The terms included in the glossary are common terms that are encountered in discussions of nonprofit financial statements and general accounting terms used in discussions involving nonprofit business activities. Many of these terms appear in nonprofit financial statements and these definitions will help readers understand the terms.
The items marked with an asterisk (*) are either replaced by new terms or the definitions have been modified as noted in the section titled “Glossary: Amendments Made Upon Adoption of ASU 2016-14.” These definitions become effective for the entity once they adopt ASU 2016-14.
The definitions marked with this symbol (†) are based on the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Master Glossary.
| account | The smallest subcategory in which financial activity is tracked. Thus, an account is a specific item of asset, liability, net asset, revenue, or expense. Also, a section of a general ledger in which only the financial activity of that particular item is recorded. |
| account balance | The net difference between total debits and credits posted to an account. |
| accounts payable | An amount owed to an outside party for goods or services received. |
| accounts receivable | An amount owed to the organization from another party for goods and services sold by the organization on credit. |
| accrual basis accounting | A method of accounting based on the economic reality of a transaction. Thus, revenues are reflected in the accounts when earned rather than when payment is received, and expenses are recorded in the accounting period incurred, rather than when paid. Although more complicated than cash-basis accounting, accrual-basis accounting results in a better matching of revenues with the expenses incurred to generate those revenues. |
| accrued expense/accrued liability | Expenses incurred in one accounting period that will be paid for in a subsequent accounting period. Similar in nature to an accounts payable, but tend to be internally generated expenses, for example, accrued salary. |
| amortization | Similar to depreciation in that it is a method of allocating the cost of an asset over the period in which the asset is used. Most often applied to leasehold improvements and intangible assets rather than fixed assets such as furniture and buildings. |
| assets | Items of economic value owned by an organization. |
| board-designated endowment fund*† | An endowment fund created by a not-for-profit entity's (NFP's) governing board by designating a portion of its unrestricted net assets to be invested to provide income for a long but unspecified period (sometimes called funds functioning as endowment or quasi-endowment funds). (See endowment fund.) (See also designated net assets.) |
| change in net assets | See net income and/or net loss. |
| contribution† | An unconditional transfer of cash or other assets to an entity, or a settlement of debt that is voluntary and nonreciprocal. |
| current asset | Cash or other assets expected to be converted into cash within one year of the reporting period. Examples: cash held in checking accounts and accounts receivable due within one year of the reporting period. |
| current liability | An obligation due to be paid within one year of the reporting period. Example: accounts payable. |
| deferred revenue | See unearned revenue. |
| depreciation expense | Annual allocation of a portion of the original cost of a fixed asset to expense over the asset's estimated useful life. |
| designated net assets*† | Unrestricted net assets subject to self-imposed limits by action of the governing board. Designated net assets may be earmarked for future programs, investment, contingencies, purchase or construction of fixed assets, or other uses. |
| donor-imposed restriction*† | A donor stipulation that specifies a use for the contributed asset that is more specific than broad limits resulting from all of the following: |
A donor-imposed restriction on an NFP's use of the asset contributed may be temporary or permanent. Some donor-imposed restrictions impose limits that are permanent, for example, stipulating that resources be invested in perpetuity (not used up). Others are temporary, for example, stipulating that resources may be used only after a specified date, for particular programs or services, or to acquire buildings and equipment.
| donor-restricted endowment fund*† | An endowment fund that is created by a donor stipulation requiring investment of the gift in perpetuity or for a specified term. Some donors may require that a portion of income, gains, or both be added to the gift and invested subject to similar restrictions. The term does not include a board-designated endowment fund. (See endowment fund.) |
| endowment fund*† | An established fund of cash, securities, or other assets to provide income for the maintenance of an NFP. The use of the assets of the fund may be permanently restricted, temporarily restricted, or unrestricted. Endowment funds are generally established by donor-restricted gifts and bequests to provide either of the following: (a) a permanent endowment, which is to provide a permanent source of income, or (b) a term endowment, which is to provide income for a specified period. Alternatively, an NFP's governing board may earmark a portion of its unrestricted net assets as a board-designated endowment fund. |
| expense | Cost of assets used up and liabilities incurred for the purpose of earning revenues. |
| fiscal year | Twelve-month accounting period selected by an organization. It may be calendar year-end, or end on any other month-end. |
| functional classification*† | A method of grouping expenses according to the purpose for which costs are incurred. The primary functional classifications are program services and supporting activities. |
| fundraising† | Activities undertaken to induce potential donors to contribute money, securities, services, materials, facilities, other assets, or time. Fundraising expenses are supporting services. |
| funds functioning as endowment*† | Unrestricted net assets designated by an entity's governing board, rather than restricted by a donor or other outside agency, to be invested to provide income for a long but unspecified period. A board-designated endowment, which results from an internal designation, is not donor-restricted and is classified as unrestricted net assets. The governing board has the right to decide at any time to expend the principal of such funds. (Sometimes referred to as quasi-endowment funds.) (See also designated net assets.) |
| furniture and equipment | A part of fixed assets. Tangible property, usually with a long useful life, used in the revenue-producing activities of the organization. |
| investments | Assets held for production of income that is incidental to the main operations and programs of the organization. Example: investment in bonds and stocks that earn interest and dividends. |
| liability | An obligation owed for goods or services received in the past that will be paid at a future time. |
| long-term liability | A liability that is expected to be paid at a future time greater than one year from the reporting period. Example: the long-term portion of a mortgage payable. |
| management and general activities*† | Supporting activities that are not identifiable with a single program, fundraising activity, or membership-development activity but that are indispensable to the conduct of those activities and to an entity's existence. |
| natural expense classification*† | A method of grouping expenses according to the kinds of economic benefits received in incurring those expenses. Examples of natural expense classifications include salaries and wages, employee benefits, supplies, rent, and utilities. |
| net assets*† | Residual value of an organization after liabilities have been paid (Assets less Liabilities = Net Assets). Sometimes called net equity. There are three mutually exclusive classes of net assets depending on the existence or absence of donor-imposed restrictions: unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets. |
| net income (change in net assets) | Excess of revenues over expenses (previously called profit). |
| net loss or deficit (change in net assets) | Excess of expenses over revenues. A net loss is frequently shown in brackets ($xxx). |
| permanently restricted net assets*† | The portion of an organization's net assets resulting from contributions of assets whose use by the organization is limited by donor-imposed stipulations that neither expire by the passage of time nor can be fulfilled or otherwise removed by actions of the organization. |
| prepaid expense | Advance payment of a cost that will provide benefits over a future time. Example: prepaid insurance. |
| program services† | Activities that result in goods and services being distributed to beneficiaries, customers, or members that fulfill the purposes or mission of the organization. |
| realized gain/loss | The amount that results from the sale of an asset. If the organization's cost exceeds the sales price, the result will be a loss incurred by the organization. If the cost is less than the sales price, the result will be a gain. (See unrealized gain/loss.) |
| reclassifications*† | Simultaneous increase of one class of net assets and decrease of another, usually as a result of the release or lapsing of restrictions. |
| restricted support† | Donor-restricted revenues or gains from contributions that increase either temporarily restricted net assets or permanently restricted net assets. Monies received by a not-for-profit by grant or donation that are explicitly limited by the donor as to how they may be used. Restrictions vary; a contribution might be limited to use for a specific project, for a specific time period, or it might be limited in that only income earned on the contribution may be spent. |
| revenue | The value of what is received in exchange for goods sold or services provided. |
| Statement of Activities | One of the basic financial statements. It summarizes the revenues and gains generated and expenses and losses incurred during the accounting period in question and results in a change in net assets (net income or net loss). |
| Statement of Financial Position (or Balance Sheet) | One of the basic financial statements; it shows at a particular date the economic worth of a nonprofit. The statement reflects the assets owned by the organization, the liabilities owed by the organization, and the residual net assets (representing the net worth). |
| supporting activities† | Activities, other than program services, consisting primarily of management and general, fundraising, and membership-development activities. |
| temporarily restricted net assets*† | The part of net assets resulting from contributions of assets whose use by the organization is limited by donor-imposed stipulations that either expire by the passage of time or can be fulfilled and removed by actions of the organization pursuant to those stipulations. |
| unearned revenue | Also called deferred revenue. A liability based on advance payment by another party for goods or services the nonprofit will provide in the future. |
| unrealized gains/loss | The difference between the fair value of an asset being held and its total cost at a certain point in time. |
| unrestricted net assets*† | The part of net assets of an NFP that is neither permanently restricted nor temporarily restricted by donor-imposed stipulations. The only limits on the use of unrestricted net assets are the broad limits resulting from the following: |
| voluntary health and welfare entities† | An NFP that is formed for the purpose of performing voluntary services for various segments of society and that is tax exempt (organized for the benefit of the public), supported by the public, and operated on a not-for-profit basis. Most voluntary health and welfare entities concentrate their efforts and expend their resources in an attempt to solve health and welfare problems of our society and, in many cases, those of specific individuals. As a group, voluntary health and welfare entities include those NFPs that derive their revenue primarily from voluntary contributions from the general public to be used for general or specific purposes connected with health, welfare, or community services. For purposes of this definition, the general public excludes governmental entities when determining whether an NFP is a voluntary health and welfare entity. |