Accounting for Non-Profit Organizations

Accounting for Non-Profit OrganizationsPascual, Pedroso, Samson, Sebastian, SiaoK322012 July 09Nonprofit OrganizationIs a non-stock corporation that is organized for the benefit of the public as a whole, rather than for the benefit of an individual proprietor, a group of partners or stockholders.ObjectiveGenerally obtains revenues sufficient to cover its expensesConcept of net income is not the primary objective of a nonprofit organizationExamplesVoluntary health and welfare organizationsSchools, colleges and universitiesHospitalsCooperativesLabor unionsFoundationsReligious organizationsCharacteristics Public service Nonprofit organizations usually render services to society as a wholeNo profit motives objective is not to earn profitFinance by the citizenry Most nonprofit organizations depend on the voluntary contributions of the citizenryGovernance of board of directors governed by elected or appointed officersUse of accrual basis of accounting adopts the same basis used by business enterprises.

Fund accountingAccounting for non-profit organizations is essentially fund accounting.Fund sum of money or other resources set aside for the purpose of carrying out specific activities or attaining certain objectives.Fund also constitutes an independent fiscal and accounting entity with a self-balancing set of accounts recording cash and other financial resources, together with all related liabilities and equities and changes therein.Funds commonly usedUnrestricted fundRestricted fundEndowment fundAgency fundPlant fundUnrestricted fundAlso known as unrestricted current or general fund.Includes all the assets of a nonprofit organization that are available for use as authorized by the board of directors and not restricted for specific use. Revenues and gains of unrestricted fund are derived from a number of sources.Revenues from servicesGross patient services - 200,000Charity care for poor - 10,000Contractual adjustment - 30,000ENTRIES:To record patient revenue exclusive of charity care: Accounts Receivable 190,000 Service Revenue Patients 190,000

To record contractual adjustments allowed: Contractual Adjustments 30,000 Accounts Receivable 30,000

Revenues from servicesGross Tuition Fees 500,000Tuition waivers provided i 50,000(fellowship program)ENTRIES:To record educational and general tuition fees: Accounts Receivable 500,000 Service Revenue Tuition Fees 500,000

To record tuition waivers: Expenditures for Student aid 50,000 Accounts Receivable 50,000

Revenues from servicesContractual adjustmentsExpenditures Student Aid

Usually, for hospitals, accounts receivable are collectible from a third-party payor such as Philippines Health and other private medical insurance companies. For colleges and universities, a comparable tuition adjustment is debited to Expenditures Student aid account.

PledgesIs a commitment by a prospective donor to contribute a specific amount of cash or property to a non-profit organization on a future date or in installments.Illustration:A nonprofit organization received unconditional pledges totaling 500,000.ENTRY:Pledge Receivable 500,000 Contributions Revenue 500,000Expenses of Unrestricted Fund1. Program Services - these are the organizations activities that result in the distribution of goods and services to beneficiaries, customers or members that fulfill the purposes of the organization.

2. Supporting services these are the other expenses that include all activities of the organization other than program services, i.e. management and administrative expenses, fund-raising costs.Restricted FundNonprofit organizations establish restricted fund to account for assets received from donors. These assets are available for current use but expendable only as authorized by the donor of the assets.

Not derived from the operations of the organization.Restricted fundTemporarily restricted fundsspecific purpose fundstime restricted fundsplant replacement and expansion funds

Permanently restricted fundsto be held for an indefinite period of time and generally are included in an endowment fund

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

Only revenues from a permanent endowment funds investment may be expended.IllustrationAssume a nonprofit organization received the following donations:Cash, restricted for acquisition of equipment 50,000 for a special projectSecurities, at market value for permanently endowment of a specific project 100,000

*the organization paid 20,000 for purchase of equipment

RESTRICTED FUNDTo record donation received for the acquisition of equipment: Cash 50,000 Contribution Revenue Temporarily Restr. 50,000IllustrationRESTRICTED FUNDTo record receipt of securities permanently restricted: Securities 100,000 Contribution Revenue Permanently Restr. 100,000

To record funds released from temporary restriction Net Assets released from Restrictions 20,000 Cash 20,000

UNRESTRICTED FUNDTo record transfer of temporarily restricted fund Cash 20,000 Net Assets released from Restrictions 20,000

To record purchase of equipment Equipment 20,000 Cash 20,000

Agency FundUsed to account for assets held by the nonprofit organization as a custodian

Example: A university may act as a custodian of cash of a student organization. The University disburses cash as directed by the officers of the student organization.

Undistributed cash of the student organization is reported as liability.Purpose of Financial StatementsPrimary purpose provide relevant information to meet the common interests of donors, members, creditors and others who provide resources to not-for-profit organizations.Financial StatementsStatement of Financial Position reports the total assets, liabilities and net assets. Classifies net assets into three classes: permanently restricted, temporarily restricted and unrestricted.Statement of Activities reports changes in net assets for the period. Also reports expenses by functional classification such as program services and supporting services.Statement of Cash FlowsNotes to financial statements

Voluntary Health and Welfare OrganizationsThey solicit funds from the community at large and typically provide their services for no feeAccrual basis of accounting is requiredThree mutually exclusive classes of net assets:Unrestricted net assetsTemporarily restricted net assetsPermanently restricted net assets

Primary activities are reported in the unrestricted asset class

Financial statements for a VHWO:

Statement of financial positionStatement of activitiesStatement of cash flowsStatement of functional expensesNotes to the financial statements

29Statement of Financial PositionMajor balance sheet accounts are as follows:Pledges from donorsInvestmentsLand, buildings, and equipmentLiabilitiesNet assetsStatement of ActivitiesPublic supportThe primary source of funds is likely to be contributions from individuals or organizations that do not derive any direct benefit from the VHWO for their gifts

RevenuesFunds received in exchange for services provided or other activities

Gains Gain or loss on sale of investments and other assets

Statement of ActivitiesDonated materials and services Should be recorded at fair value when received

Expenses Information about the major costs of providing services to the public, fund-raising, and general and administrative costs

Costs of informational materials that include a fund-raising appeal Many VHWOs prefer to classify such costs as program rather than fund-raising

Hospitals and Other Healthcare OrganizationsHospitals funds come from charges that are made to patients for medical services and other supplementary services such as pharmacies and cafeterias.

Other sources of funds are contributions and grants from private, public and charitable sources.

Accrual basis of accounting is required.

Depreciation of hospital properties are to be recognizedHospitals and Other Healthcare OrganizationsRevenues are categorised into:Gross Revenues from PatientsDeductions from RevenuesExample: Charity care, courtesy discounts and contractual adjustments with medical insurersOther Revenue SourcesExample: Cafeterias, snack bars, etc.Non Operating GainsExample: Gifts and bequestsHospitals and Other Healthcare OrganizationsExpenses are categorised into:Administrative ExpensesGeneral ExpensesDietary ExpensesHousehold and Property ExpensesProfessional CareOutpatient and EmergencyOther ExpensesFinancial statements for HospitalsStatement of Financial PositionStatement of ActivitiesStatement of Cash FlowsStatement of Changes in Net AssetsNotes to the Financial Statements

36Private Colleges and UniversitiesNon-profit organizations whose funds come from:Student Tuition FeesGovernment GrantsPrivate Donations and Grants (restricted and unrestricted)Endowment Funds (restricted and unrestricted)Revenue from Supplementary Services such as cafeterias, dormitories, etc.

Uses the accrual method of accounting.

Private Colleges and UniversitiesRevenues include:Student tuition fees, net of adjustments such as tuition waivers, employee discounts and non-employment fellowshipsScholarship grants, net of adjustments such as expenditures for student aidRevenues from auxiliary services such as cafeterias, dormitories, etc.Endowment incomePrivate Colleges and UniversitiesExpenses include:Instruction expenseResearch expensePublic service expenseAcademic supportStudent servicesInstitutional supportOperation and maintenanceDepreciation ExpensesDoubtful Accounts ExpenseFinancial Statements for Private Colleges and UniversitiesStatement of Financial PositionStatement of ActivitiesStatement of Changes in Net AssetsStatement of Cash FlowsNotes to the Financial StatementsOther Not-for-Profit Organizations Foundations/CharitiesNon-Profit Organizations that provide funds and support to other organizations.

CooperativesAn autonomous association of people who voluntarily cooperate for mutual social, economic and cultural benefit

The accounting treatment is the same as the ones discussed earlier on.Problems and IllustrationsJournal Entries and Preparation of Financial StatementsJournal Entries NonProfit SchoolPrepare the journal entries for the transactions of Elizabeth Seton College:

Paid P50,000 from the Unrestricted Fund for classroom computers, to be carried in the Plant Fund.Received an unrestricted cash gift of P2,000,000Disposed of Investment for P110,000 that had been carried in the Endowment Fund at P100,000. There was no restrictions on the use of the proceeds attributable to the gain.Constructed a new school building at a total cost of P2,000,000. Payment was by P250,000 cash from the Plant Fund, and P1,750,000 obtained on a 5% mortgage note payable.Total tuition fees for the year: P3,000,000. Tuition waivers provided under fellowship program: P200,000. Program Services and Supporting Services: P1,500,000 and P500,000 respectively.Journal Entries NonProfit SchoolPaid P50,000 from the Unrestricted Fund for classroom computers, to be carried in the Plant Fund.Plant Fund LedgerEquipment50,000 Fund Balance50,000Unrestricted Fund LedgerEquipment50,000 Fund Balance50,000Journal Entries NonProfit SchoolReceived an unrestricted cash gift of P2,000,000Unrestricted Fund LedgerCash2,000,000 Contribution Revenues2,000,000Journal Entries NonProfit SchoolDisposed of Investment for P110,000 that had been carried in the Endowment Fund at P100,000. There was no restrictions on the use of the proceeds attributable to the gain.Endowment Fund LedgerCash110,000 Investments100,000 Payable to Unrestricted Fund10,000Unrestricted Fund LedgerReceivable from Endowment Fund10,000 Investment Income10,000Journal Entries NonProfit SchoolConstructed a new school building at a total cost of P2,000,000. Payment was by P250,000 cash from the Plant Fund, and P1,750,000 obtained on a 5% mortgage note payable.Plant Fund LedgerBuilding2,000,000 Cash250,000 Mortgage Notes Payable1,750,000Journal Entries NonProfit SchoolTotal tuition fees for the year: P3,000,000. Tuition waivers provided under fellowship program: P200,000. Program Services and Supporting Services: P1,500,000 and P500,000 respectively.Unrestricted FundCash/Receivable2,800,000Expenditures for Student Aid200,000 Service Revenue - Tuition3,000,000Program Services Expense1,500,000Supporting Services Expense500,000 Cash/Payable2,000,000Journal Entries Non-Profit HCOPrepare the journal entries for the transactions of Santa Maria Hospital

Gross patient service revenues of P80,000 were billed to patients. Indigent patient charity care amounted to P4,000. There were also contractual adjustments allowed to Medicare patients of P30,000. There is also a provision for doubtful accounts, amounting to P8,000.Contributed services approximating P10,000 at going salary rates were received from volunteer nurses. Meals costing P200 were served to the volunteer nurses at no charge by the Santa Maria Hospital Cafeteria.New unrestricted pledges, due in three months, totalling P5,000 were received from various donors. Collections on pledges amounted to P3,500 and the provision for doubtful pledges on October was P800.The amount of P3,000 received from the restricted fund was expended for new surgical equipment, as authorized by the donor.Journal Entries Non-Profit HCOGross patient service revenues of P80,000 were billed to patients. Indigent patient charity care amounted to P4,000. There were also contractual adjustments allowed to Medicare patients of P30,000. There is also a provision for doubtful accounts, amounting to P8,000.Accounts Receivable76,000 Patient Service Revenues76,000Contractual Adjustments30,000 Accounts Receivable30,000Doubtful Accounts8,000 Allowance for Doubtful Accounts8,000Journal Entries Non-Profit HCOContributed services approximating P10,000 at going salary rates were received from volunteer nurses. Meals costing P200 were served to the volunteer nurses at no charge by the Santa Maria Hospital Cafeteria.

Note: If the fair value of the salaries cannot be determined, then do not recognize any value for it.Salaries Expense9,800 Contributions Revenues9,800Journal Entries Non-Profit HCONew unrestricted pledges, due in three months, totalling P5,000 were received from various donors. Collections on pledges amounted to P3,500 and the provision for doubtful pledges on October was P800.Pledges Receivable5,000 Contribution Revenues5,000Cash3,500 Pledges Receivable3,500Provision for Doubtful Pledges800 Allowance for Doubtful Pledges800Journal Entries Non-Profit HCOThe amount of P3,000 received from the restricted fund was expended for new surgical equipment, as authorized by the donor.Cash3,000 Unrestricted Fund Balance3,000Plant Assets3,000 Cash3,000Restricted Fund Entry:Restricted Fund Balance3,000 Cash3,000Preparation of FS - VHWOThe adjusted trial balance of the Child Association on December 31, 2011 were as follows: