A statement of activities is the financial report nonprofits use to show their revenue, expenses, and changes in net assets over a specific period, typically a fiscal year. It serves the same basic function as an income statement in the for-profit world, but it uses different terminology and organizes information around the organization’s mission rather than profit generation. If you’ve encountered this term while reviewing a nonprofit’s finances, filing a Form 990, or studying accounting, here’s what you need to know about how it works and what it tells you.
How It Compares to an Income Statement
A statement of activities and a for-profit income statement are functionally the same document. Both summarize an organization’s financial performance over a set time period by listing what came in, what went out, and what changed as a result. The key differences are in language and emphasis.
A for-profit income statement tracks revenue and expenses to arrive at net income, which represents profit. A nonprofit statement of activities tracks revenue and expenses to show the change in net assets. Since nonprofits don’t have owners or shareholders earning profits, the concept of “net income” doesn’t apply. Instead, the bottom line shows whether the organization’s net assets grew or shrank during the reporting period. You’ll also see terms like “revenue” and “support” where a for-profit might use “sales” or “income,” and “net assets” where a business would say “equity.”
The purpose behind the numbers differs too. A for-profit company uses its income statement primarily to evaluate profitability. A nonprofit uses its statement of activities to assess whether it has the financial resources to continue advancing its mission, whether that’s providing healthcare, running a school, or funding research.
The Two Categories of Net Assets
The most distinctive feature of the statement of activities is how it breaks net assets into two categories: net assets without donor restrictions and net assets with donor restrictions. This split tells readers not just how much money the organization has, but how freely it can use that money.
Net assets without donor restrictions are funds the organization can spend however its leadership sees fit, within the bounds of its mission. General donations, membership dues, and program fees typically fall here. These are the most flexible dollars a nonprofit has.
Net assets with donor restrictions are funds that come with strings attached. A donor might specify that their gift can only be used for a particular program, or that it can’t be spent until a future date. These restrictions can be explicit (written into a grant agreement, for example) or implicit (clear from the circumstances of the gift). The organization must honor these limitations and can’t redirect the money to other purposes until the restriction expires.
A restriction expires when the stipulated time has elapsed, the specified purpose has been fulfilled, or both. When that happens, the funds are reclassified: the restricted category decreases and the unrestricted category increases by the same amount. You’ll see this reclassification as a separate line item on the statement of activities, often labeled “net assets released from restrictions.” This movement doesn’t represent new money coming in; it simply reflects funds shifting from restricted to unrestricted status.
Endowment funds add another layer. Under most state endowment laws, both the original gift and any investment earnings on endowment assets are considered donor-restricted until the nonprofit’s board formally appropriates them for spending. This means endowment income sits in the restricted category until the organization follows its spending policy to release it.
What the Revenue Section Includes
The revenue portion of a statement of activities captures all the ways a nonprofit brings in resources. Common revenue sources include individual and corporate donations, government and foundation grants, membership dues, program service fees, investment income, and proceeds from fundraising events. Each source is reported under the appropriate net asset category based on whether donor restrictions apply.
When a donor gives $50,000 with no conditions, that shows up as revenue in the “without donor restrictions” column. If another donor gives $50,000 specifically for a scholarship program, that appears as revenue in the “with donor restrictions” column. The statement separates these so readers can see at a glance how much of the organization’s incoming resources are flexible versus earmarked.
How Expenses Are Classified
Expenses on a statement of activities are typically classified by function, meaning they’re grouped by what the money accomplished rather than just what it was spent on. The two broad functional categories are program services and supporting services.
Program services are expenses directly tied to carrying out the nonprofit’s mission. For a food bank, this would include the cost of acquiring and distributing food. For a university, it would include instructional costs. This is the category donors and board members watch most closely because it reflects how much of the organization’s spending goes directly toward its stated purpose.
Supporting services cover everything else and are usually broken into management and general expenses (administrative overhead like accounting, HR, and office costs) and fundraising expenses (the cost of soliciting donations, running campaigns, and hosting events).
This functional breakdown is required under accounting standards issued by the Financial Accounting Standards Board. FASB’s guidance (ASU 2016-14) affects virtually all nonprofits, including charities, foundations, private colleges and universities, health care providers, cultural institutions, religious organizations, and trade associations. In addition to functional classification, nonprofits must also present or disclose expenses by their natural classification (salaries, rent, supplies, depreciation, and so on), giving readers both a mission-oriented and a spending-category view of where the money went.
Why It Matters for Compliance
The statement of activities isn’t just an internal management tool. Nonprofits that are tax-exempt under Section 501(c)(3) of the Internal Revenue Code are required to submit financial statements, including the statement of activities, as part of their annual Form 990 filing with the IRS. Grant-making foundations, government agencies, and major donors also routinely request it when evaluating whether to fund an organization.
For board members and executive directors, the statement of activities is the primary document for understanding whether the organization is financially sustainable. A pattern of expenses exceeding revenue, or a heavy reliance on restricted funds with little unrestricted support, can signal trouble ahead even if the bank account looks healthy today.
Reading a Statement of Activities
When you look at a statement of activities, focus on a few key things. First, check the change in net assets at the bottom. A positive number means the organization brought in more than it spent, strengthening its financial position. A negative number means it spent down its reserves. Neither is automatically good or bad (a nonprofit might intentionally draw down restricted funds for a capital project), but the trend over multiple years matters.
Next, look at the ratio of program expenses to total expenses. This tells you what percentage of spending goes directly to the mission versus administration and fundraising. There’s no universal benchmark, but stakeholders generally expect the majority of spending to land in program services.
Finally, pay attention to the balance between restricted and unrestricted revenue. An organization that relies heavily on restricted funding may look well-resourced on paper but have very little flexibility to cover unexpected costs or invest in new initiatives. Healthy nonprofits typically maintain a meaningful base of unrestricted support alongside their restricted grants and gifts.