What are Unrestricted Net Assets?
Unrestricted net assets are the assets (current and/or fixed) donations made to not-for-profit organizations (NPOs). The assets are “unrestricted” because the donations made to the NPOs can be used flexibly for general expenditure or any other operational purpose(s), i.e., the donor didn’t specify where or how their donation(s) are to be used. Full flexibility for their usage lies with the not-for-profit organization.
- Unrestricted net assets are the assets (current and/or fixed) donations made to not-for-profit organizations.
- 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 the overall classifications of the net assets.
Net Assets Classifications
1. Unrestricted net assets
They are “unrestricted” because there are no restrictions on its usage or expenditure whatsoever. Its usage is fully flexible to be used and spent as the not-for-profit organization deems fit.
2. Restricted net assets
They are “restricted” because the donations are only usable for specific outlined purposes already established by the donor. The NPOs cannot explicitly use the donations for whatever operational purpose they deem fit.
Further, restricted net assets are also classified into two categories:
- Temporarily restricted net assets are the kind of donations that are specified by the donor beforehand as to the specific expense, or project that the donation should be used for, within a specified time period.
- Permanently restricted net assets are the donations made for a specific purpose and a specific purpose only, without any specific time period, and instead made for a permanent, perpetual basis.
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 as different funds, e.g., mission fund, growth fund, education fund, etc.
Hence, 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 NPOs.
Positive and Negative Unrestricted Net Assets Balance
The unrestricted net assets balance is positive when the sum of the unrestricted donations, revenues, and gains are higher than the total unrestricted expenses.
The unrestricted net assets balance is negative when the unrestricted expenses are higher than the 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 statement called “statement of position.” The statement of position is basically the balance sheet for an NPO.
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