NONPROFIT ORGANIZATIONS

Nonprofit Organization - a non-stock corporation organized for the benefit of the public as a whole.

- derives revenues to cover its expenses

Examples:

1. Civic Organizations 2. Colleges and Universities

3. Cultural Organizations 4. Religious Organizations

5. Cooperatives 6. Social and Country Clubs

Characteristics of NPO similar to Governmental Entities

1. Public Service – render services to society as a whole

2. No profit motives – objective is not to earn profit.

3. Finance by citizenry – depends on voluntary contributions of the citizenry

4. Stewardship of resources – must account for the resources on a stewardship basis

Characteristics of NPOsimilar to Business Entities

1. Governance of Board of Directors (BOD) – governed by elected or appointed directors

2. Use of Accrual Basis – revenues and expenses are recorded as earned and incurred

Accounting Standards for Nonprofit Organizations

Fund Accounting

Fund – accounting unit for nonprofit organizations

Separate funds to separate assets to be used and

assets restricted by donors

Unrestricted Fund – General Fund/Unrestricted

Current Fund

Restricted Fund – Restricted Current Fund

Revenues and Gains from Unrestricted Fund

Unrestricted Fund

- All assets of a nonprofit organization available for use as authorized by the BOD

- Not restricted for specific purposes

1. Revenues from Services

2. Contributions

3. Other Operating Revenues

4. Pledges

Revenues and Gains from Unrestricted Fund

Revenues from Services- recorded when services are rendered even part or all

of the revenues is to be waived or reduced

Revenues from Services - Hospital

Gross Patient Service (before any charity care or contractual adjustments)

P 250,000

Charity care for poor and indigent persons patients 50,000

Contractual adjustment allowed to Medicare patients 25,000

Provision for Doubtful Accounts 15,000

Accounts Receivable 200,000Service Revenue 200,000

Contractual Adjustments 25,000Accounts Receivable

25,000

Doubtful Accounts 15,000Allowance for Doubtful Accounts 15,000

Revenues from Services – Colleges and Universities

Tuition Fees (Gross) P 750,000

Tuition waivers under scholarship program 120,000

Provision for Doubtful Accounts 80,000

Accounts Receivable 750,000Service Revenue – Tuition Fees

750,000

Expenditures for Student Scholarships 120,000Accounts Receivable

120,000

Doubtful Accounts 80,000Allowance for Doubtful Accounts 80,000

Revenues and Gains from Unrestricted Fund

Contributed Materials, Services and Facilities Materials

Inventories xxContributions Revenue xx

Services and Facilities

Salary Expense/Rent Expense xx

Contributions Revenue xx

Revenues and Gains from Unrestricted Fund

Other Operating Revenue- Income derived from other related activities, other

than revenues of nonprofit organizations.- Proceeds from Gift shops, Cafeterias, Snack Bars,

Newsstands, Parking Lots

Cash or Accounts Receivable xx

Other Operating Revenue xx

Revenues and Gains from Unrestricted Fund

Pledges Pledge – a promise to give; a commitment by a

prospective donor to contribute a specific amount of cash or property to a nonprofit organization on a future date or in installments.

Unconditional pledge is recorded as receivables and revenues in the unrestricted fund with appropriate provision for doubtful pledges.

Conditional pledges are accounted for in a restricted fund.

Revenues from PledgesPledge Receivable P 500,000

10% Doubtful of collection

Pledge Receivable 500,000Contributions Revenue 500,000

Doubtful Pledges Expenses 50,000Allowance for Doubtful Expenses 50,000

Expenses & Losses A nonprofit organization typically recognizes all

expenses in its unrestricted fund. The losses may be recognized in other funds as well as in the unrestricted fund.

Expenses are classified as:1. Program Services2. Supporting Services

Program Services Program Services are the organization’s activities that

result in the distribution of goods and services to beneficiaries, customers, or members that fulfill the purpose or mission of organization.

Expenses are those amounts specifically expended in support of activities that directly advance the organization’s nonprofit mission

Supporting services Supporting Services are all activities of the organization

other than program services.

Examples: 1. Fund raising costs2. Membership development services

Fund Raising Expense Although fund-raising costs may benefit future

accounting periods of a nonprofit organization, just as advertising costs of a business enterprise may benefit future periods, fund-raising costs are recognized as an expense when incurred.

Administrative expenses General Expenses

- relate to activities such as oversight management, general record keeping, office maintenance, and similar expenses.

Human Resource Development- pertains to expenses incurred for the purpose of

developing and consolidating the NPO’s board of trustee, management and staff.

Conditional Pledges Some nonprofit organizations promise to make grants

to individuals or to other organizations. Generally, grants are recognized as expense when the governing board unconditionally approves them

Assets and Liabilities Most assets and liabilities of a nonprofit organization’s

unrestricted fund are similar to the current assets and liabilities of a business enterprise.

Cash, investments, inventories, accounts receivables, receivables from other funds, short term prepayments are typical assets of unrestricted fund.

Fund balance Because most nonprofit organizations do not have

owners, the net assets of the organizations’ unrestricted funds are represented by a fund balance.

The board of directors may designate a portion of an unrestricted fund’s net assets for a specific purpose.

Restricted Fund Nonprofit organizations establish restricted funds to

account for assets available for current use but expendable only as authorized by the donor of the assets.

The restricted fund resemble the special revenue fund of a governmental entity.

Assets are not derived from operations of the nonprofit organization.

Temporarily Restricted The assets are obtained from restricted gifts or grants

from individuals or governmental entities, revenues from restricted fund investments, realized and unrealized gains or investments of the restricted funds, and restricted income from endowment funds.

These assets are transferred to the unrestricted fund at the time the designated expenditure is made.

Permanently Restricted A permanent endowment fund

- one for which the principal must be maintained indefinitely in revenue producing investments.

Only the revenues from a permanent endowment fund’s investments may be expended by the nonprofit organization

Other Funds of Nonprofit

Organizations

Agency Fund An agency fund is used to account for assets held by a

nonprofit organization as custodian.

The assets are distributed only as instructed by their owner.

The undistributed assets is reported as liability of the fund rather than fund balance.

Annuity Fund Assets may be contributed to a nonprofit organization

with the stipulation that the organization pay specified fixed amounts periodically to designated recipients, for a specified time period.

An annuity fund is established by the organization to account for such arrangement.

Life Income Fund A life income fund is used to account for stipulated

payments to a named beneficiary/ies during the beneficiary’s lifetime.

Only the income is paid to the beneficiary.

Payments to beneficiary vary from one accounting period to the next, but payments from an annuity fund are fixed in amount.

Plant Fund The components of plant funds vary among nonprofit

organizations.

In addition to assets, plant funds may include cash and investments earmarked for additions to plant assets and mortgage notes payable and other liabilities collateralized by the plant assets.

Sinking fund assets set aside for retirement of debt incurred to acquire plant assets.

Financial Statements of Nonprofit

Organizations

Financial Statements of Nonprofit Organizations

For uniformity in financial reporting, the Financial Accounting Standards Board of the AICPA issued FASB Statement No. 117, “Financial Statements of Not-for-Profit Organizations”

FASB Statement No. 117 Provisions

Financial statements shall include:1. Statement of Financial Position2. Statement of Activities3. Statement of Cash Flows4. Notes to the Financial Statements

The Statement of Financial Position shall report: Amounts of total assets, total liabilities and total net

assets Amounts of each of the three classes of net assets:

1. Permanently Restricted2. Temporarily Restricted3. Unrestricted

FASB Statement No. 117 Provisions

The statement of activities shall report: Amount of change in net assets for the period with a

caption such as changes in net assets or change in equity

Amount of changes in each of the three classes of net assets

Gross amounts or revenues and expenses, except that investment revenues may be reported net of expenses and gains and losses on disposal of plant assets

Expenses by functional classifications such as program services and supporting services

FASB Statement No. 117 Provisions

The statement of cash flows shall be similar in format-direct method or indirect method, the one used by the business enterprise.