What are the classifications of net assets for non-profit organizations?

Non-profit organizations classify their net assets into two primary categories based on donor restrictions: net assets with donor restrictions and net assets without donor restrictions. This classification is essential as it reflects the organization's ability to use resources and provides insights into how funds ought to be managed and reported.

Net assets with donor restrictions consist of resources that have specific stipulations set by donors, such as limits on their use or requirements for future spending. These restrictions could be temporal, where the donor specifies a time frame, or permanent, which mandates that the principal amount must be maintained intact while permitting only the income generated from it to be used. On the other hand, net assets without donor restrictions represent resources that the organization can use at its discretion, providing greater flexibility in fulfilling its mission.

While the other choices define various aspects of net asset classification, they do not align with the specific terminologies and frameworks established by the Financial Accounting Standards Board (FASB) for non-profit organizations. For example, temporary and permanent net assets do not capture the current phrasing being used, and unrestricted and restricted net assets are less precise in differentiating between different types of restrictions overseen by the donors. Ultimately, the classification of net assets into with donor restrictions and without donor restrictions helps ensure clarity