Understanding Unrestricted Net Assets for Nonprofits

Unrestricted net assets are the asset (current and/or fixed) donations made to not-for-profit organizations (NPOs)Not-for-Profit OrganizationsA not-for-profit organization focuses on a particular social cause, and all the money earned or donated is used in pursuing its objectives.. The assets are “unrestricted” because they can be used for general expenditures or any other operational purpose(s), i.e., the donor didn’t specify where or how their donation(s) are to be used.

Summary

• Unrestricted net assets are the asset (current and/or fixed) donations made to not-for-profit organizations that can be used for general expenditures or for any operating purpose.
• Fund accounting makes it possible to record the donations received, segregated according to the purpose it is received for, hence making it an ideal accounting method for not-for-profit organizations.
• The total net assets for a not-for-profit organization are equal to the sum of all the classifications of net assets.

Net Assets Classifications

1. Unrestricted net assets

They are “unrestricted” because there are no restrictions on its usage or expenditureExpenditureAn expenditure represents a payment with either cash or credit to purchase goods or services. An expenditure is recorded at a single point in whatsoever. Their usage is determined by the not-for-profit organization as it deems fit.

2. Restricted net assets

They are “restricted” because the donations are only usable for specific outlined purposes established by the donor. The NPOs cannot use these donations for whatever operational purpose they deem fit as they are earmarked for certain programs.

Further, restricted net assets are also classified into two categories:

• Temporarily restricted net assets are donations that are specified by the donor beforehand to be used for a specific expense, or project, within a specified time period.
• Permanently restricted net assets are the donations made for a specific purpose, without any specific time period, in perpetuity.

Total Net Assets

Total net assets for a not for profit organization is equal to the sum of the above classifications of net assets, i.e.:

Total Net Assets =  Unrestricted Net Assets + Restricted Net Assets

Total Net Assets =  Unrestricted Net Assets + (Temporarily Restricted Net Assets + Permanently Restricted Net Assets)

What is Fund Accounting?

Fund accounting is one of the popular accounting methods used by not-for-profit organizations for recording and reporting financial transactions.

Fund accounting involves recording and reporting an organization’s financial transactions based on the money received and the purpose for which it is stored or used. The accounting method is popular with NPOs because the organizations receive money and donations from various sources for various purposes. All the money/assets received are used or stored for different purposes in different funds, e.g., mission fund, growth fund, education fund, etc.

Hence, fund accounting makes it possible to record the donations received and segregate them according to the purpose it is received for, hence making it an ideal accounting method for NPOs.

Positive and Negative Unrestricted Net Assets Balance

The unrestricted net assets balance is positive when the total historical sum of the unrestricted donations, revenues, and gains are higher than the total historical sum of unrestricted expenses.

The unrestricted net assets balance is negative when the total historical unrestricted expenses are higher than the total historical unrestricted contributions, donations, revenues, and gains.

Recording Net Assets for an NPO

The net assets for a not-for-profit organization – including unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets – are all recorded in the financial statementAnalysis of Financial StatementsHow to perform Analysis of Financial Statements. This guide will teach you to perform financial statement analysis of the income statement, called “statement of position.” The statement of position is basically the balance sheet for an NPO.

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• Endowment FundEndowment FundAn endowment fund is an investment portfolio with the initial capital deriving from donations. Endowment funds are established to fund
• Net Liquid AssetsNet Liquid AssetsNet liquid assets is a term used to define the immediate liquidity position of a company. It is calculated as the difference between liquid assets and
• Restricted FundsRestricted FundsIn the non-profit industry, restricted funds refer to a reserve of money that can only be used for particular projects or purposes. The funds can be