Understanding Financial Statements

MONEY
MANAGEMENT

Keeping Tabs on Where the Money Goes at Your Nonprofit

Launched in 1982 by Jim and Patty Rouse,
The Enterprise Foundation is a national,
nonprofit housing and community develop-
ment organization dedicated to bringing lasting
improvements to distressed communities.

Copyright 1999, The Enterprise Foundation, Inc.

All rights reserved.
ISBN: 0-942901-54-1

No content from this publication may be reproduced or

transmitted in any form or by any means, electronic or
mechanical, including photocopying, recording or any infor-
mation storage and retrieval system, without permission
from the Communications department of The Enterprise
Foundation. However, you may photocopy any worksheets
or sample pages that may be contained in this manual.

This publication is designed to provide accurate and authori-

tative information on the subject covered. It is sold with the
understanding that The Enterprise Foundation is not render-
ing legal, accounting or other project-specific advice. For
expert assistance, contact a competent professional.

COMMUNITY DEVELOPMENT LIBRARY™

This book is part of the Enterprise Community
Development Library, an invaluable reference collection
for nonprofit organizations dedicated to revitalizing and
reconnecting neighborhoods to mainstream America.
One of many resources available through Enterprise, it
offers industry-proven information in simple, easy-to-
read formats. From planning to governance, fund rais-
ing to money management, and program operations
to communications, the Community Development
Library will help your organization succeed.

ADDITIONAL ENTERPRISE RESOURCES

The Enterprise Foundation provides nonprofit
organizations with expert consultation and training
as well as an extensive collection of print and online
tools. For more information, please visit our Web site
at www.enterprisefoundation.org.
About This Manual
What are financial statements?

Financial statements are numerical descriptions of fiscal activity

and status required as part of an audit. Understanding the finan-
cial statements of your organization will give you a different, and
important, view of the nonprofit’s health and prospects.

Understanding Financial Statementsis designed for the staffs and boards

of nonprofit organizations; city, county and state agencies; and techni-
cal assistants and partners of nonprofit community development orga-
nizations. This guide explains the elements of nonprofit organizational
financial statements, providing information on:
■ Standard formats of various financial statements and reports
■ Cash vs. accrual accounting
■ Restricted funds
Not intended as an in-depth text, Understanding Financial Statements
provides examples and exercises written from the standpoint of a non-
profit manager or board member who is not familiar with accounting
or the details of financial management.

This manual is one of the books within the Money Managementseries Table of Contents
of The Enterprise Foundation’s Community Development Library™.
The series provides detailed information on: Chart of Accounts 2

■ Budgeting Balance Sheets 11

■ Cash flow projections Exercise #1 14

■ Sound financial management Exercise #2 16

■ Assessing your organization’s finances Income Statements 18
■ Accounting software Exercise #3 21
■ Federal rules of nonprofit money management Exercise #4 24

Statements of Cash Flows 26

Exercise #5 28

Trial Balance: Connecting Balance

Sheets With Income Statements 32

Exercise #6 37

Understanding Different
Accounting Methods 43

Fund Accounting 46

Exercise #7 51

1
 Chart of Accounts
The chart of accounts is a listing of the different
accounts used to record the activities or transac-
tions of your organization. A chart of accounts
reflects your nonprofit’s particular nature and
function while using standard accounting terms.
For instance, everyone will have a cash account.
But you may not have an inventory account
unless you are a retailer or wholesaler.

For community development organizations, the

chart of accounts may include accounts related
to single-family development such as construc-
tion in progress.

Five major accounts are used in a chart

of accounts:
■ Assets
■ Liabilities
■ Equity or Net Assets
■ Revenues
■ Expenses

2
COMMON CLASSIFICATIONS

These five major accounts are larger categories that allow an organization to place its many different
accounts and financial activities into an ordered, comprehensible structure. They help turn a confus-
ing tangle of numbers into a clear narrative about your organization’s financial condition based on
your organization’s particular activities.

Commonly used classifications

Assets Current Assets — cash, accounts receivable, prepaid expenses and other assets that
can be readily converted to cash or consumed (within one year or accounting cycle).

Investments — typically stocks, bonds and other securities.

Fixed Assets — land and durable property and equipment held and used in normal
operations and depreciated over future periods.

Other Assets — accounts in this "catch-all" section vary between industries and orga-
nizations but are typically any asset that does not fit into other categories, particu-
larly noncurrent assets such as long-term notes receivable (loans to others). Also,
nondepreciable fixed assets such as buildings purchased for renovation and resale
(housing inventory for a housing development corporation).

Liabilities Current Liabilities — obligations that are expected to be satisfied with current assets
or within one year: accounts payable, wages and other payroll liabilities; short-term
notes or current payments of longer-term obligations.

Long-Term Liabilities — obligations that are not expected to be satisfied within the
current period (one year) but rather will be paid in future periods: bonds, pensions,
long-term notes (loans).

Net Assets Equivalent to equity in a for-profit entity, the net assets account represents the
cumulative effect of all transactions of the organization throughout its life. “What
you own minus what you owe equals your net assets.” Assets - Liabilities = Net Assets

Revenues Most nonprofit organizations classify revenues as either restricted or unrestricted.

Restricted revenue refers to income that must be used for a specific purpose or pro-
gram and comes from a special source. Unrestricted revenue refers to income that
can be used at the nonprofit’s discretion for any activity (program or administrative).

Other classifications can be defined based on their relevance to the organization’s

activities. For example, some community development organizations may want a
classification for revenue accounts related to federal contracts.

Expenses Expense accounts may be classified based on the type of organization and the
nature of its activities. The classifications may also be determined by how the man-
agement of the organization wants to see the information — the format of the
financial statements.

The grouping of expenses may vary greatly between industries and companies. Many
nonprofits classify their expenses as program and nonprogram — often called gen-
eral and administrative, or G&A. Program expenses are those that are directly attrib-
utable to a specific program. Nonprogram expenses refer to those costs that may not
be directly attributed to a program but are incurred in the operation of the organiza-
tion (fund raising, for example). Other classifications — such as direct and indirect
expenses — may exist as well.

3
 FOREVER HOMES CDC —
CODES & ACCOUNTS

Let’s look at an example of a fictitious 501(c)(3)
nonprofit organization, Forever Homes, that has
three distinct business operations, all related to
housing.
■ Managing Property Owned by Other
Nonprofits — In 1998 Forever Homes managed
400 units of affordable multifamily housing.
■ Developing Single-Family Homes for Sale
to First-Time Low-Income Home Buyers —
In 1998 Forever Homes developed six houses.
■ Providing Supportive Housing for
Households with Extensive Social Service
Needs — In 1998 Forever Homes owned and
managed 15 units of supportive housing.

Forever Homes’ activities are reflected in

its chart of accounts. Here is a typical chart
of accounts for this nonprofit. The code
number stands for posting categories, and
the account name describes the activity
Codes & Accounts that takes place under each category.

Code Account Code Account

1010 Cash — Checking 4160 Training Fees

1015 Cash — HOME Funds 4170 Consulting
1020 Cash — Savings 4200 Sale of Property
1030 Cash — Petty Cash 4900 Interest Income
1200 Accounts Receivable 5000 Cost of Property Sold
1300 Prepaid Expenses 6010 Salaries
1500 Land/Buildings 6020 Benefits
1510 Construction in Progress 6100 Program Supplies
1520 Salable Property 6150 Equipment Rental
1600 Long-Term Investments 6200 Staff Training
1800 Office Furniture & Equipment 6250 Marketing/Advertising
1801 Accumulated Depreciation — 6300 Printing & Reproduction
Furniture & Equipment 6350 Publications & Memberships
1900 Notes Receivable 6400 Travel
2000 Accounts Payable 7050 Fund-Raising & Event Costs
2100 Payroll Liabilities 7100 Rent
2120 Accrued Expenses 7110 Utilities
2200 Purchaser’s Deposits 7120 Telephone
2300 Lease Payable 7130 Insurance
2400 Notes Payable 7140 Office Supplies
2500 HOME Funds Payable 7150 Postage & Delivery
3000 Net Assets 7160 Repairs & Maintenance
4010 Grants (unrestricted) 7200 Legal Fees
4011 Grants (restricted) 7210 Accounting & Auditing Fees
4050 Contributions 7800 Miscellaneous
4100 Fund-Raising Event 7900 Interest
4150 Program Fees 8000 Depreciation

4
How transactions affect Forever Homes’ chart of accounts

Sample Transactions Classifications Affected

Monthly payments of $18,750 $18,750 removed from Cash account

for salaries $18,750 added to Salaries account

Receipt of $5,000 from a $5,000 added to Cash account

fund-raising event $5,000 added to Fund-Raising Event account

Payment of $960 in interest $960 removed from Cash account

on a loan $960 added to Interest account

Receipt of $75 for interest $75 added to Cash account

on bank deposits $75 added to Interest Income account

Payment of $4,000 for $4,000 removed from Cash account

an audit $4,000 added to Accounting & Auditing Fees account

5
 More sample transactions and the accounts they affect

Transaction Accounts Classification

Received unrestricted operating grant and Cash Current Asset

deposited money in bank Grants (unrestricted) Revenue

Paid staff salaries Salaries Expenses

Cash Current Asset

Purchased supplies on account Supplies Expenses

(due in 30 days) Accounts Payable Current Liability

Borrowed money from bank for development Cash Current Asset

(note due in five years) Notes Payable Long-Term Liability

Paid invoices from last month Accounts Payable Current Liability

Cash Current Asset

Recorded renovation costs for single-family Construction in Progress Housing Inventory

home (from contractor’s invoice) Accounts Payable Current Liability

Sold single-family home — transferring Notes Payable Long-Term Liability

development loan to buyer Sale of Property Revenue

6
Example of Chart of Accounts for Forever Homes CDC
— Classifications of Balance Sheet Accounts

This chart builds on what you already have seen in prior examples. In addition to codes and account
names, the chart includes a classification of accounts by type as described earlier. Please note that all of
the accounts on this page are balance sheet accounts. (More about balance sheets later.)

Classifications of balance sheet accounts

Code Account Classification

1010 Cash — Checking Current Asset

1015 Cash — HOME Funds Current Asset
1020 Cash — Savings Current Asset
1030 Cash — Petty Cash Current Asset
1200 Accounts Receivable Current Asset
1300 Prepaid Expenses Current Asset

1500 Land/Buildings Housing Inventory

1510 Construction in Progress Housing Inventory
1520 Salable Property Housing Inventory

1600 Long-Term Investments Investment

1800 Office Furniture & Equipment Fixed Asset

1801 Accum. Depr. — Furn. & Equip. Fixed Asset

1900 Notes Receivable Other Asset

2000 Accounts Payable Current Liability

2100 Payroll Liabilities Current Liability
2120 Accrued Expenses Current Liability
2200 Purchaser’s Deposits Current Liability

2300 Lease Payable Long-Term Liability

2400 Notes Payable Long-Term Liability
2500 HOME Funds Payable Long-Term Liability

3000 Net Assets Net Assets

7
 Example of Chart of Accounts for Forever Homes CDC
— Classifications of Income Statement Accounts

This chart is another example showing all three headers: codes, account names and classification by
type. The difference between this chart and the one shown just before is that all of the accounts on
this page are income statement accounts instead of balance sheet accounts. (More about income
statements later.)

Classifications of income statement accounts

Code Account Classification

4010 Grants (unrestricted) Revenue

4011 Grants (restricted) Revenue
4050 Contributions Revenue
4100 Fund-Raising Event Revenue
4150 Program Fees Revenue
4160 Training Fees Revenue
4170 Consulting Revenue
4200 Sale of Property Revenue
4900 Interest Income Revenue

5000 Cost of Property Sold Cost of Property Sold

6010 Salaries Direct Expenses

6020 Benefits Direct Expenses
6100 Program Supplies Direct Expenses
6150 Equipment Rental Direct Expenses
6200 Staff Training Direct Expenses
6250 Marketing/Advertising Direct Expenses
6300 Printing & Reproduction Direct Expenses
6350 Publications & Memberships Direct Expenses
6400 Travel Direct Expenses

7050 Fund-Raising & Event Costs Indirect Expenses

7100 Rent Indirect Expenses
7110 Utilities Indirect Expenses
7120 Telephone Indirect Expenses
7130 Insurance Indirect Expenses
7140 Office Supplies Indirect Expenses
7150 Postage & Delivery Indirect Expenses
7200 Legal Fees Indirect Expenses
7210 Accounting & Auditing Fees Indirect Expenses
7900 Interest Indirect Expenses

8000 Depreciation Indirect Expenses

8
Example of Chart of Accounts for Forever Homes CDC — Dollars Assigned

On prior charts you have already seen three columns with codes, account names and classification by
type headers. Now you can see the addition of a fourth column, which shows actual amounts specified
for each account under a new header called Balance.

Dollars assigned

Code Account Classification Balance

1010 Cash — Checking Current Asset $4,015

1015 Cash — HOME Funds Current Asset $34,000
1020 Cash — Savings Current Asset $0
1030 Cash — Petty Cash Current Asset $250
1200 Accounts Receivable Current Asset $1,000
1300 Prepaid Expenses Current Asset $450
1500 Land/Buildings Housing Inventory $30,000
1510 Construction in Progress Housing Inventory $15,000
1520 Salable Property Housing Inventory $56,000
1600 Long-Term Investments Investment $0
1800 Office Furniture & Equipment Fixed Asset $30,000
1801 Accum. Depr. — Furn. & Equip. Fixed Asset $13,500
1900 Notes Receivable Other Asset $5,000
2000 Accounts Payable Current Liability $3,200
2100 Payroll Liabilities Current Liability $6,800
2120 Accrued Expenses Current Liability $0
2200 Purchaser’s Deposits Current Liability $0
2300 Lease Payable Long-Term Liability $3,000
2400 Notes Payable Long-Term Liability $0
2500 HOME Funds Payable Long-Term Liability $135,000
3000 Net Assets Net Assets $0
4010 Grants (unrestricted) Revenue $75,000
4011 Grants (restricted) Revenue $220,000
4050 Contributions Revenue $25,000
4100 Fund-Raising Event Revenue $5,000
4150 Program Fees Revenue $0
4160 Training Fees Revenue $21,000
4170 Consulting Revenue $20,000
4200 Sale of Property Revenue $0
4900 Interest Income Revenue $75
5000 Cost of Property Sold Cost of Property Sold $0
6010 Salaries Direct Expenses $225,000
6020 Benefits Direct Expenses $49,500
6100 Program Supplies Direct Expenses $0
6150 Equipment Rental Direct Expenses $2,000
6200 Staff Training Direct Expenses $2,000
6250 Marketing/Advertising Direct Expenses $2,000

chart continued on next page

9
 Code Account Classification Balance

6300 Printing & Reproduction Direct Expenses $2,400

6350 Publications & Memberships Direct Expenses $1,500
6400 Travel Direct Expenses $4,500
7050 Fund-Raising & Event Costs Indirect Expenses $2,000
7100 Rent Indirect Expenses $18,500
7110 Utilities Indirect Expenses $2,100
7120 Telephone Indirect Expenses $3,900
7130 Insurance Indirect Expenses $5,000
7140 Office Supplies Indirect Expenses $5,500
7150 Postage & Delivery Indirect Expenses $3,500
7160 Repairs & Maintenance Indirect Expenses $0
7200 Legal Fees Indirect Expenses $4,000
7210 Accounting & Auditing Fees Indirect Expenses $4,000
7800 Miscellaneous Indirect Expenses $0
7900 Interest Indirect Expenses $960
8000 Depreciation Indirect Expenses $13,500

LOOK AT YOUR ORGANIZATION’S

CHART OF ACCOUNTS

Think about what you have just learned and

compare it to the way your nonprofit keeps its
chart of accounts.

Notice the five account classifications:

Assets
Liabilities
Net Assets
Re ve n u e s
Ex p e n s e s

Also look at the level of detail in your accounts:

Forever Homes has one account for salaries.

Does your organization have one or more

than one? Is the classification type listed next
to each account?

10
Balance Sheets
The balance sheet — known officially as a
Statement of Financial Position — is a report
of the financial position of an organization
at one moment in time, providing a snapshot
of your company’s financial health. The infor-
mation contained in the balance sheet shows
your organization’s ability to meet present and
future obligations with current resources, how
much is owed and how much is owned by
the organization.
STANDARD FORMAT
The balance sheet contains the first three of the
five major account types:
■ Assets
■ Liabilities
■ Net Assets
Assets comprise one section of the balance
sheet while liabilities and net assets comprise
the other section. The “totals” of these two
sections should balance.
The assets section shows what you own or what
resources you have available. The liabilities and
net assets section shows what you owe plus the
organization’s net account balance.
THE BASIC ACCOUNTING EQUATION
Assets – Liabilities = Net Assets
– or –
Assets = Liabilities + Net Assets
Again, the balance sheet reflects the financial sta-
tus of your organization for one day or moment.
A subsequent balance sheet the very next day or
moment could show a very different picture. The
next examples illustrate this concept.

Forever Homes CDC balance sheet — consolidated as of Dec. 31, 1998

Balance
ASSETS Current Assets $ 39,715
Housing Inventory 101,000
Investments 0
Fixed Assets 16,500
Other Assets 5,000
Total Assets $ 162,215

LIABILITIES Current Liabilities $ 10,000

Long-Term Liabilities 138,000
Total Liabilities 148,000

NET ASSETS 14,215

TOTAL LIABILITIES & NET ASSETS $ 162,215

Assumptions
■ Line-item categories are the same as line items in the chart of accounts.
■ Each consolidated category is broken out into line items.
■ The basic accounting equation still holds: Assets = Liabilities + Net Assets

11
 How Balance Sheets Are Affected by Purchases

Forever Homes CDC balance sheet — detailed as of Dec. 31, 1998

Balance Dec. 31

ASSETS CURRENT ASSETS

Cash — Checking $ 4,015
Cash — HOME Funds 34,000
Cash — Savings 0
Cash — Petty Cash 250
Accounts Receivable 1,000
Prepaid Expenses 450
Total Current Assets 39,715

INVESTMENTS
Land/Buildings 30,000
Construction in Progress 15,000
Salable Property 56,000
Long-Term Investments 0
Total Investments 101,000

FIXED ASSETS
Office Furniture & Equipment 30,000
Accum. Depr. — Furn. & Equip. (13,500)
Total Fixed Assets 16,500

OTHER ASSETS
Notes Receivable 5,000
Total Other Assets 5,000

TOTAL ASSETS $ 162,215

LIABILITIES CURRENT LIABILITIES

Accounts Payable $ 3,200
Payroll Liabilities 6,800
Accrued Expenses 0
Purchaser’s Deposits 0
Total Current Liabilities 10,000

LONG-TERM LIABILITIES
Lease Payable 3,000
Notes Payable 0
HOME Funds Payable 135,000
Total Long-Term Liabilities 138,000

TOTAL LIABILITIES 148,000

NET ASSETS 14,215

TOTAL LIABILITIES & NET ASSETS $ 162,215

12
On Jan. 3, 1999, Forever Homes purchased a computer that cost $2,500. The organization agreed to
pay the computer store within 30 days. The balance sheet of January 3 reflects this transaction.

Forever Homes CDC balance sheet — as of Jan. 3, 1999

Balance Jan. 3

ASSETS CURRENT ASSETS

Cash — Checking $ 4,015
Cash — HOME Funds 34,000
Cash — Savings 0
Cash — Petty Cash 250 Notice:
Accounts Receivable 1,000 ■ The increase in the

Prepaid Expenses 450 Office Furniture &

Total Current Assets 39,715 Equipment line item
INVESTMENTS — from $30,000 in
Land/Buildings 30,000 the December 31 bal-
Construction in Progress 15,000 ance sheet to $32,500
Salable Property 56,000 in the January 3 bal-
Long-Term Investments 0 ance sheet
Total Investments 101,000 ■ Corresponding
FIXED ASSETS increases in the
Office Furniture & Equipment 32,500 summary line items
Accum. Depr. — Furn. & Equip. (13,500) Total Fixed Assets
Total Fixed Assets 19,000 and Total Assets

OTHER ASSETS ■ The increase in the

Notes Receivable 5,000 liability line item
Total Other Assets 5,000 Accounts Payable

TOTAL ASSETS $ 164,715 ■ Corresponding

increases in the sum-
LIABILITIES CURRENT LIABILITIES mary line items Total
Accounts Payable $ 5,700 Current Liabilities,
Payroll Liabilities 6,800 Total Liabilities, and
Accrued Expenses 0 Total Liabilities and
Purchaser’s Deposits 0 Net Assets
Total Current Liabilities 12,500

LONG-TERM LIABILITIES
Lease Payable 3,000
Notes Payable 0
HOME Funds Payable 135,000
Total Long-Term Liabilities 138,000

TOTAL LIABILITIES 150,500

NET ASSETS 14,215

TOTAL LIABILITIES & NET ASSETS $ 164,715

13
 Balance Sheets: Exercise #1
Balance Sheet Transaction Changes

On Jan. 15, 1999 Forever Homes purchased a single-family house for $30,000. Closing costs charged to
the purchaser were $2,200. HOME funds were already lent by the city to pay all costs of this purchase.
Use this page to show how this transaction changes the balance sheet of Jan. 3, 1999.

Forever Homes CDC balance sheet

as of Jan. 3 as of Jan. 15

ASSETS CURRENT ASSETS

Cash — Checking $ 4,015
Cash — HOME Funds 34,000
Cash — Savings 0
Cash — Petty Cash 250
Accounts Receivable 1,000
Prepaid Expenses 450
Total Current Assets 39,715

INVESTMENTS
Land/Buildings 30,000
Construction in Progress 15,000
Salable Property 56,000
Long-Term Investments 0
Total Investments 101,000

FIXED ASSETS
Office Furniture & Equipment 32,500
Accum. Depr. — Furn. & Equip. (13,500)
Total Fixed Assets 19,000

OTHER ASSETS
Notes Receivable 5,000
Total Other Assets 5,000

TOTAL ASSETS $ 164,715

LIABILITIES CURRENT LIABILITIES

Accounts Payable $ 5,700
Payroll Liabilities 6,800
Accrued Expenses 0
Purchaser’s Deposits 0
Total Current Liabilities 12,500

LONG-TERM LIABILITIES
Lease Payable 3,000
Notes Payable 0
HOME Funds Payable 135,000
Total Long-Term Liabilities 138,000

TOTAL LIABILITIES 150,500

NET ASSETS 14,215

TOTAL LIABILITIES & NET ASSETS $ 164,715

© 1999, The Enterprise Foundation, Inc.

14
Answers to Exercise #1

Forever Homes CDC balance sheet — as of Jan. 15, 1999

Balance

ASSETS CURRENT ASSETS

Cash — Checking $ 4,015
Cash — HOME Funds 1,800
Cash — Savings 0
Cash — Petty Cash 250 Notice:
Accounts Receivable 1,000 ■ The decrease in the

Prepaid Expenses 450 Cash—HOME Funds

Total Current Assets 7,515 line item — from
INVESTMENTS $34,000 on Jan. 3 to
Land/Buildings 62,200 $1,800 on Jan. 15
Construction in Progress 15,000 ■ The corresponding
Salable Property 56,000 decrease in the sum-
Long-Term Investments 0 mary line item Total
Total Investments 133,200 Current Assets
FIXED ASSETS ■ The increase in the
Office Furniture & Equipment 32,500 Land/Buildings line
Accum. Depr. — Furn. & Equip. (13,500) item — from $30,000
Total Fixed Assets 19,000 on Jan. 3 to $62,200
OTHER ASSETS on Jan. 15
Notes Receivable 5,000 ■ The corresponding
Total Other Assets 5,000 increase in the sum-
TOTAL ASSETS $ 164,715 mary line item Total
Investments
LIABILITIES CURRENT LIABILITIES ■ No changes in Total
Accounts Payable $ 5,700 Assets, Total
Payroll Liabilities 6,800 Liabilities, Net Assets,
Accrued Expenses 0 or Total Liabilities and
Purchaser’s Deposits 0 Net Assets
Total Current Liabilities 12,500

LONG-TERM LIABILITIES
Lease Payable 3,000
Notes Payable 0
HOME Funds Payable 135,000
Total Long-Term Liabilities 138,000

TOTAL LIABILITIES 150,500

NET ASSETS 14,215

TOTAL LIABILITIES & NET ASSETS $ 164,715

15
 Balance Sheets of Your Organization: Exercise #2
Look at your nonprofit’s most recent and next most recent balance sheets. If those are not available,
take any two that were created at different times. Use this exercise to list the components of each
balance sheet. Then answer the questions on the next page.

ASSETS CURRENT ASSETS

Cash — Checking
Cash — Savings
Total Current Assets

HOUSING INVENTORY
Land/Buildings
Construction in Progress
Salable Property
Total Housing Inventory

INVESTMENTS
Long-Term Investments
Total Investments

FIXED ASSETS
Office Furniture & Equipment
Accum. Depr. — Furn. & Equip.
Total Fixed Assets

OTHER ASSETS
Notes Receivable
Total Other Assets

TOTAL ASSETS

LIABILITIES CURRENT LIABILITIES

Accounts Payable
Payroll Liabilities
Accrued Expenses
Total Current Liabilities

LONG-TERM LIABILITIES
Lease Payable
Notes Payable
Total Long-Term Liabilities

TOTAL LIABILITIES

NET ASSETS

TOTAL LIABILITIES & NET ASSETS

© 1999, The Enterprise Foundation, Inc.

16
Balance Sheet Questions:

Have total assets increased or decreased?

Which categories of the assets caused the change?

Have total liabilities increased or decreased?

Which categories of the liabilities caused the change?

What has been the effect on net assets?

© 1999, The Enterprise Foundation, Inc.

17
 Income Statements
The income statement — known officially as
a Statement of Activity — is a report that mea-
sures the results of an organization’s activities
over a period of time. Very simply, the income
statement reports the organization’s revenues and
expenses for the given period — month, quarter,
year, etc. — and the resulting difference: profit
(surplus) or loss (deficit). The income statement
may also be called a statement of revenue and
expenses or a profit and loss statement.
STANDARD FORMAT OF
INCOME STATEMENTS
Income statements contain the last two of the
five major types of accounts:
■ Revenues
■ Expenses
Revenues represent resources flowing into the
organization for the period; expenses represent
uses of those resources flowing out of the organi-
zation. The resulting difference is the net income
— profit or loss. In the nonprofit world, it may
Forever Homes CDC income statement —
Consolidated as of Dec. 29, 1998
REVENUES Restricted
Unrestricted
Total Revenues
EXPENSES Personnel Expenses
Direct Program Costs
Indirect and Nonprogram Costs
Total Expenses
NET INCOME
Assumptions
■ Revenues are listed at the top of the page
■ Expenses are listed below revenues
■ Net income is listed at the bottom
■ Net income = total revenues – total expenses
18
be more appropriate to refer to net income as
surplus or deficit. You may also see it called the
change in net assets.
The standard format of an income statement is
simple but can be as detailed as you want, with
revenues and expenses grouped and subtotaled
into subtypes or classifications. Whereas the
balance sheet shows the financial position of
the organization for the report date, the income
statement shows the financial performance of
the organization for the reporting period.
REVENUES LESS EXPENSES EQUALS
NET INCOME
An income statement may not necessarily report
on all incoming resources and outgoing uses.
For example, a bank loan coming into the orga-
nization and the payments of principal going
out will not be reflected (although interest owed
and paid on that loan will be reflected in the
income statement). (See the Statement of Cash
Flow section for more information.)
Current period
$ 220,000
131,075
351,075
248,500
14,400
62,460
325,360
$ 25,715
Forever Homes CDC income statement —
Detailed (not consolidated) as of Dec. 29, 1998

Current Period

REVENUES Grants (unrestricted) $ 60,000

Grants (restricted) 220,000
Contributions 25,000
Fund-Raising Event 5,000
Program Fees 0
Training Fees 21,000
Consulting 20,000
Sale of Property 0
Interest Income 75
Total Revenues 351,075

EXPENSES PERSONNEL EXPENSES

Salaries 203,000
Benefits 45,500
Total Personnel Expenses 248,500

DIRECT PROGRAM COSTS

Program Supplies 0
Equipment Rental 2,000
Staff Training 2,000
Marketing/Advertising 2,000
Printing & Reproduction 2,400
Publications & Memberships 1,500
Travel 4,500
Total Direct Program Costs 14,400

INDIRECT AND NONPROGRAM COSTS

Fund-Raising & Event Costs 2,000
Rent 18,500
Utilities 2,100
Telephone 3,900
Insurance 5,000
Office Supplies 5,000
Postage & Delivery 3,500
Repairs & Maintenance 0
Legal Fees 4,000
Accounting & Auditing Fees 4,000
Miscellaneous 0
Interest 960
Depreciation 13,500
Total Indirect and Nonprogram Costs 62,460

Total Expenses 325,360

NET INCOME $ 25,715

Assumptions
■ Line-item categories are the same as the line items in the Chart of Accounts
■ Each consolidated category is broken out into line items
■ Net income = total revenues – total expenses

19
 On Dec. 30, 1998, Forever Homes purchased office supplies that cost $500. This income
statement up to December 30 reflects this transaction.

Forever Homes CDC income statement —

For the year-to-date ended Dec. 30, 1998

Current Period

REVENUES Grants (unrestricted) $ 60,000

Grants (restricted) 220,000
Contributions 25,000
Fund-Raising Event 5,000
Program Fees 0
Training Fees 21,000
Consulting 20,000
Sale of Property 0
Interest Income 75
Notice:
Total Revenues 351,075 ■ The increase in the

office supplies line

EXPENSES PERSONNEL EXPENSES
item — from $5,000
Salaries 203,000
in the December 29
Benefits 45,500
statement to $5,500
Total Personnel Expenses 248,500
in the December 30
DIRECT PROGRAM COSTS statement
Program Supplies 0 ■ The corresponding
Equipment Rental 2,000
$500 increase in the
Staff Training 2,000
summary line items,
Marketing/Advertising 2,000
Total Indirect and
Printing & Reproduction 2,400
Nonprogram Costs
Publications & Memberships 1,500
and Total Expenses
Travel 4,500
Total Direct Program Costs 14,400 ■ The corresponding
$500 decrease in the
INDIRECT AND NONPROGRAM COSTS
summary line item
Fund-Raising & Event Costs 2,000
Net Income
Rent 18,500
Utilities 2,100
Telephone 3,900
Insurance 5,000
Office Supplies 5,500
Postage & Delivery 3,500
Repairs & Maintenance 0
Legal Fees 4,000
Accounting & Auditing Fees 4,000
Miscellaneous 0
Interest 960
Depreciation 13,500
Total Indirect and Nonprogram Costs 62,960

Total Expenses 325,860

NET INCOME $ 25,215

20
Income Statements: Exercise #3
On Dec. 31, 1998, Forever Homes received an unrestricted grant payment of $15,000 and paid monthly
payroll expenses of $22,000 in salaries and $4,000 in benefits.

Use the following page to show how these transactions change the income statement of Dec. 31, 1998.

Forever Homes CDC income statement —

For the year-to-date ended Dec. 30, 1998

as of Dec. 30 as of Dec. 31

REVENUES Grants (unrestricted) $ 60,000

Grants (restricted) 220,000
Contributions 25,000
Fund-Raising Event 5,000
Program Fees 0
Training Fees 21,000
Consulting 20,000
Sale of Property 0
Interest Income 75
Total Revenues 351,075

EXPENSES PERSONNEL EXPENSES

Salaries 203,000
Benefits 45,500
Total Personnel Expenses 248,500

DIRECT PROGRAM COSTS

Program Supplies 0
Equipment Rental 2,000
Staff Training 2,000
Marketing/Advertising 2,000
Printing & Reproduction 2,400
Publications & Memberships 1,500
Travel 4,500
Total Direct Program Costs 14,400

INDIRECT AND NONPROGRAM COSTS

Fund-Raising & Event Costs 2,000
Rent 18,500
Utilities 2,100
Telephone 3,900
Insurance 5,000
Office Supplies 5,500
Postage & Delivery 3,500
Repairs & Maintenance 0
Legal Fees 4,000
Accounting & Auditing Fees 4,000
Miscellaneous 0
Interest 960
Depreciation 13,500
Total Indirect and Nonprogram Costs 62,960

Total Expenses 325,860

NET INCOME $ 25,215

21
© 1999, The Enterprise Foundation, Inc.
 Answers to Exercise #3
Forever Homes CDC income statement —
For the year-to-date ended Dec. 31, 1998

Current Period

REVENUES Grants (unrestricted) $ 75,000

Grants (restricted) 220,000
Contributions 25,000
Fund-Raising Event 5,000 Notice:
■ The increase in Grants
Program Fees 0
Training Fees 21,000 (unrestricted) — from
Consulting 20,000 $60,000 on Dec. 30 to
Sale of Property 0 $75,000 on Dec. 31
Interest Income 75 ■ A corresponding
Total Revenues 366,075 increase in the
summary line item
EXPENSES PERSONNEL EXPENSES Total Revenues
Salaries 225,000
Benefits 49,500 ■ The increase in two
Total Personnel Expenses 274,500 Personnel Expenses
line items — Salaries
DIRECT PROGRAM COSTS from $203,000 to
Program Supplies 0 $225,000, and
Equipment Rental 2,000 Benefits from
Staff Training 2,000 $45,500 to $49,500
Marketing/Advertising 2,000
Printing & Reproduction 2,400 ■ Corresponding
Publications & Memberships 1,500 increases in the sum-
Travel 4,500 mary line items Total
Total Direct Program Costs 14,400 Personnel Expenses
and Total Expenses
INDIRECT AND NONPROGRAM COSTS
Fund-Raising & Event Costs 2,000 ■ A corresponding
Rent 18,500 decrease in Net
Utilities 2,100 Income — from
Telephone 3,900 $25,215 on Dec. 30
Insurance 5,000 to $14,215 on Dec. 31
Office Supplies 5,500
Postage & Delivery 3,500
Repairs & Maintenance 0
Legal Fees 4,000
Accounting & Auditing Fees 4,000
Miscellaneous 0
Interest 960
Depreciation 13,500
Total Indirect and Nonprogram Costs 62,960

Total Expenses 351,860

NET INCOME $ 14,215

22
Notes

23
 Income Statements of Your Organization: Exercise #4
Look at your nonprofit’s most recent and next most recent income statement. If those are not avail-
able, take any two that were created at different times. Use the following page to list the amounts
in each category of each income statement. Then answer the questions that follow.

Your Organization
Statement of Income

Earlier Period Later Period

REVENUES Grants (unrestricted) $60,000

Grants (restricted) 220,000
Contributions 25,000
Fund-Raising Event 5,000
Program Fees 0
Training Fees 21,000
Consulting 20,000
Sale of Property 0
Interest Income 75
Total Revenues $351,075

Cost of Property Sold 0

EXPENSES PERSONNEL EXPENSES

Salaries $203,000
Benefits 45,500
Total Personnel Expenses $248,500

DIRECT PROGRAM COSTS

Program Supplies $0
Equipment Rental 2,000
Staff Training 2,000
Marketing/Advertising 2,000
Printing & Reproduction 2,400
Publications & Memberships 1,500
Travel 4,500
Total Direct Program Costs $14,400

INDIRECT AND NONPROGRAM COSTS

Fund-Raising & Event Costs $2,000
Rent 18,500
Utilities 2,100
Telephone 3,900
Insurance 5,000
Office Supplies 5,500
Postage & Delivery 3,500
Repairs & Maintenance 0
Legal Fees 4,000
Accounting & Auditing Fees 4,000
Miscellaneous 0
Interest 960
Depreciation $13,500
Total Indirect and Nonprogram Costs $62,960

Total Expenses $325,860

24 NET INCOME $25,215

© 1999, The Enterprise Foundation, Inc.

Income Statement Questions

Have total revenues increased or decreased?

Which components of revenues caused the change?

Have total expenses increased or decreased?

Which components of expenses caused the change?

What has been the effect on net income?

© 1999, The Enterprise Foundation, Inc.

25
 Statements of Cash Flows
A statement of cash flows is a report of cash
activity. Its purpose is to illustrate how your
cash position has changed. The cash flow state-
ment reports, by certain classifications, where
cash is derived and spent. It typically shows
what areas of the organization received cash and
what areas spent cash.
STANDARD FORMAT OF
CASH FLOW STATEMENTS
Cash flow statements are usually divided
into three sections: operations, investing
and financing.
Cash flows from operations:
Inflows
■ From grants, contributions and fund raising
■ From program, management and
training fees
Outflows
■ To employees, suppliers and other vendors
■ To the Internal Revenue Service, lenders
and donors
Cash flows from investing:
Inflows
■ From sale of property or equipment
■ From collection of principal on loans
Outflows
■ To purchase property or equipment
■ To make loans to other entities
Cash flows from financing:
Inflows
■ From loans or other financing
Outflows
■ To make a payment on a loan
26
THE ROLE OF CASH FLOW AT A NONPROFIT
Although a required part of nonprofit audits,
the cash flow statement is used less often than
balance sheets and income sheets as a routine
financial management tool by many community
development organizations. It is most often pre-
pared by the auditor or accountant for the
reporting period.
STATEMENT OF CASH FLOWS VS. CASH
FLOW PROJECTIONS
While the cash flow statement reports on activi-
ties in the past, the cash flow projection details
the prediction of the timing of all funds in and
out of the system for a period in the future. The
two may have similar names, but they look and
function differently.
EFFECTS OF COMPARING CASH FLOW
STATEMENTS TO INCOME STATEMENTS
When compared to the income statement, the
cash flow statement will point out differences
between net income and cash flow. While your
financial statements may report a positive net
income, they may also report a negative cash
flow. For instance, a balloon payment on a loan
at the end of the year may drain your available
cash but will not be reflected in your income
statement (because the principal portion of the
loan is not an expense). The cash flow statement
serves as a reconciliation of accrual accounting
to cash accounting. (See the section on
Understanding Different Accounting Methods
for a definition of accrual and cash accounting.)
Notice how the operating cash flow reflects the
positive net income. However, because of the
loan to an affiliate and the payment on a com-
pleted project loan — activities that do not run
through the income statement — a negative
cash flow is reported.
Recording depreciation drives down the net
income. However, because depreciation does
not involve cash, the net cash flow in this
example is positive.

Income Statement Income Statement

REVENUES Grants $ 100 REVENUES Grants $ 100

Program Fees 70 Program Fees 70
170 170

EXPENSES Program Expenses 120 EXPENSES Program Expenses 120

Other Expenses 40 Other Expenses 40
160 Depreciation 20
180
NET INCOME $ 10
NET INCOME $ (10)

Statement of Cash Flows Statement of Cash Flows

OPERATING Inflow $ 170 OPERATING Inflow $ 170

Outflow 160 Outflow 150
Net cash provided from 10 Net cash provided from 20
operating activities operating activities

INVESTING Inflow 45 INVESTING Inflow 45

(payment on loan) (payment on loan)
Outflow 50 Outflow 50
(loan to affiliate) (loan to affiliate)
Net cash used in (5) Net cash used in (5)
investing activities investing activities

FINANCING Inflow 100 FINANCING Inflow 100

(new project loan) (new project loan)
Outflow 110 Outflow 110
(old loan payment) (old loan payment)
Net cash used in (10) Net cash used in (10)
financing activities financing activities

NET DECREASE IN CASH $ (5) NET CASH FLOW $ 5

Beginning cash, 1/1 50 Beginning cash, 1/1 50

Ending cash, 12/31 $ 45 Ending cash, 12/31 $ 55

Assumption Assumptions
■ All revenues and expenses involve cash ■ $10 of the program expenses have not yet
(no outstanding payables or depreciation) been paid (accounts payable)
■ Depreciation expenses of $20 have

been recorded

27
 Statements of Cash Flows: Exercise #5
How Transactions Affect Income Statements and Statements of Cash Flows

Part 1
For each transaction, circle the y(yes) or n(no) whether the income and/or cash flow statements are
affected in the current period. Assume each transaction is independent of other transactions.

Transaction Income Cash Flow

Statement Statement

1. Received grant for housing services program y n y n

2. Purchased supplies on account for program workshop y n y n

3. Secured financing for housing development (installments

will be received when construction begins next year) y n y n

4. Paid employees and consultants for services y n y n

5. Purchased four-unit rental property with existing grant y n y n

6. Made payment on construction loan: a. Principal portion y n y n

b. Interest portion y n y n

7. Sold rehabilitated single-family home — proceeds recognized y n y n

8. Made payment on program materials purchased last year y n y n

9. Disbursed loan to affiliated nonprofit y n y n

10. Purchased computer equipment for finance staff y n y n

© 1999, The Enterprise Foundation, Inc.

28
Part 2
How is cash flow affected, if at all?

Look back at the 10 transactions listed in Part 1.

For each transaction that would affect the cash flow statement, write what section of the cash flow
statement would be affected.

TRANSACTION SECTION AFFECTED

6a

6b

10

© 1999, The Enterprise Foundation, Inc.

29
 Answers to Exercise #5
How Transactions Affect Income Statements and Statements of Cash Flows

Part 1
The correct answers are circled below.

Transaction Income Cash Flow

Statement Statement

1. Received grant for housing services program y n y n

2. Purchased supplies on account for program workshop y n y n

3. Secured financing for housing development (installments

will be received when construction begins next year) y n y n

4. Paid employees and consultants for services y n y n

5. Purchased four-unit rental property with existing grant y n y n

6. Made payment on construction loan: a. Principal portion y n y n

b. Interest portion y n y n

7. Sold rehabilitated single-family home — proceeds recognized y n y n

8. Made payment on program materials purchased last year y n y n

9. Disbursed loan to affiliated nonprofit y n y n

10. Purchased computer equipment for finance staff y n y n

© 1999, The Enterprise Foundation, Inc.

30
Part 2

The correct answers are shown below.

TRANSACTION SECTION AFFECTED

1 Operating

2 n/a

3 n/a

4 Operating

5 Investing

6a Financing

6b Financing

7 Operating

8 Operating

9 Investing or Operating

10 Investing

© 1999, The Enterprise Foundation, Inc.

Please note: With respect to transaction #9, some activities such as

disbursing loans to affiliates may be considered by the management
of the organization as ordinary operations. Such transactions may
be classified in the appropriate section of the cash flow statement.

31
 Trial Balance: Connecting Balance Sheets With
Income Statements
A trial balance is a report of all the accounts on
the books and their respective balances as of the
date of the report. The trial balance is produced
to verify that your books are in balance, and it is
from the trial balance that the other financial
statements are constructed.
STANDARD FORMAT
Each account has either a debit or credit bal-
ance. Without getting into the details of the
theory behind debit/credit and double entry
accounting, suffice it to say that with respect
to the five major types of accounts, assets and
expenses typically have a debit balance, and lia-
bilities, net assets and revenues typically have
a credit balance.
If your trial balance is correct, the total debits and
total credits will equal: They will be in balance.
LINKING BALANCE SHEETS AND INCOME
STATEMENTS
Balance sheet accounts (assets, liabilities and net
assets) contain the cumulative effect of activities
from the beginning of time (day one of the orga-
nization’s life). Income statement accounts (rev-
enues and expenses) contain transactions only
from the current accounting cycle (fiscal year).
At the end of the year, the net difference of rev-
enues and expenses (net income) is rolled into
the net assets account, and the new fiscal year
begins with zero balances for revenues and
expenses. This is why in the nonprofit world,
net income is often referred to as change in net
assets. Let’s look at the financial statements and
trial balance of Forever Homes on the next few
pages to see how this works.

Accounts Debit Credit

Assets xx.xx

Liabilities xx.xx

Net Assets xx.xx

Revenues xx.xx

Expenses xx.xx

Totals xx.xx xx.xx

© 1999, The Enterprise Foundation, Inc.

32
Exercise 3 showed how Forever Homes’ income statement would be affected by the receipt of an unre-
stricted grant payment of $15,000 and payment of monthly payroll expenses of $22,000 in salaries and
$4,000 in benefits. This chart shows a trial balance for the receipt of a grant and payment of payroll.

Forever Homes CDC trial balance —

For Jan. 1 through Dec. 31, 1998

Code Account Debit Credit

1010 Cash — Checking $ 4,015

1015 Cash — HOME Funds 34,000
1020 Cash — Savings 0
1030 Cash — Petty Cash 250
1200 Accounts Receivable 1,000
1300 Prepaid Expenses 450
1500 Land/Buildings 30,000
1510 Construction in Progress 15,000
1520 Salable Property 56,000
1600 Long-Term Investments 0
1800 Office Furniture & Equipment 30,000
1801 Accum. Depr. — Furn. & Equip. $ 13,500
1900 Notes Receivable 5,000
2000 Accounts Payable 3,200
2100 Payroll Liabilities 6,800
2120 Accrued Expenses 0
2200 Purchaser’s Deposits 0
2300 Lease Payable 3,000
2400 Notes Payable 0
2500 HOME Funds Payable 135,000
3000 Net Assets
4010 Grants (unrestricted) 75,000
4011 Grants (restricted) 220,000
4050 Contributions 25,000
4100 Fund-Raising Event 5,000
4150 Program Fees 0
4160 Training Fees 21,000
4170 Consulting 20,000
4200 Sale of Property 0
4900 Interest Income 75
5000 Cost of Property Sold 0
6010 Salaries 225,000
6020 Benefits 49,500
6100 Program Supplies 0
6150 Equipment Rental 2,000
6200 Staff Training 2,000
6250 Marketing/Advertising 2,000

chart continued on next page

33
 Forever Homes CDC trial balance —
For Jan. 1 through Dec. 31, 1998

Code Account Debit Credit

6300 Printing & Reproduction 2,400

6350 Publications & Memberships 1,500
6400 Travel 4,500
7050 Fund-Raising & Event Costs 2,000
7100 Rent 18,500
7110 Utilities 2,100
7120 Telephone 3,900
7130 Insurance 5,000
7140 Office Supplies 5,500
7150 Postage & Delivery 3,500
7160 Repairs & Maintenance 0
7200 Legal Fees 4,000
7210 Accounting & Auditing Fees 4,000
7800 Miscellaneous 0
7900 Interest 960
8000 Depreciation 13,500

Total $ 527,575 $ 527,575

Assumptions
■ Each line item in the trial balance comes from the chart of accounts.
■ Each line item in the trial balance is represented once, and only once, in the
balance sheet or the income statement.

34
Forever Homes CDC corresponding balance sheet —
For the year ended Dec. 31, 1998

Balance Dec. 31

ASSETS CURRENT ASSETS

Cash — Checking $ 4,015
Cash — HOME Funds 34,000
Cash — Savings 0
Cash — Petty Cash 250
Accounts Receivable 1,000
Prepaid Expenses 450
Total Current Assets 39,715

INVESTMENTS
Land/Buildings 30,000
Construction in Progress 15,000
Salable Property 56,000
Long-Term Investments 0
Total Investments 101,000

FIXED ASSETS
Office Furniture & Equipment 30,000
Accum. Depr. — Furn. & Equip. (13,500)
Total Fixed Assets 16,500

OTHER ASSETS
Notes Receivable 5,000
Total Other Assets 5,000

TOTAL ASSETS $ 162,215

LIABILITIES CURRENT LIABILITIES

Accounts Payable $ 3,200
Payroll Liabilities 6,800
Accrued Expenses 0
Purchaser’s Deposits 0
Total Current Liabilities 10,000

LONG-TERM LIABILITIES
Lease Payable 3,000
Notes Payable 0
HOME Funds Payable 135,000
Total Long-Term Liabilities 138,000

TOTAL LIABILITIES 148,000

NET ASSETS 14,215

TOTAL LIABILITIES & NET ASSETS $ 162,215

35
 Forever Homes CDC corresponding income statement —
For the year ended Dec. 31, 1998

Current Period

REVENUES Grants (unrestricted) $ 75,000

Grants (restricted) 220,000
Contributions 25,000
Fund-Raising Event 5,000
Program Fees 0
Training Fees 21,000
Consulting 20,000
Sale of Property 0
Interest Income 75
Total Revenues 366,075

EXPENSES PERSONNEL EXPENSES

Salaries 225,000
Benefits 49,500
Total Personnel Expenses 274,500

DIRECT PROGRAM COSTS

Program Supplies 0
Equipment Rental 2,000
Staff Training 2,000
Marketing/Advertising 2,000
Printing & Reproduction 2,400
Publications & Memberships 1,500
Travel 4,500
Total Direct Program Costs 14,400

INDIRECT AND NONPROGRAM COSTS

Fund-Raising & Event Costs 2,000
Rent 18,500
Utilities 2,100
Telephone 3,900
Insurance 5,000
Office Supplies 5,500
Postage & Delivery 3,500
Repairs & Maintenance 0
Legal Fees 4,000
Accounting & Auditing Fees 4,000
Miscellaneous 0
Interest 960
Depreciation 13,500
Total Indirect and Nonprogram Costs 62,960

Total Expenses 351,860

NET INCOME $ 14,215

36
Trial Balance: Exercise #6
Connecting Balance Sheets With Income Statements

Using the trial balance, construct a balance sheet and an income statement on the format pages that
follow for Forever Homes for the period Jan. 1, 1999 through Jan. 31, 1999.

Forever Homes CDC trial balance —

For Jan. 1 through Jan. 31, 1999

Code Account Debit Credit

1010 Cash — Checking $ 7,451

1015 Cash — HOME Funds 17,800
1020 Cash — Savings 0
1030 Cash — Petty Cash 250
1200 Accounts Receivable 650
1300 Prepaid Expenses 0
1500 Land/Buildings 62,200
1510 Construction in Progress 37,000
1520 Salable Property 56,000
1600 Long-Term Investments 0
1800 Office Furniture & Equipment 32,500
1801 Accum. Depr. — Furn. & Equip. $ 13,500
1900 Notes Receivable 5,000
2000 Accounts Payable 26,320
2100 Payroll Liabilities 6,800
2120 Accrued Expenses 0
2200 Purchaser’s Deposits 0
2300 Lease Payable 3,000
2400 Notes Payable 10,000
2500 HOME Funds Payable 151,000
3000 Net Assets 14,215
4010 Grants (unrestricted) 12,000
4011 Grants (restricted) 31,406
4050 Contributions 800
4100 Fund-Raising Event
4150 Program Fees
4160 Training Fees 650
4170 Consulting
4200 Sale of Property
4900 Interest Income
5000 Cost of Property Sold
6010 Salaries 31,000
6020 Benefits 7,750
6100 Program Supplies 725
6150 Equipment Rental
6200 Staff Training
6250 Marketing/Advertising
6300 Printing & Reproduction

chart continued on next page

37
 Forever Homes CDC trial balance —
For Jan. 1 through Jan. 31, 1999

Code Account Debit Credit

6350 Publications & Memberships 150

6400 Travel 925
7050 Fund-Raising & Event Costs
7100 Rent 4,100
7110 Utilities 250
7120 Telephone 445
7130 Insurance 4,400
7140 Office Supplies 350
7150 Postage & Delivery 245
7160 Repairs & Maintenance
7200 Legal Fees 500
7210 Accounting & Auditing Fees
7800 Miscellaneous
7900 Interest
8000 Depreciation

$ 269,691 $ 269,691

© 1999, The Enterprise Foundation, Inc.

38
Forever Homes CDC
Balance sheet format for you to fill in as of Jan. 31, 1999

Balance Jan. 31

ASSETS CURRENT ASSETS

Cash — Checking
Cash — HOME Funds
Cash — Savings
Cash — Petty Cash
Accounts Receivable
Prepaid Expenses
Total Current Assets

INVESTMENTS
Land/Buildings
Construction in Progress
Salable Property
Long-Term Investments
Total Investments

FIXED ASSETS
Office Furniture & Equipment
Accum. Depr. — Furn. & Equip.
Total Fixed Assets

OTHER ASSETS
Notes Receivable
Total Other Assets

TOTAL ASSETS

LIABILITIES CURRENT LIABILITIES

Accounts Payable
Payroll Liabilities
Accrued Expenses
Purchaser’s Deposits
Total Current Liabilities

LONG-TERM LIABILITIES
Lease Payable
Notes Payable
HOME Funds Payable
Total Long-Term Liabilities

TOTAL LIABILITIES

NET ASSETS

TOTAL LIABILITIES & NET ASSETS

© 1999, The Enterprise Foundation, Inc.

39
 Forever Homes CDC
Income statement format for you to fill in
for the year-to-date ended Jan. 31, 1999

Current Period

REVENUES Grants (unrestricted) $60,000

Grants (restricted) 220,000
Contributions 25,000
Fund-Raising Event 5,000
Program Fees 0
Training Fees 21,000
Consulting 20,000
Sale of Property 0
Interest Income 75
Total Revenues $351,075

EXPENSES PERSONNEL EXPENSES

Salaries $203,000
Benefits 45,500
Total Personnel Expenses $248,500

DIRECT PROGRAM COSTS

Program Supplies $0
Equipment Rental 2,000
Staff Training 2,000
Marketing/Advertising 2,000
Printing & Reproduction 2,400
Publications & Memberships 1,500
Travel 4,500
Total Direct Program Costs $14,400

INDIRECT AND NONPROGRAM COSTS

Fund-Raising & Event Costs $2,000
Rent 18,500
Utilities 2,100
Telephone 3,900
Insurance 5,000
Office Supplies 5,500
Postage & Delivery 3,500
Repairs & Maintenance 0
Legal Fees 4,000
Accounting & Auditing Fees 4,000
Miscellaneous 0
Interest 960
Depreciation $13,500
Total Indirect and Nonprogram Costs $62,960

Total Expenses $325,860

NET INCOME $25,215

© 1999, The Enterprise Foundation, Inc.

40
Answers to Exercise #6
Trial balance: Connecting income statements with balance sheets

You have just done an exercise to show how the Forever Homes balance sheet as of Jan. 31, 1999 and
income statement for the period Jan. 1, 1999 through Jan. 31, 1999 go together. These charts show
the correct answers. How did you do?

Forever Homes CDC balance sheet

Balance Jan. 31

ASSETS CURRENT ASSETS

Cash — Checking $ 7,451
Cash — HOME Funds 17,800
Cash — Savings 0
Cash — Petty Cash 250
Accounts Receivable 650
Prepaid Expenses 0
Total Current Assets 26,151

INVESTMENTS
Land/Buildings 62,200
Construction in Progress 37,000
Salable Property 56,000
Long-Term Investments 0
Total Investments 155,200

FIXED ASSETS
Office Furniture & Equipment 32,500
Accum. Depr. — Furn. & Equip. (13,500)
Total Fixed Assets 19,000

OTHER ASSETS
Notes Receivable 5,000
Total Other Assets 5,000

TOTAL ASSETS $ 205,351

LIABILITIES CURRENT LIABILITIES

Accounts Payable $ 26,320
Payroll Liabilities 6,800
Accrued Expenses 0
Purchaser’s Deposits 0
Total Current Liabilities 33,120
LONG-TERM LIABILITIES
Lease Payable 3,000
Notes Payable 10,000
HOME Funds Payable 151,000
Total Long-Term Liabilities 164,000

TOTAL LIABILITIES 197,120

NET ASSETS 8,231

TOTAL LIABILITIES & NET ASSETS $ 205,351

41
 Forever Homes CDC income statement —
For the year-to-date ended Jan. 31, 1999

Current Period

REVENUES Grants (unrestricted) $ 12,000

Grants (restricted) 31,406
Contributions 800
Fund-Raising Event 0
Program Fees 0
Training Fees 650
Consulting 0
Sale of Property 0
Interest Income 0
Total Revenues 44,856

EXPENSES PERSONNEL EXPENSES

Salaries 31,000
Benefits 7,750
Total Personnel Expenses 38,750

DIRECT PROGRAM COSTS

Program Supplies 725
Equipment Rental 0
Staff Training 0
Marketing/Advertising 0
Printing & Reproduction 0
Publications & Memberships 150
Travel 925
Total Direct Program Costs 1,800

INDIRECT AND NONPROGRAM COSTS

Fund-Raising & Event Costs 0
Rent 4,100
Utilities 250
Telephone 445
Insurance 4,400
Office Supplies 350
Postage & Delivery 245
Repairs & Maintenance 0
Legal Fees 500
Accounting & Auditing Fees 0
Miscellaneous 0
Interest 0
Depreciation 0
Total Indirect and Nonprogram Costs 10,290

Total Expenses 50,840

NET INCOME $ (5,984)

42
Understanding Different Accounting Methods
CASH VS. ACCRUAL ACCOUNTING
In practice, there are two methods of account-
ing: cash and accrual. The difference between the
two lies in when transactions are recorded.
Under the cash method, transactions are
recorded when cash is exchanged: Income is rec-
ognized when it is received; expenses are recog-
nized when they are paid.
Under the accrual method, transactions are
recorded as they occur: Income is recognized
when it is earned; expenses are recognized
when they are incurred.
According to the accounting profession, the
accrual method is more appropriate. Why? With
accrual accounting, financial statements accu-
rately reflect all of the organization’s assets and
expenses regardless of when they have been
paid. So statements accurately reflect all of the
organization’s obligations (liabilities).
Key points you need to know about
Cash vs. Accrual Accounting:
■ Accrual accounting gives a more accurate pic-
ture of the match between income and expense.
■ Accrual accounting is required under Generally
Accepted Accounting Principles (GAAP), the
standards that must be followed if you want
your financial statements to be accepted by
most independent third parties such as finan-
cial institutions.
■ Cash accounting might not distort your pic-
ture too much if there are only one or two
major sources of income and if expenses are
uniform and predictable.
■ If your organization uses a cash basis for
accounting, your auditor may translate that
method into an accrual method for the audit.
If so, the audited financials will present a dif-
ferent picture than the unaudited financials.
Consider the following: Your company has
unrestricted revenue received this year. Let’s say
office supplies were purchased on November 5
and used, but the vendor invoice was not due
until January 15. Under the cash accounting
method, there would be no accounts payable
since purchases would not be recorded until the
items are paid. So the expense for office supplies
would not “hit the books” until January 15. Yet
the actual expense was incurred in November
when the supplies were received and consumed.
This illustrates the driving concept behind
accrual accounting. In order for net income to
be reflected accurately, revenue and expenses
should be matched within the same fiscal
period. Only then do the financial statements
give a realistic picture of the performance of the
organization for a particular period.
EFFECTS OF THE TWO METHODS
ON FINANCIAL STATEMENTS
Let’s see what happens on the balance sheets and
income statements when the same transactions
are recorded under the two different methods.
Assumptions
■ A $5,000 restricted grant was received on
September 1 to cover one month’s salaries, rent
and office supplies.
■ Another $3,000 grant was received on
September 30 to cover the next month’s salaries.
■ Payroll is transacted on the 15th and 30th of
every month and rent is due the first of each
month — monthly payroll is $3,000 and rent
is $1,000.
■ Office supplies were purchased and received
on September 10 for $500 — invoice due in
30 days.
43
 Transactions

SEPTEMBER Notice:
1 Received grant $5,000 deposit ■ The use of accounts payable

1 Paid rent 1,000 check to record the purchase of

10 Ordered and supplies under the accrual
received supplies 500 invoice method.
15 Payroll 1,500 check
■ The revenue from the sec-
30 Payroll 1,500 check
ond grant is not recognized
30 Received grant $3,000 deposit
but rather deferred until
OCTOBER next month so it can be
1 Paid rent $1,000 check matched with the related
10 Paid office expenses (deferred revenues
supplies invoice 500 check are classified in the liabili-
15 Payroll 1,500 check ties and net assets section
30 Payroll $1,500 check of the balance sheet).

Under the cash accounting method, here is how Under the accrual accounting method, here is
the September financial statements appear. how the September financial statements appear.

Cash Method — September financial statements Accrual Method — September financial statements

Balance — Sept. 30, 1999 Balance — Sept. 30, 1999

ASSETS Cash $ 4,000 ASSETS Cash $ 4,000

Other 1,000 Other 1,000
$ 5,000 $ 5,000

LIABILITIES Accounts Payable $ 0 LIABILITIES Accounts Payable $ 500

Other 1,000 Other 1,000
NET ASSETS 4,000 Deferred Revenue 3,000
$ 5,000 NET ASSETS 500
$ 5,000

Income Statement — Sept. 30, 1999 Income Statement — Sept. 30, 1999

REVENUE Grants $ 8,000

REVENUE Grants $ 5,000
EXPENSES Salaries 3,000
Rent 1,000 EXPENSES Salaries 3,000
Supplies 0 Rent 1,000
4,000 Supplies 500
4,500
NET INCOME $ 4,000
NET INCOME $ 500

44
WHAT HAPPENS A MONTH LATER?

We have seen what happens on the initial bal-

ance sheets and income statements when the
same transactions are recorded under the two
methods. Now compare the different ways of
accounting in October.

Cash Method — October financial statements Accrual Method — October financial statements

Balance — Oct. 31, 1999 Balance — Oct. 31, 1999

ASSETS Cash $ (500) ASSETS Cash $ (500)

Other 1,000 Other 1,000
$ 500 $ 500

LIABILITIES Accounts Payable $ 0 LIABILITIES Accounts Payable $ 0

Other 1,000 Other 1,000
NET ASSETS (500) NET ASSETS (500)
$ 500 $ 500

Income Statement — Oct. 31, 1999 Income Statement — Oct. 31, 1999

REVENUE Grants $ 0 REVENUE Grants $ 3,000

EXPENSES Salaries 3,000 EXPENSES Salaries 3,000

Rent 1,000 Rent 1,000
Supplies 500 Supplies 0
4,500 4,000

NET INCOME $ (4,500) NET INCOME $ (1,000)

45
 Fund Accounting
Fund accounting is typically employed by gov- Sources of restricted funds:
ernments and nonprofit organizations. Its use ■ Government contracts
arises from a need to record and report the
activities of various and independent funding ■ Foundation grants
sources and uses. For example, a block grant ■ Program income, earned through use of gov-
from the federal government is given to a CDC
ernment capital funds
for the specific purpose of running a day care
center. Chances are good that the expenditures ■ Loan proceeds
related to that grant will need to be tracked and ■ Investments
reported back to the donors.
Typical restrictions:
HOW DOES FUND ACCOUNTING WORK?
■ Using all funds for specific line items in devel-
An easy way to understand fund accounting is opment projects
to think of each fund as a separate and distinct ■ Not using funds to pay for too high a percent-
pot of money with a self-contained and self-
age of indirect (overhead) expenses
balanced set of records. Within the organiza-
tion’s books, each fund is set up as a separate ■ Using all funds for the direct benefit of persons
entity — with its own assets, liabilities and fund who live in a specified neighborhood or whose
balance (net assets). household incomes are below a set level

Separate funds are generally established: Example of a Restricted Fund

■ To help manage resources in accordance with
contractual agreements
■ To help senior staff plan for future activities by
alerting them to reductions in funds
■ To report details on your organization’s use of
restricted funds
The block grant for the day care center is money
that cannot be used for other programs or
administrative purposes. Other pots of money
that have no limitations on their use are often
grouped into one pot of unrestricted money.

WHAT ARE RESTRICTED FUNDS?

Restricted funds are monies that can be used only

for predefined purposes. Typically, their use will
be defined in contracts between the donor and
your organization. In the case of government
funds, the contracts may incorporate statutes
and regulations that govern the use of funds.

46
A NOTE ON FUND ACCOUNTING SOFTWARE

Automated fund accounting systems have

evolved so much that the definition of fund
accounting — in today’s nonprofit world — has
broadened. Now the term refers to the recording
and reporting of activities not just by funding
sources (HOME, CDBG, etc.) but also by pro-
gram or project (single-family development,
social services, etc.) This is because software is
becoming more flexible — allowing users to
track and report activities at various levels. With
some fund accounting systems, your nonprofit
can generate reports (such as revenue and expen-
diture statements) by program or even function
within program (training). This is similar to
reporting by cost centers in the for-profit sector.
Refer to Improving Your Accounting Softwar e,
another manual in the Money Managementseries,
for further information.

With the increased flexibility and detail in

reporting allowed by these software systems, it is
important to make clear the distinction between
funds, programs and other levels of activities as
defined by your organization.

FUND ACCOUNTING EXAMPLES

Let’s review a trial balance, balance sheet and

income statement for Jan. 1 through Jan. 31,
1999 for Forever Homes.

47
 Forever Homes CDC trial balance by fund accounting —
For Jan. 1 through Jan. 31, 1999

Unrestricted Block Grant Loan Fund Total

Cash — Checking $ 2,965 $ 2,381 $ 2,875 $ 8,221

Cash — Petty Cash 250 0 0 250
Accounts Receivable 650 0 0 650
Prepaid Expenses 0 0 0 0
Long-Term Investments 0 0 0 0
Office Furniture & Equipment 26,000 4,000 2,500 32,500
Accum. Depr. — Furn. & Equip. (12,000) (1,500) 0 (13,500)
Notes Receivable 5,000 0 0 5,000
Accounts Payable (200) (1,200) (2,500) (3,900)
Payroll Liabilities (2,300) (2,700) 0 (5,000)
Lease Payable (3,000) 0 0 (3,000)
Notes Payable 0 0 (10,000) (10,000)
Fund Balance (Net Assets) (16,515) (2,800) 0 (19,315)
Grants (unrestricted) (12,000) 0 0 (12,000)
Grants (restricted) 0 (13,406) 0 (13,406)
Contributions (800) 0 0 (800)
Fund-Raising Event 0 0 0 0
Program Fees 0 0 0 0
Training Fees (650) 0 0 (650)
Consulting 0 0 0 0
Interest Income 0 0 0 0
Salaries 9,000 9,300 2,700 21,000
Benefits 2,250 2,325 675 5,250
Program Supplies 0 525 0 525
Equipment Rental 0 0 0 0
Staff Training 0 0 0 0
Marketing/Advertising 0 0 0 0
Printing & Reproduction 0 0 0 0
Publications & Memberships 150 0 0 150
Travel 0 25 200 225
Fund-Raising & Event Costs 0 0 0 0
Rent 900 300 1,250 2,450
Utilities 50 100 0 150
Telephone 100 225 0 325
Insurance 0 2,400 2,000 4,400
Office Supplies 50 0 300 350
Postage & Delivery 100 25 0 125
Legal Fees 0 0 0 0
Accounting & Auditing Fees 0 0 0 0
Interest 0 0 0 0
Depreciation 0 0 0 0

Balance $ 0 $ 0 $ 0 $ 0

Assumptions
■ Received a block grant to fund its Supportive Housing Initiative
■ Secured a working capital loan from a local bank to start its new property management company
■ All other administrative activities supported by unrestricted funds — grants, contributions and

training fees

48
Forever Homes CDC balance sheet by fund accounting —
For Jan. 31, 1999

Unrestricted Block Grant Loan Fund Total

CURRENT ASSETS
Cash — Checking $ 2,965 $ 2,381 $ 2,875 $ 8,221
Cash — Petty Cash 250 0 0 250
Accounts Receivable 650 0 0 650
Prepaid Expenses 0 0 0 0
Total Current Assets 3,865 2,381 2,875 9,121

INVESTMENTS, PROPERTY
& OTHER ASSETS
Long-Term Investments 0 0 0 0
Office Furniture & Equip. 26,000 4,000 2,500 32,500
Accum. Depr. — Furn. Equip. (12,000) (1,500) 0 (13,500)
Notes Receivable 5,000 0 0 5,000
Total Investments,
Property & Other Assets 19,000 2,500 2,500 24,000

TOTAL ASSETS $ 22,865 $ 4,881 $ 5,375 $ 33,121

LIABILITIES & FUND BALANCE

CURRENT LIABILITIES
Accounts Payable $ 200 $ 1,200 $ 2,500 $ 3,900
Payroll Liabilities 2,300 2,700 0 5,000
Total Current Liabilities 2,500 3,900 2,500 8,900

LONG-TERM LIABILITIES
Lease Payable 3,000 0 0 3,000
Notes Payable 0 0 10,000 10,000
Total Long-Term Liabilities 3,000 0 10,000 13,000

TOTAL LIABILITIES 5,500 3,900 12,500 21,900

FUND BALANCE
(Net Assets) 17,365 981 (7,125) 11,221

TOTAL LIABILITIES &

FUND BALANCE $ 22,865 $ 4,881 $ 5,375 $ 33,121

49
 Forever Homes CDC income statement by fund accounting —
For the year-to-date ended Jan. 31, 1999

Unrestricted Block Grant Loan Fund Total

REVENUES
Grants (unrestricted) $ 12,000 $ 0 $ 0 $ 12,000
Grants (restricted) 0 13,406 0 13,406
Contributions 800 0 0 800
Fund-Raising Event 0 0 0 0
Program Fees 0 0 0 0
Training Fees 650 0 0 650
Consulting 0 0 0 0
Interest Income 0 0 0 0

Total Revenues 13,450 13,406 0 26,856

EXPENSES
Salaries 9,000 9,300 2,700 21,000
Benefits 2,250 2,325 675 5,250
Program Supplies 0 525 0 525
Equipment Rental 0 0 0 0
Staff Training 0 0 0 0
Marketing/Advertising 0 0 0 0
Printing & Reproduction 0 0 0 0
Publications & Memberships 150 0 0 150
Travel 0 25 200 225
Fund-Raising & Event Costs 0 0 0 0
Rent 900 300 1,250 2,450
Utilities 50 100 0 150
Telephone 100 225 0 325
Insurance 0 2,400 2,000 4,400
Office Supplies 50 0 300 350
Postage & Delivery 100 25 0 125
Legal Fees 0 0 0 0
Accounting & Auditing Fees 0 0 0 0
Interest 0 0 0 0
Depreciation 0 0 0 0

Total Expenses 12,600 15,225 7,125 34,950

NET INCOME $ 850 $ (1,819) $ (7,125) $ (8,094)

50
Fund Accounting: Exercise #7

For each transaction listed, indicate which of the funds in the chart below should be charged by
entering the amount.

Unrestricted Block Grant Loan Fund HOME

1. $8,000 Received donations from

fund-raising event to sup-
port CDC activities

2. $300 Purchased supplies for

training courses given by
supportive housing staff

3. $756 Paid monthly loan pay-

ment to bank (working
capital loan)

Paid salaries to staff:

4. $8,000 G&A

$8,500 Supportive housing

$2,500 Property management

5. $36,550 Received draw from HUD

for last month’s single-
family rehab costs

6. $1,800 Cost to send supportive

housing director to con-
ference in Seattle

7. $5,000 Purchased software for

new property manage-
ment system

8. $12,000 Paid construction contrac-

tor for rehab work on
two single-family houses

9. $4,000 Paid for annual audit

Assumptions
■ Received a block grant to fund its Supportive Housing Initiative
■ Secured a working capital loan from a local bank to start its new property management company
■ All other administrative activities supported by unrestricted funds — grants, contributions and

training fees

© 1999, The Enterprise Foundation, Inc.

51
 Answers to Exercise #7
FUND ACCOUNTING

Unrestricted Block Grant Loan Fund HOME

1. $8,000 Received donations from $8,000

fund-raising event to sup-
port CDC activities

2. $300 Purchased supplies for $300

training courses given by
supportive housing staff

3. $756 Paid monthly loan pay- $756

ment to bank (working
capital loan)

Paid salaries to staff:

4. $8,000 G&A $8,000

$8,500 Supportive housing $8,500

$2,500 Property management $2,500

5. $36,550 Received draw from HUD $36,550

for last month’s single-
family rehab costs

6. $1,800 Cost to send supportive $1,800

housing director to con-
ference in Seattle

7. $5,000 Purchased software for $5,000

new property manage-
ment system

8. $12,000 Paid construction contrac- $12,000

tor for rehab work on
two single-family houses

9. $4,000 Paid for annual audit $4,000

52
THE ENTERPRISE FOUNDATION
The Foundation’s mission is to see that all low-
income people in the United States have access
to fit and affordable housing and an opportunity
to move out of poverty and into the mainstream
of American life. To achieve that mission, we
strive to:
■ Build a national community revitalization
movement.
■ Demonstrate what is possible in low-income
communities.
■ Communicate and advocate what works
in community development.
As the nation’s leader in community development,
Enterprise cultivates, collects and disseminates
expertise and resources to help communities
across America successfully improve the quality
of life for low-income people.

ACKNOWLEDGMENTS
Authors: David Crowley, CPA and consultant;
Bill Batko, The Enterprise Foundation
Contributors: Carter Cosgrove + Company,
Ben Hecht, Catherine Hyde, Jane Usero,
Benjamin Warnke

SPECIAL THANKS
Research and development of this manual was
made possible by the National Community
Development Initiative, which is a consortium
of 15 major national corporations and founda-
tions and the U.S. Department of Housing and
Urban Development, and scores of public and
private organizations. NCDI was created to sup-
port and sustain the efforts of community devel-
opment organizations.

FOR MORE INFORMATION

The Enterprise Foundation
10227 Wincopin Circle, Suite 500
Columbia, Maryland 21044-3400

tel: 410.964.1230
fax: 410.964.1918
email: mail@enterprisefoundation.org

For more information about The Enterprise

Foundation or the Community Development
Library™, visit us at www.enterprisefoundation.org.
To review our online community magazine, check
out www.horizonmag.com.