A nonprofit statement of activities is the nonprofit equivalent of an income statement: it reports revenues, expenses, and the resulting change in net assets for a fiscal period. Instead of a profit or loss figure, the bottom line is called the change in net assets, and it is split between money the organization can spend freely and money that donors have restricted. Boards, donors, grantmakers, and auditors read it to gauge financial health, and its figures flow directly into the organization’s Form 990.
How It Differs From a For-Profit Income Statement
A for-profit income statement ends in net income: revenue minus expenses equals profit. A nonprofit runs the same math but frames it differently. The bottom line is the change in net assets, because nonprofits do not generate profit for owners or shareholders. And the statement splits its columns based on donor restrictions, a concept with no parallel in for-profit accounting. A corporation reports one pool of revenue. A nonprofit has to show which dollars it can spend freely and which carry strings attached by the people who gave them.
The vocabulary shifts too. Where a business reports sales revenue, a nonprofit reports contributions, grants, and program service fees. Where a business tracks equity, a nonprofit tracks net assets. These are not cosmetic differences. The donor-restriction columns drive how the entire statement is organized and determine whether money can legally be spent on a given activity.
The Two Net Asset Categories
Every dollar on the statement falls into one of two buckets: net assets without donor restrictions or net assets with donor restrictions. This two-category system replaced the older three-category approach (unrestricted, temporarily restricted, and permanently restricted) when FASB updated its nonprofit reporting standards in 2016.1Financial Accounting Standards Board (FASB). Accounting Standards Update 2016-14
Net assets without donor restrictions are funds the board can spend at its discretion on any purpose that advances the mission. These typically come from general donations where the giver did not specify a use, fees for services, and unrestricted investment income. This is the money that keeps the lights on and the programs running.
Net assets with donor restrictions carry specific conditions on timing or purpose. A donor might fund a building project, endow a scholarship, or make a grant that can only be spent in a particular year. Those restrictions are legally binding. Spending restricted money on the wrong thing can trigger legal claims from donors and jeopardize the organization’s tax-exempt status.2Office of the Law Revision Counsel. 26 USC 501 – Exemption From Tax on Corporations, Certain Trusts, Etc
Releases From Restrictions
When a nonprofit satisfies a donor’s conditions, the money moves from the restricted column to the unrestricted column through a journal entry called a release from restrictions. If a grant requires a three-year literacy program, one-third gets released each year as the work happens. If the restriction is time-based, funds move over once the specified period expires. This mechanism is what lets restricted revenue be matched against the expenses it was meant to cover, so the statement gives an accurate picture of both compliance and spending.
Investment Income and Endowments
Investment returns add a layer of complexity. Dividends, interest, and gains from an unrestricted portfolio are generally reported as increases in net assets without donor restrictions. But for endowment funds where a donor requires the principal to remain invested, the investment return stays classified as restricted until the organization appropriates it for spending. If the endowment’s market value drops below the original gift, those losses are also reported in the restricted column. The statement must show these flows clearly so a reader can tell money earned from operating programs apart from money generated by the portfolio.
Revenue Sources on the Statement
Revenue comes from several streams: individual and corporate contributions, government grants, program service fees, membership dues, special events, and investment income. Each source is recorded when earned under accrual-basis accounting, not when the check arrives. A pledge made in December but paid in January counts as revenue in December.
One category that trips up many organizations is contributed nonfinancial assets, often called gifts-in-kind: donated supplies, professional services, use of facilities, and similar non-cash contributions. Since 2021, nonprofits must present these as a separate line item on the statement, apart from cash contributions. The organization must also break them down by category and disclose whether the gifts were used directly or converted to cash, what programs benefited, and how fair value was determined. Lumping gifts-in-kind together with cash can significantly inflate reported revenue, and separating them gives donors a clearer picture of actual fundraising results.
Functional Expense Classifications
The expense side divides spending into functional categories that show donors and regulators where the money actually goes.3Internal Revenue Service. Form 990 – Return of Organization Exempt From Income Tax The two main groupings are program services and supporting services, and supporting services split into two subcategories:
- Program services: the direct costs of carrying out the mission. For a food bank, that is the cost of acquiring and distributing food. For a tutoring nonprofit, it is instructor salaries and classroom supplies.
- Management and general: administrative overhead like accounting, human resources, legal fees, and board meeting costs.
- Fundraising: everything spent to bring in donations, from gala events to direct mail to the salaries of development staff.
Accounting standards also require nonprofits to show natural expense classifications (salaries, rent, depreciation, supplies) alongside the functional categories, either on the face of the statement or in a separate schedule. That cross-reference lets a reader see not just that 70 percent of spending went to programs, but what those program dollars actually bought.
Donors often calculate the ratio of program spending to total spending as a rough efficiency measure. An organization that spends 80 cents of every dollar on programs looks different from one that spends 50 cents. The ratio is not the full story. A startup investing heavily in fundraising infrastructure may have a low program ratio for good reason. But it is the number most people look at first, and it comes straight from these functional categories.
Joint Cost Allocation
Some activities serve both fundraising and program purposes at the same time. A mailer that asks for donations and also educates the public about disease prevention might qualify for joint cost allocation, splitting the expense between the fundraising and program columns. The accounting here gets genuinely tricky. The organization has to pass tests related to purpose, audience, and content before any allocation is allowed. If the audience was selected because they are likely donors, the entire cost defaults to fundraising. If the content educates but does not include a clear call to action, it is fundraising. Organizations that aggressively allocate joint costs to inflate their program ratios draw scrutiny from auditors and state regulators.
Calculating the Change in Net Assets
The bottom of the statement pulls everything together. Total revenues minus total expenses equals the change in net assets for the period. A positive number means the organization took in more than it spent. A negative number means it drew down reserves. This figure is calculated separately for each net asset category and then combined into a total.
The change is added to the opening balance, the net assets at the beginning of the year, to produce the closing balance. An organization that started the year with $500,000 in total net assets and had a positive change of $50,000 ends with $550,000. That closing number carries directly to the statement of financial position, which is the nonprofit equivalent of a balance sheet. The two reports have to tie. If the numbers do not match, something is wrong in the books, and that is one of the first things an auditor will flag.
How It Feeds Form 990
The statement of activities is not just an internal document. Its revenue and expense figures flow directly into the organization’s annual IRS filing, and Part IX of Form 990 requires the same functional expense breakdown (program, management and general, fundraising) that the statement reports.3Internal Revenue Service. Form 990 – Return of Organization Exempt From Income Tax Getting the statement wrong means filing an inaccurate Form 990, which is a public document that anyone can request or download. Because Form 990 is also the basis for state charitable registration filings and for federal Single Audit reviews when applicable, errors in the statement of activities ripple outward into every compliance obligation the organization faces.