Carlisle Clinic, a not-for-profit organization, reported an equity balance of $1,000,000 on its December 2012 balance sheet. Assuming net income of $200,000 for the year and no other equity adjustments during 2012, what was Carlisle Clinic's equity balance as of December 31, 2011?

• A. $800,000
• B. $1,000,000
• C. $1,200,000
• D. $600,000

Answer: (B)

Not-for-profit organizations use net assets instead of equity, and net income increases those net assets. The ending net assets for a year equal the beginning net assets plus the year’s net income (assuming no other changes to net assets).

Here, ending net assets are 1,000,000 and net income for the year is 200,000. With no other equity adjustments, the beginning net assets must be 1,000,000 minus 200,000, which is 800,000. Therefore, the equity balance as of December 31, 2011 would be 800,000.