Chapter 10
Accounting for Private Not-for-Profit Organizations
Not-for-Profit (NFP) Organization
An entity that possesses the following characteristics that
distinguish it from a business enterprise:
a)contributions of significant resources from provides who
do not expect any return
b)operating purposes other than to provide goods and
services at a profit, and
c)absence of ownership interests like those of a business
enterprise.
- Accounting Standards Jurisdiction
FASB has standard setting authority over business organizations
and non-governmental not-for-profit organizations, e.g., hospitals
and universities. To illustrate, Salvation Army or Golden Triangle Baptist Hospital would use non-governmental NFP accounting
discussed in Chapter 10 for VHWO or Chapter 12 for hospitals.
Private sector, non-governmentally related NFPs typically
generate their revenue from either contributions or user charges.
GASB has standard setting authority over state and local
governments and governmentally related not-for profits, e.g.,
hospitals and universities. To illustrate, Oktibbeha County
Hospital and Mississippi State University would use Enterprise Fund Accounting discussed in Chapter 5.
Chapters 10, 11 and 12 will examining the accounting standards
for private-sector, non-governmental NFPs. There are four
categories of these NFPs: voluntary health and welfare
organizations (VHWO) and “other” nonprofit organizations,
colleges and universities, hospitals and other health care entities.
In this chapter, we will discuss the accounting standards for
non-governmental VHWOs that promotes the health and well-
being of the public and for “other” NFPs, such as religious
organizations, libraries, museums. A distinguishing feature of
these organizations is that they receive significant resources from
contributions, not from services rendered.
The next chapter, Chapter 11, will examining accounting
standards for non-governmental NFP colleges and universities.
Chapter 12 will examine accounting standards for non-
governmental NFP hospitals and health care providers, and
provide a brief discussion of accounting for governmental and
for-profit hospitals . A distinguishing feature of these
organizations is that they receive a lot of their resources from
services rendered the public.
- Overview of Accounting for Not-for-Profit Organizations
Three classes of net assets:
Permanently restricted – e.g., endowments and certain assets
that must be maintained or used in a certain way.
Temporarily restricted – resources that are to be used for a
particular purpose or at a time in the future.
Unrestricted – includes all other resources.
Three required financial statements:
Statements of Financial Position reports assets, liabilities,
and net assets, which must be broken down into
unrestricted, temporarily restricted, and permanently
restricted classes.
Statement of Activities reports revenues, expenses, gains,
losses, and reclassifications. Organization-wide totals must
be provided, and separate revenues, expenses, gains and
losses are provided for each class of net assets. Expenses
are only reported for unrestricted net assets.
Statement of Cash Flows uses the standard operating,
investing, and financing categories, and either the direct or
indirect method may be used. Restricted contributions for
long-term purposes are shown as financing activities.
In addition, voluntary health and welfare organizations
(VHWO) also require a Statement of Functional Expenses,
showing expenses classified by function, object, or natural
classification.
Note disclosures are required for all standard FASB items
that are relevant to nonprofit organizations.
- Accounting, Including Reclassifications
Revenues, expenses, gains and losses are recorded on full
accrual basis, i.e., revenues are recognized when earned and expenses when incurred.To illustrate, bad debt expense is recognized at same time revenue is recognized from accounts receivable.
Accts Receivable1,000
Sales Revenue1,000
Bad Debt Expense 50
Allowance for Bad Debt 50
Revenue accounts are classified as unrestricted, temporary restricted or permanently restricted in preparing journal entries. Using these 3 categories is not required for assets, liabilities, expenses and other accounts (but always for revenues).
Cash1,000
Contribution – Unrestricted500
Contribution – Temp. Restricted300
Contribution – Perm. Restricted200
Contributions if other than cash, e.g., plant, land, bonds or stock,
are recorded at their fair market value.
Land9,000
Investment – Stock1,000
Contribution – Unrestricted10,000
Revenues, including contributions, are considered to be
unrestricted unless donor-imposed restrictions apply. To
illustrate, exchange revenues are reported as increases in
unrestricted net assets. An exchange transaction is where the
buyer and seller both expect to receive something of value, e.g.,
you spend $2 for a cup of coffee.
If conditions are imposed by donor, then the revenue is normally classified a temporary restricted. A program restriction is imposed if the resources can only be spent for a particular purpose, e.g., scholarships. A plant restriction is imposed if the resources can only be spent for capital resources such as equipment, land and building. A time restriction is imposed if resources can’t be spend until a following year or contribution will not be received until a following year. Time restrictions would be reclassified from temporary restricted to unrestricted in the following year when receive the resources or can spend them.
If the contribution cannot be spent (an endowment) then the
revenue is classified as permanently restricted. Permanently
restricted resources cannot be reclassified.
As temporary restrictions are met for program, plant or time, reclassifications from temporary restricted to unrestricted are made:
Reclass. from Temporary Restricted1,000
Reclass. to Unrestricted1,000
Multi-year promises to give are recorded as revenues at the
present value of future collections.
Contribution Receivable8,500
Contribution –Temp. Restricted8,500
As the promises are collected in future years, the difference
between previously recorded temporarily restricted revenue at
present value amounts and the current value collected is recorded
as contribution revenue, not interest revenue.
Cash1,000
Contribution Receivable850
Contribution – Unrestricted150
The promises received would also be reclassified from temporary restricted to unrestricted if they can now be spend for any purpose. Otherwise they would be reclassified as they are spend for their allowed purpose.
Reclass. from Temporary Restricted 850
Reclass. to Unrestricted850
Expenses are reported only in the unrestricted net asset
classification. When temporary restricted resources are used for
their allowed purpose they are frequently expensed. Since
expenses are unrestricted and the resources being used are
temporary restricted, a reclassification is needed from
temporarily restricted to unrestricted resources. To illustrate,
restricted resources are spent for a scholarship.
Expense – Scholarships1,000
Cash1,000
Reclass. from Temporary Restricted 1,000
Reclass. to Unrestricted1,000
A presumption is made that a given expense would first be made
from restricted resources for that particular purpose, if available,
rather than unrestricted resources. As shown above, when
restricted resources are used for their allowed purpose and are
expensed, a reclassification would be necessary.
Expenses are to be reported by function, which may be described
as either program or supporting. Major program classifications
should be shown, e.g., Performance Expense or Ballet School Expense. For VHWO both program and supporting activities are
to be shown on a Statement of Functional Expenses. Natural
categories can also be used for expenses, e.g., salaries expense,
supplies expense or depreciation expense.
Plant may be recorded as temporarily restricted or unrestricted,
depending on policy of organization. In this class our policy is to
classify PPE as unrestricted. A reclassification journal entry
therefore is needed when restricted resources are used to
purchase an unrestricted asset but no reclassification entry is
needed when PPE is depreciated.(If PPE istemporarily
restricted, then no reclassification entry is needed when restricted
resources are used to purchase a restricted asset but an amount is
reclassified each period to unrestricted for the amount of
depreciation.) All plant other than land and museum collections
are to be depreciated.
Contributed services are where individuals provide services to
NFPs. Contributed services are recognized only when they:
1) create or enhance nonfinancial assets, OR
2) require specialized skills, are provided by individuals
possessing those skills, and typically would be purchased
if not provided by donation.
When recognized, contributed services are recorded as both
a revenue and expense:
Expense – Contributed Servicesxx
Revenue – Contributed Servicesxx
Investments in stock and bonds are to be carried at fair value.
Purchases and gifts of stocks and bonds are classified as
Investments–Stock or Investment-Bonds (not as Common
Stock!!). Since stocks and bonds both have to be adjusted to fair
value at end of year you normally should keep them in different
portfolios to make that adjustment.
Normally, donations of collections of art work are not recorded.
As discussed in other chapters, the three requirements to disclose
but not record such donations are: 1) held for public exhibition, 2)
properly taken care of, and 3) if sold proceeds are used to
purchase other works of art. When works of art are recorded, they are recorded as permanently restricted assets.
Painting by Monet5,000,000
Contribution – Perm. Restricted5,000,000
Illustrative Transactions
1.Contributions and revenues are normally unrestricted. Can also
receive cash payments on accounts receivable outstanding.
Cash5500
Accounts Receivable200
Interest Receivable 200
Contributions-Unrestricted 2200
Admission charges-Unrestricted 1200
Tuition-Unrestricted500
Concessions-Unrestricted300
Interest Revenues-Unrestricted 800
- Not all revenue is from cash.
Accounts Receivable300
Tuition-Unrestricted300
- When donors impose restrictions of purpose, plant or time on
contribution, then the revenue has to be identified as temporary
restricted.
Contributions receivable1000
Contributions-Temp. Restricted1000
- A reversing journal entry is made at the beginning of the year for
performances to be completed during the current year. The
performances could not be recognized as revenue in the previous
year since they are to occur in the current year so a liability had
been set up, Deferred Revenue, when the cash or receivable was
received. We can now recognize them as revenue since the
performances are to occur in the current year.
Deferred Revenue2,000
Admission Revenue-Unrestricted2,000
- Season tickets sold at beginning of year for performances in the
future would not be recognized as revenue but as a liability
(Deferred Revenue). As the performances occur during the year
they can be transferred from Deferred Revenue to a realized
revenue account, as in #6 journal entry below.
Cash5,200
Deferred Revenue5,200
Part of monies received may be for contributions rather than for
performances that are purchased.
Cash 10,000
Deferred Revenue ($80 x 50)4,000
Contributions-Unrestricted (($120 x 50)6,000
- Half of season ticket performances ($5,200 + $4,000) were
performed by year end.
Deferred Revenue4,600
Admission Revenue-Unrestricted4,600
- Received interest income (unrestricted) on endowed investments
during the year, and accrued interest on them at year-end.
Cash1,700
Interest Receivable 200
Interest Receivable 420
Interest Revenue-Unrestricted1,480
- Unrestricted and restricted pledges of contribution were received.
Pledges may be restricted by purpose, by time, or for plant
acquisition. Multi-year pledges are recorded at the present value
of the payments. Interest is accrued on them each period (in the
Contribution account), which will bring the receivable up to the
face amount of the actual contribution.
Contributions Receivable4,906
Contributions-Temp. Restricted4,006
Contributions-Unrestricted 900
Contributions Receivable63
Contributions-Temp. Restricted63
- Cash can be received for contributions made and recognized last
year. Because of the time restriction, itwould be reclassified this
year from restricted to unrestricted. It can now be spent for any
purpose.
Cash830
Contributions Receivable830
Reclass. from Temp. Restricted-Time830
Reclass. to Unrestricted-Time830
- Cash was received on unrestricted contributions made in current
year:
Cash2,800
Contributions Receivable2,800
- Restricted resources were used to pay for certain expenses:
Performance Assistance Expense-CPE1,600
BalletSchool Expense-CPE 500
Neighborhood Production Expense-CPA 800
Cash2,900
Reclass. from Temp. Restricted-Program2,900
Reclass. to Unrestricted-Program2,900
12. A new organ with a market value of $2,500 was donated.
Equipment2,500
Contributions-Unrestricted2,500
13.Restricted funds use to purchase musical instruments.
Equipment200
Cash200
Reclass. from Temp. Restricted-Plant Acq.200
Reclass to Unrestricted-Plant Acq.200
- The time requirement for funds previously received has expired,
and the funds now are unrestricted.
Reclass. from Temp. Restricted-Time1,750
Reclass. to Unrestricted-Time1,750
- A permanently restricted gift of stock and bonds is received as an endowment.
Investment-Endowment2,000
Contributions-Perm. Restricted2,000
- The investment porfolio is adjusted to net fair value at year-end.
Investment-Endowment1,750
Gains on Investments-Unrestricted1,750
- Salaries incurred during the year were paid.
Performance Expense-Salaries2,000
BalletSchool Expense-Salaries4,000
Neighborhood Production Expense-Salaries 500
Management & General Expense-Salaries3,500
Fund-Raising Expense-Salaries 500
Membership Development Expense-Salaries 500
Cash 11,000
- Depreciation expense on plant assets was recorded.
Performance Expense-Depr.1,426
BalletSchool Expense-Depr. 700
Neighborhood Production Expense-Depr 50
Management & General Expense-Depr 600
Fund-Raising Expense-Depr. 300
Membership Development Expense-Depr 300
Accum. Depr-Building 600
Accum. Depr-Equipment2,776
- Grants were awarded to schools to assist in their productions of plays, concerts, and ballet performances, and $300 in Grants Payable outstanding at beginning of year paid.
Grants Expense800
Grants Payable300
Cash1,000
Grants Payable 100
- Supplies were purchased for various activities and outstanding
Accounts Payable from beginning of year paid.
Performance Expense-Supplies600
BalletSchool Expense-Supplies500
Neighborhood Production Expense-Supplies100
Management & General Expense-Supplies400
Fund Raising Expense-Supplies200
Membership Development Expense-Supplies100
Accounts Payable150
Cash1930
Accounts Payable 120
- Paid interest on notes payable and long-term debt and charged to various functions, and made payments on them also.
Performance Expense-Interest214
BalletSchool Expense-Interest151
Neighborhood Production Expense-Interest 83
Management & General Expense-Interest 80
Fund Raising Expense-Interest 40
Membership Development Expense-Interest 32
Notes Payable500
Long Term Debt400
Cash1,500
- Took an inventory of office supplies on hand at end of year and had used up $70 from inventory on hand at beginning of year.
Management & General Expense-Supplies70
Inventories70
- Prepared closing entries for each classification, i.e., unrestricted,
temporarily restricted, and permanently restricted assets.
Contributions-Unrestricted11,600
Admission Revenue 7,800
Interest Revenue 2,280
Concession Revenue 400
Tuition Revenue 800
Gains on Investments 1,750
Reclass. to Unrestricted-Time 2,580
Reclass. to Unrestricted-Plant Acq. 200
Reclass. to Unrestricted-Program 2,900
Performance Expense5,840
BalletSchool Expense5,851
Neighborhood Production Expense1,533
Management & General Expense4,650
Grant Expense 800
Fund Raising Expense1,040
Membership Development Expense 932
Net Assets-Unrestricted 9,664
Contributions-Temp. Restricted4,069
Net Assets-Temp. Restricted1,611
Reclass. of Temp. Restricted-Time2,580
Reclass. of Temp. Restricted-Plant Acq. 200
Reclass. of Temp. Restricted-Program2,900
Contributions-Permanently Restricted2,000
Net Assets-Permanently Restricted2,000
- Alternative Procedure for Recording Fixed Assets
NFPs can record fixed assets as unrestricted or restricted. In our journal entries, we assumed that they are classified as unrestricted so that we can depreciate them without a reclassification entry.
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