Net Assets

NET ASSETS = Assets - Liabilities

Assets are anything which the firm owns or has title to (in other words ownership of). Examples of Assets are cash, accounts receivable, investments, equipment, furniture, and buildings.

Liabilities are something which a firm owes to a person or another firm. It may be in the form of creditors - people or firms who have sold you goods and services which you have not yet paid for, or it may be money borrowed from a financial institution - loans. Examples of Liabilities are accounts payable, payroll taxes payable, and loans payable.

FASB Statement of Financial Accounting Concepts 6, Elements of Financial Statements defines Net assets as "the residual interest in  an entity's assets remaining after liabilities  are deducted."

Type of Net Assets

SFAS 117 introduced the concept of reporting net assets in three different classes. Net assets are classified based on the presence or absence of donor imposed restriction as either (1) unrestricted , (2)temporarily restricted, or (3) permanently restricted.

Unrestricted Net Assets: are net assets that are neither temporarily restricted nor permanently restricted. Therefore, they include all net assets with uses not restricted by donors or by law.

Temporarily Restricted Net Assets: are net assets whose use is limited by either donor-imposed time restrictions or purpose restrictions. Time restrictions require resources to be used in a certain period or after a specified date. Purpose restrictions require resources to be used for a specified purpose.

Permanently Restricted Net Assets: are those that the donor stipulates must be maintained by the organization in perpetuity. Permanently restricted net assets increase when organizations receive contributions for which donor-imposed restrictions limiting the organization's use of an asset or its economic benefits neither expire with the passage of time nor can be removed by the organization's meeting certain requirements.