Both nonprofit organizations and investor-owned businesses strive to strengthen their balance sheets by increasing assets and decreasing debts and other liabilities. The balance sheets of both operations show equity as a snapshot of the financial health of the organization for a particular period by stating what is owned, owed and invested.
Assets in the Equity Equation
Assets in a "for profit" business include buildings, furniture, computers, equipment or even investments and security deposits. In a nonprofit organization, assets are not as complex. It is the funds raised. In both cases, whatever assets are retained by the organization after paying debts is the equity. For a nonprofit organization, the equity is referred to as "fund balance."
Restricted Assets Effect on Equity
The balance sheet is intended to reflect how well a business or nonprofit organization is performing. Strength in equity does not necessarily reflect availability of funds. With a business, assets appear to strengthen the balance sheet. However, when assets are used as collateral for a loan it is restricted and does not serve as cash flow and the new debt decreases the business's equity. With a nonprofit organization, the fund may receive a temporarily restricted grant appearing to strengthen the equity on the balance sheet. However, because the funds are restricted it does not serve the purpose of immediate cash flow.
Liabilities in the Equity Equation
Any accounts payable plus other amounts owed are deducted from the total assets. It is recorded as the "fund balance" on the nonprofit balance sheet. Similar to a business balance sheet, the left side of the statement lists and totals the assets. The right side lists and totals the liabilities. Below the liabilities, the fund balance, or equity for a business balance sheet, is recorded. The sum of the fund balance or equity is added to the total liabilities and recorded as "Total Liabilities and Fund Balance" for a nonprofit balance sheet, or "Total Liabilities and Equity" for a business balance sheet. The total must be equal to the total assets.
Types of Equity
The two sources of equity shown on a business balance sheet are retained earnings and new stock sales. A nonprofit balance sheet can retain earnings but cannot sell common stock to raise funds. Therefore, stock sales is not shown on a nonprofit balance sheet. Instead it raises funds through grants and donations for a specific cause, such as needs in health care or education.