Understanding the financial health of a charity is crucial for transparency and accountability. But what exactly are financial statements, and why are they so important? Let's break it down.

‍
What Are Financial Statements?

Financial statements are detailed reports that show the financial activities and position of an organization. They are like a snapshot of how much money the charity has, where it comes from, and how it is spent. These statements are crucial for charities to file their annual information return, known as the T3010 or T2 for Not-for-Profit, even if the charity was not active or had no financial activity during the fiscal year.

Types of Financial Statements

There are two main types of financial statements that charities need to prepare:

1. Statement of Assets and Liabilities (Balance Sheet): This statement shows what the charity owns (assets) and what it owes (liabilities). It includes:

• Current Assets: Cash, bank accounts, short-term investments, and receivables.
• Long-term Assets: Investments maturing in more than a year, like stocks and bonds.
• Fixed Assets: Capital assets such as buildings and equipment.
• Current Liabilities: Accounts payable and deferred revenue.
• Long-term Liabilities: Debts like mortgages that are due in more than a year.
• Accumulated Surplus or Deficit: The difference between assets and liabilities, showing if the charity has more assets (surplus) or more liabilities (deficit).
  
  

2. Statement of Revenue and Expenditures (Income Statement): This statement details the money the charity earns (revenue) and spends (expenditures). It includes:

• Revenue: Donations, government grants, investment income, sales of goods and services, rental income, fees, and income from fundraising.
• Expenditures: Costs such as advertising, travel, interest and bank charges, office supplies, salaries, and occupancy costs (like rent and utilities).
• Net Income or Loss: The difference between revenue and expenditures, indicating a surplus or deficit for the year.

Prepared NotesFinancial statements also include prepared notes that provide additional details, such as:

• Accounting Policies: For example, how depreciation is calculated.
• Details of Investments: Including maturity dates and interest rates.
• Sources of Revenue: Specifying types of government grants.
• Transactions with Non-Arm's Length Parties: Deals with people or organizations closely related to the charity.
• Information About Long-Term Funds: Such as donations that must be held for ten years or more.
• Future Obligations: Expected future costs.

Reporting MethodsCharities can choose between two methods to report their finances:

1. Cash Basis Method: Records revenue and expenditures only when money is received or paid.
2. Accrual Basis Method: Records revenue when it is earned and expenditures when they are incurred, even if the money hasn't been received or paid yet.

It's important to use the same method consistently throughout the financial statements, except when reporting gifts received, which must always use the cash method.

Public AvailabilityFinancial statements are available to the public upon request. This transparency helps maintain trust with donors, government agencies, and the public.

Why Are Financial Statements Important?

1. Transparency: They show how the charity uses its funds, ensuring donors and stakeholders know where their money goes.
2. Accountability: Accurate financial statements help prevent misuse of funds and ensure legal compliance.
3. Informed Decision-Making: Financial statements provide essential information for planning and budgeting.
4. Public Trust: Openness about finances builds trust and confidence among supporters.

Financial statements are essential for every charity, regardless of size or activity level. They provide a clear picture of the charity's financial health, ensuring transparency, accountability, and trust. By understanding and properly preparing these statements, charities can better manage their resources and fulfill their missions effectively.