Understanding Financial Statements

Preparing and understanding financial statements for a church or nonprofit organization is easier if you follow this simple rule:

"know your audience"

For example, preparing a financial report to turn into your bank would be much more detailed than the report you would prepare for your church membership or department head in a nonprofit.

You might also be required to prepare your financial statements using the Statement of Financial Accounting Standards (SFAS) Numbers 116 and 117, which describes the way nonprofits should account for contributions, and present their financial statements.

Basis for preparing and understanding financial statements:

  • be easy to read so any person studying them will understand your organization’s financial picture;
  • be brief and to the point so that the person studying them doesn’t get lost in the details;
  • cover all the activities of the organization;
  • have a comparison such as a budget or data from a corresponding period of the previous year;
  • be prepared in a timely manner.

A financial report for your church members will usually just consist of the contributions and expenses. Financial reports for department heads in a nonprofit might only contain information relating to their department. However, most financial statements are prepared for the church board or governing body and financial institutions.

The two principal financial statements for a church or small nonprofit are the Statement of Activity and the Statement of Financial Position. The Statement of Cash Flows is sometimes required for larger churches and nonprofits.

The order in which the statements are normally prepared and the nature of the data presented in each statement are as follows:

  • Statement of Activity (Statement of Revenue and Expense)—a summary of your organization’s support and revenue, expenses, and changes in net assets for a specific period of time, such as a month or year. The Statement of Activity, also known as the Statement of Revenue and Expenses, reflects a church or nonprofits' support and revenue, expenses, and changes in net assets (fund balances) for a certain period of time such as month, quarter, or year.

    It shows the church or nonprofit’s source of income and how they used their resources. The form of the statement will depend on the type and size of an organization and the accounting method used. However, the statement must show the changes in restricted, temporary restricted, permanently restricted and total net assets.

  • Statement of Financial Position (Balance Sheet) — shows assets, liabilities, and net assets as of the end of a period such as a month, quarter, or year.  Because it shows how the two sides of the accounting equation
    (Assets –Liabilities = Net Assets) it is often referred to as a balance sheet.

  • Statement of Cash Flows —a summary of the cash receipts and cash payments for a specific period of time, such as a month or a year.

*Learn more about financial statements for churches, recording financial transactions, and basic accounting concepts in the Basic Church Accounting ebook.

(See this page for explanations and examples of financial statements for "For-Profit" businesses: Understanding Financial Statements for your Small Business)

Church Accounting Package

A set of 4 ebooks that cover the following topics...

  • Fund Accounting Examples and Explanations
  • Setting up a fund accounting system
  • Donation management
  • Minister compensation and taxes
  • Internal controls and staff reimbursements
  • Much more - Click here for details

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