To calculate the change in net assets for a nonprofit, subtract total expenses and losses from total revenues and gains for the fiscal period. A positive result means the organization ended the year with more resources than it started; a negative result means it spent more than it took in. Because nonprofit accounting standards require net assets to be split into “with donor restrictions” and “without donor restrictions,” you run the math for each category and then add the two results for the total.
The formula in one line:
Change in Net Assets = (Total Revenues + Gains) − (Total Expenses + Losses)
The Two-Column Approach
Every dollar a nonprofit holds sits in one of two columns. Net assets without donor restrictions are the flexible funds leadership can direct anywhere, from payroll to program delivery. Net assets with donor restrictions come with strings from the giver: the money must fund a specific program, cover a capital project, or stay invested in an endowment.
You calculate the change for each column separately because their revenue and expense activity is not interchangeable. A $50,000 grant restricted to youth programming lands in the restricted column when received, not the unrestricted column. Only when the organization spends that money on the approved purpose does the amount move to unrestricted through a reclassification.
One classification trap: when a board sets aside unrestricted money for a specific internal purpose, such as a quasi-endowment or a capital reserve, that designation is voluntary and does not create a donor restriction. Under FASB standards, the principal of a board-designated endowment stays in net assets without donor restrictions. Disclose the designation in the notes, but keep the money in the unrestricted column for the calculation.
Pulling the Right Numbers
The math is simple. The data collection is where errors creep in. Pull revenues from every source for the fiscal period: donor contributions, government and private grants, program service fees, membership dues, investment returns, and special event proceeds. On the expense side, compile program costs, management and general expenses, and fundraising costs. Your general ledger, donation records, payroll system, and investment statements are the primary sources.
Two items that smaller organizations routinely miss:
In-kind contributions. Under Accounting Standards Update 2018-08, nonprofits must report donated goods and certain donated services at fair value on their financial statements. If a law firm donates $15,000 of pro bono legal work that meets recognition criteria, that amount appears as both revenue and expense. The net effect on the change in net assets is often zero, but leaving in-kind items out understates the organization’s actual activity.
Unrealized investment gains and losses. Nonprofit accounting standards require you to report changes in the fair value of investments, whether or not you sold anything. If your portfolio rose by $40,000 during the year and you held everything, that $40,000 still belongs in the calculation. Organizations that only book realized activity will produce a number that diverges from what auditors expect.
If your organization owes unrelated business income tax on activities not substantially related to its exempt purpose, the tax payment itself is an expense that reduces the change in net assets.
Releases From Restrictions
When an organization satisfies a donor’s conditions, either by spending money on the specified project or by reaching a date the donor set, the related amount moves from the restricted column to the unrestricted column. This reclassification is called net assets released from restrictions. On the Statement of Activities, it shows as a negative adjustment in the restricted column and an equal positive adjustment in the unrestricted column.
The transfer nets to zero across the two columns, so it does not change the total. Within each column, though, the movement changes the picture significantly, and forgetting to record it makes the restricted column look larger than it is while understating unrestricted growth.
A Worked Example
A community health nonprofit starts its fiscal year with $400,000 in net assets without donor restrictions and $150,000 in net assets with donor restrictions. During the year:p>
- Unrestricted revenues: $300,000 in donations, $80,000 in program fees, and $15,000 in investment gains, totaling $395,000
- Restricted revenues: a $60,000 grant for dental clinic equipment
- Total expenses: $340,000, all charged against unrestricted funds
- Investment losses: $5,000 unrestricted
- Restriction satisfied: $40,000 of previously restricted funds spent on the dental clinic
Unrestricted column: $395,000 in revenues and gains, plus $40,000 released from restrictions, minus $340,000 in expenses, minus $5,000 in losses. Change: positive $90,000. Ending unrestricted net assets: $400,000 + $90,000 = $490,000.
Restricted column: $60,000 in new restricted revenue, minus $40,000 released to unrestricted. Change: positive $20,000. Ending restricted net assets: $150,000 + $20,000 = $170,000.
Total change in net assets: $90,000 + $20,000 = $110,000. Total ending net assets: $490,000 + $170,000 = $660,000.
The Cross-Check
Once you have a total change figure, verify it with a second calculation:
Change in Net Assets = Ending Net Assets − Beginning Net Assets
In the example above, beginning net assets were $550,000 and ending net assets were $660,000. The $110,000 difference matches the sum of the two column calculations. When both approaches produce the same number, the books are clean. When they don’t, something was misclassified or left out and you need to find it before publishing the statements.
Where the Number Lands
The change in net assets appears on the Statement of Activities, the nonprofit equivalent of an income statement. Revenues and expenses run vertically, with the two restriction categories in separate columns. The change for each column appears near the bottom, followed by beginning net assets and ending net assets. That ending figure carries directly to the Statement of Financial Position, where it appears as the residual after subtracting total liabilities from total assets.
Auditors will check that the ending net assets on the Statement of Activities match the net assets line on the Statement of Financial Position. A mismatch signals a booking error somewhere in the year’s entries and will hold up the audit or review engagement.
Mistakes That Throw the Number Off
A few classification errors show up over and over:
- Recording a restricted contribution as unrestricted, which inflates available resources on paper and creates a compliance problem if the money is spent on the wrong thing
- Failing to record the release of restrictions when donor conditions are satisfied, which distorts both columns even though the total is unchanged
- Omitting unrealized investment gains and losses, especially at organizations that only track realized activity
- Treating board-designated funds as if they were donor-restricted, which overstates the restricted column
- Leaving in-kind contributions off the statements entirely
Organizations with federal expenditures above $1 million trigger a Single Audit requirement, which applies additional scrutiny to how restricted federal dollars flow through the calculation. Getting the classification right the first time is always cheaper than correcting it during an audit.
Reading a Negative Result
A negative change in net assets for a single year is not, by itself, a crisis. Organizations dip into reserves to launch new programs, buy equipment, or bridge a gap between grant cycles. The warning sign is a pattern across multiple years, because a reserve that keeps shrinking eventually runs out.
When you read the result, look at the unrestricted column more closely than the total. An organization can post a positive total change while its unrestricted funds quietly erode, because a surge in restricted contributions can mask the underlying picture. Restricted money can only go toward its designated purpose, so an organization with a starved unrestricted pool will eventually struggle to pay rent, utilities, and staff regardless of how healthy the restricted balance looks.