Unlike the Profit-making organizations, the Non-profit making organizations are not concerned about reporting profits to the investors. But still, they have the statutory liability to submit their financial statements to the state regulators, tax authorities, and their own board. The Income statement of such organizations are termed as the statement of affairs or the statement of activities and their balance sheet is referred to as Statement of Financial Position just like the profit-making organizations. The assets reported in the SOFP of non-profit making organizations are classified into three main categories depending upon the regulations and flexibility of their consumptions. One is the permanently restricted asset which is regulated under stringent terms and conditions, second is the temporarily restricted asset, and third one is for which the organization enjoys full discretions to use it. The Statement of financial position must separately report all types of assets with explicit description about each category with relevant headings. Aggregating all types of assets may lead to the misrepresentation of the application side of the statement of the financial position. Lacking in an appropriate administration of the assets may lead to the penalties ranging from fines to the total refund of the grants/donations.
The restricted assets are specifically used for a particular purpose and they cannot be used for any other purpose as they are project specific. For example, any grant allocated to a university by the state for the construction of the building is said to be a non-recurring fund and is allowed to be used for the same purpose. From temporarily restricted funds the restriction is lifted after the fulfillment of certain condition(s), which is part of its TOR’s for the usage such funds, such as funds can be utilized only after hiring certain number of new experts or employees. Sometimes, the restrictions are imposed by the organization itself in order to regulate and organize the funds utilization. This also helps to avoid the misappropriation of the funds. Permanently restricted assets/donations are brought into lifelong usage of the organization and they can never be sold. For example, a piece of land received by a college as donation can be held life long and be used for the recurring source of income such as for generating crops for the college but it can never be sold. Therefore, it always stands as an asset of the organization in the SOFP.
The income statement of a non-profit making organization matches incomes with the expenses like a profit-making organization. The profit for any fiscal year is termed as surplus and loss is termed as deficit. The unrestricted grant is reflected as an income or receipts for that specific financial year. If terms and condition of the grant includes that it is for more than one year then it is released into the statement of activity systematically over its life. The surplus/deficit is then closed to the capital fund in the statement of the financial position.