforms. Follow Eric on Twitter and Instagram at @TheRubioRoom, and visit his website ericjrubio.com.

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