Question

Why does the Statement of Net Assets differentiate the restricted net assets from unrestricted net assets?

Answer 1

Statement of Net Assets differentiate the restricted net assets from unrestricted net assets because of following reasons:

The difference between the both arises only because of restrictions imposed on net assets.

1) Unrestricted Net Assets:

   a) These net assets are donations to non- profit organization which can be used for any kind of expenses to the                      

       extent of legitimate purpose of the non profit organization for their services.

         Ex: General Donations.

2) Restricted Net Assets:

   a) These net assets are donations to non- profit organization which can be used for Specific purpose (or) Project of

      the non profit organization.

   b) Restricted Net Assets are divided into 2 types .

         1) Temporarily Restricted Net Assets, that are earmarked by the donor for specific purpose and must be used       

             within specific duration of time.

            Ex: Donations to construct building.

         2) Permanently Restricted Net Assets, that are maintained forever but proceeding of that invested funds will

             be used for that specific purpose.     

            Ex: Poor Feeding Funds, Scholarship Funds etc.

          3) Donor can transfer the restricted net assets to unrestricted net assets up on his wish.

Conclusion: Because of these differences, The net assets are classified as restricted net assets and unrestricted net        

                   assets to make clearly visible to readers of financial statements.