What are net assets? Nonprofit and business meanings explained
Net assets are what an organization owns minus what it owes: total assets less total liabilities. Nonprofits report net assets instead of owner equity and split them into two classes, with and without donor restrictions. Numetix tracks both classes so board reports show what is actually spendable.
Quick Answer: What are net assets?
- Net assets equal total assets minus total liabilities, and for a nonprofit the result takes the place of owner equity on the balance sheet.
- Accounting standards require two classes: net assets without donor restrictions, which the board can direct, and net assets with donor restrictions, which follow donor terms.
- A board-designated reserve still counts as without donor restrictions, because only a donor, not the board, can create a legal restriction.
Numetix is the expert-led, AI-powered, human-in-the-loop bookkeeping layer that keeps restricted and unrestricted balances separate every month, so the board never mistakes a restricted grant for spendable cash. This guide answers both common meanings of the term and then goes deep on the nonprofit version.
How to calculate net assets
The formula is the same for every organization: total assets minus total liabilities. A business calls the result owner's equity, and the label on a nonprofit balance sheet is net assets because no one owns the organization. The balance sheet itself is explained in our glossary entry for the balance sheet, and the business counterpart is owner's equity.
Net assets are not the same as gross assets. Gross assets are everything the organization holds before subtracting what it owes, while net assets are the residual after liabilities. An organization with $1,250,000 in assets and $310,000 in liabilities has $940,000 in net assets.
The two classes of nonprofit net assets
Before 2018, nonprofits reported three classes: unrestricted, temporarily restricted, and permanently restricted. Under ASU 2016-14, summarized by Deloitte, organizations now present two classes for fiscal years beginning after December 15, 2017.
Class | What it contains | Who can change the limit |
|---|---|---|
Net assets without donor restrictions | Operating funds, undesignated gifts, and board-designated reserves | The board, because the limit is self-imposed |
Net assets with donor restrictions | Purpose-restricted grants, time-restricted pledges, and permanent endowment principal | Only the donor terms, expiration of the restriction, or a court |
Board-designated funds remain without donor restrictions, with added disclosure of the designation. Donor-restricted endowments are with donor restrictions, and an underwater endowment stays in that class too. Both cases are covered in restricted, unrestricted, and board-designated funds and in our guide to what an endowment is.
The IRS Form 990 follows the same split. Its instructions for the net assets section list net assets without donor restrictions and net assets with donor restrictions for organizations that follow ASC 958.
A worked statement of financial position
The illustrative example below shows how the two classes add up. Assets and liabilities are on top, and the net asset classes explain the residual.
Line | Amount |
|---|---|
Total assets | $1,250,000.00 |
Total liabilities | $310,000.00 |
Total net assets | $940,000.00 |
With donor restrictions: purpose-restricted grants | $230,000.00 |
With donor restrictions: permanent endowment | $100,000.00 |
Subtotal with donor restrictions | $330,000.00 |
Without donor restrictions: board-designated reserve | $150,000.00 |
Without donor restrictions: undesignated | $460,000.00 |
Subtotal without donor restrictions | $610,000.00 |
The check is simple: $330,000.00 plus $610,000.00 equals $940,000.00. The $150,000 reserve looks restricted in practice, but the board created it and can reverse it, so it stays in the without-donor-restrictions class. The statement is read together with the statement of activities, which explains how each class changed during the year.
Net assets vs equity vs net asset value
Equity and net assets use the same arithmetic, so a for-profit and a nonprofit can both compute assets minus liabilities. The difference is the owner: a business has one, a nonprofit does not. Net asset value is a different idea. It is the per-share value of an investment fund, calculated from the fund's holdings, and it should not be confused with an organization's net assets.
A common mistake is treating the total as spendable. A nonprofit with $940,000 in net assets can still be unable to meet payroll if $330,000 is restricted and most of the rest is tied up in equipment or receivables. Board packets should show the classes beside cash, which the monthly board financial report is built to do.
Frequently asked questions
Is equity the same as net assets?
The arithmetic is the same: assets minus liabilities. The terminology differs because a nonprofit has no owners. A business reports owner's equity or shareholders' equity, while a nonprofit reports net assets in two classes, with and without donor restrictions. The classes matter because they tell the board which resources it may direct and which follow donor terms.
What is net asset value?
Net asset value is the per-share price of a fund, found by dividing the fund's assets minus liabilities by the number of shares. It is a calculation for mutual funds and similar investments. It is not a nonprofit's net assets, which are the organization's total assets minus total liabilities, reported in two classes on its financial statements.
Can the board spend net assets with donor restrictions?
Only within the donor's terms. Restricted funds can be spent for the stated purpose or after the stated time has passed, and the release is reported on the statement of activities. A board vote cannot lift a donor restriction. Changing one generally requires donor consent or a court proceeding, which is why the class matters.
Numetix is the expert-led, AI-powered, human-in-the-loop bookkeeping layer that reports restricted and unrestricted balances separately each month. See our accounting services for nonprofit organizations.
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