Reading Nonprofit Financial Statements: What’s in the Equity Section?
We’ve talked about nonprofit assets (what your organization has) and we’ll get to liabilities (what you owe). This post will dig into the part of the balance sheet that often raises the most eyebrows in nonprofit board meetings: Equity.
Also called Net Assets, the equity section shows your organization’s accumulated financial story over time. It reflects the difference between what you own and what you owe—and gives insight into how much flexibility you have to weather challenges and fund your mission going forward.
Let’s unpack what’s in there, what it means, and how to read it with confidence.
What Is Equity in a Nonprofit?
In a for-profit business, equity belongs to owners or shareholders. In a nonprofit, it belongs to the mission. There are no shareholders—just resources stewarded for public good.
Equity (or net assets) is what remains after subtracting liabilities from assets. It’s basically your nonprofit’s cumulative financial result: all the surpluses and deficits, restricted gifts, building purchases, and rainy-day reserves that have built up over time.
Three Main Categories of Equity (Net Assets)
You’ll usually see three categories in the equity section:
1. Without Donor Restrictions
These are funds the organization can use for any purpose. They might come from general operating support, program income, or earned revenue. Think of this as your most flexible pool of funds.
2. With Donor Restrictions
These funds were given for a specific purpose or time period. You’ll see this category grow when you receive restricted grants or gifts—and shrink when you spend those funds according to donor intent.
3. Board-Designated Net Assets (Sometimes broken out separately)
This is a subset of “without donor restrictions” that your board has set aside for a specific purpose—like reserves, a capital project, or program expansion. They’re not legally restricted, but they’re internally earmarked.
What Does Healthy Equity Look Like?
A healthy equity section is a sign of long-term sustainability. You want to see:
Positive net assets overall—showing you have more assets than liabilities
A stable or growing “without donor restrictions” balance—indicating flexibility
Restricted net assets that align with current and upcoming work—not funds that have gone unused for years. Let’s look at a couple of examples:
Example 1: All Dressed Up, Nowhere to Spend
A small environmental nonprofit we worked with had nearly $500K in net assets—great! But $420K of that was restricted for a long-term climate education project that hadn’t launched due to staffing delays. Their unrestricted net assets were barely covering payroll.
We worked with them to present the equity section more clearly and build a narrative around why temporarily restricted funds hadn’t yet been released. Meanwhile, they used surplus operating income to start building unrestricted reserves for day-to-day flexibility.
Example 2: A Quiet Turnaround
Another client—a community arts center—had operated at a small deficit for several years, slowly depleting their net assets. They didn’t fully realize the extent of it until their new treasurer looked at the equity section and raised concerns.
With that clarity, the board rallied around a plan: they reduced overhead, launched a modest capital campaign, and started budgeting for a surplus. Over two years, they shifted from negative to positive net assets—and the board began setting aside a portion of each year’s surplus into a board-designated reserve fund.
What to Watch Out For
Negative net assets – This means you owe more than you own and should trigger a close look at cash flow and sustainability.
Large restricted balances with little movement – This can raise questions from auditors or donors.
No board-designated reserves – If you’re running lean and not setting aside surplus, it’s time to start building a cushion.
Healthy Equity Means your Organization has Choices
Your equity section is more than a leftover total—it’s a pulse check on your long-term health. When you have a healthy amount of equity, it gives you options—to invest in programs, weather a downturn, or respond to unexpected needs.
It also tells your story to funders and board members. When you understand what’s in those net asset categories, you can better communicate where you’ve been, what you’ve built, and how you’re planning for the future.
