Charities and other nonprofit organizations are known best for the charitable causes they serve, but increasingly, they are using strategies and techniques borrowed from the for-profit business world. It has become extremely important for charities to account for their assets and income in a way that their stakeholders can understand, and what's known as the statement of activities and changes in net assets provides vital financial information. Below, you'll learn more about this statement, and how you can use it to calculate the net assets that a nonprofit holds.

How a charity works
The typical charity sees money flow through its organization in a regular way. Money comes in through charitable gifts from donors, and some charities offer goods or services that generate income, as well. It then flows out of the charity through ordinary expenses in the course of fulfilling the organization's mission.

In addition to the impact of cash flow on a charity's financial condition, changes in net assets can also happen because of increases or decreases in the value of those assets. When a charity sells an asset, it can realize a gain or loss compared to what it paid, and that can affect the net value of the charity's total assets. For publicly traded securities, changes in value also occur from simple market fluctuations, and those increases or decreases will be reflected in the unrealized gain or loss on the charity's portfolio.

All of these figures should appear on a charity's statement of activities and changes in net assets. Therefore, if you have that statement, as well as the amount of net assets as of the beginning date that the statement covers, then you can easily calculate the ending net asset amount.

Calculating net assets
In order to calculate net assets as of the end of the accounting period, follow these steps.

  • Add up all the inflows from donations and revenue that the charity generated.
  • Subtract the outflows from expenses related to the charity's operations.
  • Find the net realized gain or loss from sales of assets during the period, and either add in the gain, or subtract the loss.
  • Find the net unrealized gain or loss from changes in value of assets during the period, and either add in the gain, or subtract the loss.

The result will give you the change in assets during the period. If it's positive, then add it to the beginning asset balance. If it's negative, subtract it from the beginning asset balance. That gives you the ending balance of net assets for the charity.

Charities don't work exactly like for-profit businesses, but there are a lot of similarities. Using the statement of activities and changes in net assets can help you better understand a charity's true financial condition.

This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors. We'd love to hear your questions, thoughts, and opinions on the Knowledge Center in general or this page in particular. Your input will help us help the world invest, better! Email us at knowledgecenter@fool.com. Thanks -- and Fool on!

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.