Financial Statements for Charities and Nonprofits

Financial statements are detailed reports that show how your organization receives, spends, and manages money, including all assets, liabilities, revenue, and expenses. These formal records are essential for maintaining your charitable status and demonstrating accountability to supporters.

Organizations sometimes treat financial statements as simple bookkeeping exercises. In reality, these statements tell the complete story of your mission's financial health.

They reveal patterns in donation cycles, program effectiveness, and long-term sustainability. Understanding how to structure and present this information can help secure major funding and maintain donor confidence.

Throughout this guide, we'll walk through the core components of nonprofit financial statements. We'll also explore how revenue recognition works differently for charitable organizations.

We will cover annual reporting requirements that keep your organization compliant. Best practices for maintaining transparency with your stakeholders will also be discussed.

What Are Financial Statements for Charities and Nonprofits?

Financial statements for charities and nonprofits are formal records that show how these organizations receive, manage, and spend money. They follow specific rules and formats that differ from business financial statements because charities serve the public good rather than make profits.

Definition and Purpose

Financial statements for charities are official documents that track all money coming into and going out of the organization. They show donors, government agencies, and the public exactly how funds are used.

These statements prove that the charity uses donations properly and follows its stated mission. They help donors decide whether to give money to the organization.

The main goals include:

• Building trust with supporters
• Meeting legal requirements
• Showing financial health
• Proving accountability

Charities must prepare these statements every year. They become public records that anyone can review.

This transparency helps maintain public confidence in charitable work. The statements also help charity leaders make better decisions.

They can see which programs cost the most money and which bring in the most donations.

Legal and Regulatory Background

Canadian charities must file financial statements with the Canada Revenue Agency each year. This requirement applies to all registered charities, regardless of their size or income level.

The Income Tax Act sets out these filing rules. Charities that fail to submit proper financial statements can lose their charitable status.

Without charitable status, organizations cannot issue tax receipts for donations.

Filing requirements include:

• Annual information return (Form T3010)
• Audited financial statements (for larger charities)
• Public access to filed documents

Provincial laws may add extra requirements. Some provinces require charities to file statements with provincial authorities as well.

The rules vary depending on where the charity operates. Charities with revenues over $500,000 typically need audited statements.

Smaller organizations may prepare their own statements or use a bookkeeper.

Key Differences from For-Profit Financial Statements

Charity financial statements use different names and focus on different things than business statements. Instead of showing profit, they show how well the charity serves its mission.

Main differences include:

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Charities must show how much money goes to programs versus administration. Donors want to see that most funds support the charity's actual work, not overhead costs.

The statement of financial position shows assets and liabilities like business statements do. However, charities separate restricted funds from unrestricted ones.

Restricted funds can only be used for specific purposes. Charities also report on cash flows differently and focus on how money supports charitable activities.

Understanding the financial health of a charity is crucial for transparency and accountability. But what exactly are financial statements, and why are they so important? Let's break it down.

What Are Financial Statements?

Financial statements are detailed reports that show the financial activities and position of an organization. They are like a snapshot of how much money the charity has, where it comes from, and how it is spent. These statements are crucial for charities to file their annual information return, known as the T3010 or T2 for Not-for-Profit, even if the charity was not active or had no financial activity during the fiscal year.

Types of Financial Statements

There are two main types of financial statements that charities need to prepare:

1. Statement of Assets and Liabilities (Balance Sheet): This statement shows what the charity owns (assets) and what it owes (liabilities). It includes:

• Current Assets: Cash, bank accounts, short-term investments, and receivables.
• Long-term Assets: Investments maturing in more than a year, like stocks and bonds.
• Fixed Assets: Capital assets such as buildings and equipment.
• Current Liabilities: Accounts payable and deferred revenue.
• Long-term Liabilities: Debts like mortgages that are due in more than a year.
• Accumulated Surplus or Deficit: The difference between assets and liabilities, showing if the charity has more assets (surplus) or more liabilities (deficit).

2. Statement of Revenue and Expenditures (Income Statement): This statement details the money the charity earns (revenue) and spends (expenditures). It includes:

• Revenue: Donations, government grants, investment income, sales of goods and services, rental income, fees, and income from fundraising.
• Expenditures: Costs such as advertising, travel, interest and bank charges, office supplies, salaries, and occupancy costs (like rent and utilities).
• Net Income or Loss: The difference between revenue and expenditures, indicating a surplus or deficit for the year.

Prepared NotesFinancial statements also include prepared notes that provide additional details, such as:

• Accounting Policies: For example, how depreciation is calculated.
• Details of Investments: Including maturity dates and interest rates.
• Sources of Revenue: Specifying types of government grants.
• Transactions with Non-Arm's Length Parties: Deals with people or organizations closely related to the charity.
• Information About Long-Term Funds: Such as donations that must be held for ten years or more.
• Future Obligations: Expected future costs.

Reporting MethodsCharities can choose between two methods to report their finances:

1. Cash Basis Method: Records revenue and expenditures only when money is received or paid.
2. Accrual Basis Method: Records revenue when it is earned and expenditures when they are incurred, even if the money hasn't been received or paid yet.
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It's important to use the same method consistently throughout the financial statements, except when reporting gifts received, which must always use the cash method.

Public AvailabilityFinancial statements are available to the public upon request. This transparency helps maintain trust with donors, government agencies, and the public.

Why Are Financial Statements Important?

1. Transparency: They show how the charity uses its funds, ensuring donors and stakeholders know where their money goes.
2. Accountability: Accurate financial statements help prevent misuse of funds and ensure legal compliance.
3. Informed Decision-Making: Financial statements provide essential information for planning and budgeting.
4. Public Trust: Openness about finances builds trust and confidence among supporters.

Financial statements are essential for every charity, regardless of size or activity level. They provide a clear picture of the charity's financial health, ensuring transparency, accountability, and trust. By understanding and properly preparing these statements, charities can better manage their resources and fulfill their missions effectively.

Core Components of Financial Statements

Charitable and nonprofit organizations must prepare four distinct financial statements. These statements track how organizations receive and use their financial resources while demonstrating accountability to donors and regulators.

Statement of Financial Position

The statement of financial position shows what our organization owns and owes at a specific point in time. This statement replaces the traditional balance sheet used by for-profit businesses.

Assets represent everything of value that our organization owns. We list these in order of how quickly they can be converted to cash:

• Current assets (cash, receivables, inventory)
• Fixed assets (buildings, equipment, vehicles)
• Investments and endowment funds

Liabilities are what our organization owes to others. We separate these into two categories:

• Current liabilities (accounts payable, salaries due within one year)
• Long-term liabilities (mortgages, multi-year commitments)

Net assets represent the difference between our assets and liabilities. We show net assets with or without donor restrictions.

Restricted net assets must be used for specific purposes as directed by donors. The basic equation remains: Assets = Liabilities + Net Assets

Statement of Operations

The statement of operations tracks our organization's revenue and expenses over a full accounting period. This statement shows how effectively we use financial resources to advance our mission.

Revenue sources include:

• Donations and contributions
• Government grants
• Program service fees
• Investment income
• Special event proceeds

We organize expenses into three main categories:

• Program expenses: Direct costs of delivering services
• Management expenses: Administrative and operational costs
• Fundraising expenses: Costs related to donor development

The statement follows this formula: Revenue - Expenses = Change in Net Assets

We must clearly separate restricted and unrestricted activities. Restricted revenue can only be used for specific programs or purposes.

When we fulfill these restrictions, we report the release of funds from restricted to unrestricted categories.

Statement of Cash Flows

The statement of cash flows shows how cash moves in and out of our organization during the reporting period. This statement helps board members understand our liquidity and ability to meet financial obligations.

Operating activities include:

• Cash received from donors and program participants
• Cash paid for salaries and program expenses
• Interest and investment income received

Investing activities cover:

• Purchase or sale of equipment and property
• Investment transactions
• Loans made to other organizations

Financing activities involve:

• Borrowing money or repaying loans
• Donor contributions restricted for long-term purposes
• Endowment gifts and investment returns

The statement reconciles the beginning and ending cash balances. It reveals whether our operations generate enough cash flow to sustain programs without borrowing.

Statement of Changes in Net Assets

The statement of changes in net assets shows how our net assets changed during the reporting period. This statement links our statement of financial position with our statement of operations.

We track changes separately for restricted and unrestricted net assets. Unrestricted net assets can be used for any organizational purpose.

Restricted net assets have donor-imposed limitations on their use. Key changes include:

• Operating surpluses or deficits
• Investment gains or losses
• Release of restrictions when conditions are met
• New donor restrictions imposed during the year

This statement helps donors and stakeholders understand how we manage financial resources over time. It shows whether we're building reserves or using existing funds to support current operations.

Recognising Revenue and Managing Donations

Charities and nonprofits must properly record different types of income. They also need to maintain accurate donor records.

This includes understanding various revenue sources, tracking donations, and providing proper tax receipts to donors.

Types of Revenue for Charities and Nonprofits

We need to understand the different revenue streams that support our charitable work. Each type requires specific accounting treatment and documentation.

Primary Revenue Sources:

• Donations from individuals and corporations
• Government grants and funding
• Investment income from endowments
• Program service fees and sales
• Fundraising event proceeds
• Membership fees and subscriptions

Recording Revenue Properly

We must distinguish between contributions and exchange transactions. Contributions are donations where donors receive nothing of equal value in return.

Exchange transactions provide goods or services for payment. Conditional contributions require us to meet specific requirements before we can record the revenue.

Unconditional contributions can be recorded immediately when promised or received. We record revenue using either cash or accrual accounting methods.

Cash accounting records revenue when money arrives. Accrual accounting records revenue when earned, even if payment comes later.

Multi-year Grants

These require careful tracking across reporting periods. We must monitor conditions and milestones to ensure proper revenue recognition timing.

Donation Tracking and Acknowledgement

We must maintain detailed records of all donations. Proper tracking helps us manage relationships and comply with regulations.

Essential Tracking Information:

• Donor name and contact details
• Donation amount and date
• Payment method used
• Designation or restrictions
• Acknowledgement sent date

Documentation Requirements

We need to keep records of all donations, regardless of size. This includes cash gifts, in-kind donations, and pledges.

Each donation should have supporting documentation like cheques, credit card receipts, or gift agreements.

Donor Communication

We should send acknowledgement letters promptly after receiving donations. These letters confirm receipt and show appreciation for the donor's support.

Database Management

We can use donor management software to track contributions efficiently. This helps us avoid errors and maintain accurate records for reporting purposes.

Tax Receipts for Donors

We must issue official donation receipts to help donors claim tax deductions. Canadian regulations require specific information on these receipts.

Required Receipt Information:

• Our registered charity number
• Receipt number and date
• Donor's name and address
• Donation amount and date received
• Location where receipt was issued
• Our signature or authorised person's signature

Eligible Donations

We can only issue tax receipts for gifts where donors receive no benefit in return. If donors receive goods or services, we must calculate the eligible portion for tax receipt purposes.

Timing Requirements

We must issue receipts by February 28th of the year following the donation. For donations made in December, this gives us just two months to process receipts.

Record Keeping

We need to maintain copies of all issued receipts for our records. These documents must be available for review by Canada Revenue Agency if requested.

Managing Financial Resources and Liabilities

Effective management requires careful budgeting throughout the fiscal year. Accurate identification of what your organisation owes is also important.

Understanding these two areas helps maintain financial stability and ensures proper reporting.

Budgeting Practices

Creating annual budgets builds the foundation of sound financial management. We plan how to use our financial resources before each fiscal year begins.

Start by reviewing last year's actual revenue and expenses. This gives us a realistic baseline for planning.

Revenue planning should include:

• Expected donations and grants
• Investment income projections
• Fundraising event estimates
• Service fee collections

Expense budgeting covers:

• Program costs and staff salaries
• Administrative expenses
• Fundraising costs
• Equipment and facility needs

We track actual amounts against budgeted figures each month. This lets us spot problems early and adjust spending as needed.

Cash flow planning helps us pay bills throughout the year. Donations often arrive seasonally, but expenses happen monthly.

Reserve funds cover unexpected costs or revenue shortfalls. Most organisations keep three to six months of operating expenses in reserves.

Identifying and Reporting Liabilities

Current liabilities must be paid within one year. These include accounts payable, staff wages owing, and deferred revenue from grants.

We record liabilities when we become legally obligated to pay, even if we have not received a bill yet.

Common current liabilities:

• Unpaid invoices from suppliers
• Accrued payroll and benefits
• Grant money received but not yet spent
• Short-term loan payments

Long-term liabilities include mortgages and equipment loans due after one year. We list these separately on our financial statements.

Deferred revenue is money received for future services. We owe donors these services instead of cash.

Track payment due dates to avoid late fees. Set up systems to record all invoices before the fiscal year ends.

Annual Reporting and the Fiscal Year Cycle

Canadian charities must align their financial statements with specific fiscal year requirements. Meeting strict reporting deadlines keeps their charitable status.

The fiscal year determines when we finalize financial records. It also drives all compliance obligations.

Fiscal Year Selection and Compliance

We can choose our charity's fiscal year-end date. This decision impacts all future reporting requirements.

The fiscal year covers a 12-month period in our financial statements. Most charities select December 31st as their year-end date.

This aligns with the calendar year and simplifies record-keeping.

Key fiscal year requirements include:

• Must be consistent from year to year
• Cannot exceed 53 weeks for incorporated charities
• Determines when we calculate disbursement quotas
• Sets the timeline for all annual reporting obligations

Once we pick our fiscal year-end, we prepare comprehensive financial statements. These statements form the foundation of our T3010 filing with the Canada Revenue Agency.

Our fiscal year choice affects cash flow planning and audit scheduling. We should consider operational cycles and staff availability when selecting dates.

Reporting Deadlines and Requirements

All registered charities must file Form T3010 within six months of their fiscal year-end. Missing this deadline can lead to revocation of charitable status.

For charities with December 31st year-ends, the T3010 is due by June 30th. We must include audited financial statements if our annual revenue exceeds certain thresholds.

Additional reporting requirements:

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Federally incorporated charities face additional deadlines. We must file our Annual Corporate Return within 60 days of our incorporation anniversary.

Provincial reporting varies by jurisdiction. Ontario charities under ONCA require audited statements when revenue exceeds $500,000.

We keep all financial records for at least six years. Proper documentation supports our annual filings and protects against audits.

Ensuring Transparency and Accountability

Financial statements build trust with donors and the public. Audits provide external validation of financial accuracy.

Proper access lets stakeholders review how charities use their funds.

Role of Audits and Reviews

Independent audits validate our financial statements. An auditor examines our books and records to confirm we report finances accurately.

Many provinces require audits for charities above certain revenue thresholds. Even when not required, audits show our commitment to accountability.

Key audit benefits include:

• External verification of financial accuracy
• Identification of internal control weaknesses
• Enhanced credibility with donors and funders
• Compliance with regulatory requirements

Reviews offer a middle ground between audits and internal preparation. They provide some external oversight at lower cost than full audits.

We should choose qualified accountants who know charity accounting standards. The auditor's independence ensures an unbiased assessment of our financial practices.

Access for Donors and Stakeholders

We make financial information available to those who support our work. Transparency builds trust and shows donors how we use their contributions.

Required disclosures typically include:

• Annual financial statements
• Canada Revenue Agency T3010 forms
• Auditor's reports when applicable
• Executive compensation details

Many charities post financial statements on their websites for easy access. This demonstrates our commitment to openness.

Donors have the right to ask questions about our finances. We respond promptly and clearly to reasonable requests for financial information.

Board members need regular financial reports to fulfill their oversight duties. We provide monthly or quarterly statements showing budget versus actual performance.

Conclusion

Financial statements are essential tools for charities and nonprofits. They help organizations meet legal requirements and build trust with donors and supporters.

These four key statements work together to tell your organization's financial story. They show how well you manage resources and advance your mission.

Proper financial reporting also opens doors to grant funding and major gifts.

At B.I.G. Charity Law Group, we understand the legal complexities of nonprofit financial statements. Our team helps charities navigate compliance requirements and develop strong financial practices.

Contact us at dov.goldberg@charitylawgroup.ca or call 416-488-5888 to discuss your organization's needs. Visit CharityLawGroup.ca to learn more about our services and schedule a free consultation.

Frequently Asked Questions

Nonprofit organisations face specific requirements for financial reporting that differ from for-profit businesses. These questions address the most common concerns about preparing, filing, and analysing financial statements for charities and nonprofits.

What are the financial statements for a nonprofit organisation?

Nonprofit organisations prepare three main financial statements. The Statement of Financial Position shows assets, liabilities, and net assets at a specific date.

This statement often includes restricted funds and deferred revenue. The Statement of Operations shows revenues and expenses over a period.

It tracks how money flows in and out of the organisation. The Statement of Cash Flows shows actual cash movements and helps track liquidity and cash management.

Which financial statement is mandatory for NPO?

The Statement of Financial Position is mandatory for most nonprofits. Provincial regulations require this statement as part of annual filing requirements.

Registered charities must provide financial statements when filing their annual information return. The size and type of organisation determines which additional statements are required.

Do charities need to prepare financial statements?

Yes, charities must prepare financial statements. Registered charities have legal requirements to file financial statements annually.

Most charities need audited financial statements each year. Audits provide accountability and control measures for donors and regulators.

The board of directors must approve these financial statements. This approval cannot be delegated to committees.

What is a financial statement analysis for a non profit organisation?

Financial statement analysis examines how well a nonprofit uses its resources. We look at program efficiency ratios to see how much money goes directly to programs.

Administrative cost ratios show how much goes to overhead. Liquidity ratios tell us if the organisation can pay its bills.

Revenue diversity analysis shows if funding sources are stable. This helps assess financial health and sustainability.

What documents are needed to prepare financial statements?

Bank statements and reconciliations are essential documents. We need records of all cash transactions and account balances.

Donation records and grant agreements provide revenue information. Invoices and receipts document all expenses.

Fixed asset records show equipment and property values. Accounts payable and receivable lists track money owed and owing.

How to prepare financial statements for NGO?

Start by gathering all financial records for the reporting period. Reconcile bank accounts and update the general ledger.

Record all accrued expenses. Separate restricted and unrestricted funds.

Calculate depreciation on fixed assets. Prepare the three main financial statements using nonprofit accounting standards.

Qualified personnel should review the statements. The board then approves the statements.