- What Is the Meaning and Objectives of Cash Flow Statements?
- How Are Financial Statements Different in Different Industries?
- The Advantages of Fund Accounting in Nonprofits
- How to Calculate Change in Assets
- How to Calculate the Net Worth on Financial Statements
- Accounting Rules for Payable & Receivable
Assets are everything of value that an organization owns, including property and cash. Net assets refer to what an organization has left over after all its liabilities -- or debts -- have been paid off. There are different types of net assets, including restricted and unrestricted net assets. Restricted assets are most common in nonprofits that receive money from donors. Understanding the difference between restricted and unrestricted net assets can help you better make sense of an organization’s finances.
Unrestricted Net Assets
Unrestricted net assets are part, but not all, of what would be left over if the organization’s liabilities were all satisfied today. This portion of its net assets can be used however the organization sees fit. That means that their use is not restricted by law, shareholders or donors.
Restricted Net Assets
Unlike unrestricted net assets, restricted net assets can’t be used however an organization sees fit. Rather, these assets must be used in accordance with the entity that placed the restrictions on their use, such as donors in a nonprofit organization, shareholders in a for-profit corporation or even the law. Restrictions might state how much of that money can be used in any given year, or what the money can be used to purchase or pay for.
For any organization, be it a small charity or a large corporation, unrestricted funds are the most desirable because they give organizational leaders the ability to use the money in any manner that they believe best furthers the organization’s goals. This might include paying for salaries of additional staff, making facilities improvements or expanding their reach. On the other hand, restricted assets can be a way for donors, shareholders or other constituents to money they are giving to or investing in an organization is being used in the way they’d like it to be; for individuals, restricted net assets can hold more appeal.
The problem with having both restricted and unrestricted net assets is that it can give a skewed idea of an organization’s finances. For instance, a donor might see an organization’s net assets as being $2 million without realizing that the vast majority of that money might be unavailable for everyday operating expenses because it comes from restricted funds. So even if an organization has a lot in net assets, it may not have the required reserves to carry out all operational functions with financial ease.