Level Up the Net Assets Portion of Your Balance Sheet

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.

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

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.

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:

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.