A non-profit organization is an entity that is operated for the benefit of society as a whole rather than for the benefit of an individual proprietor or a group of partners or shareholders. A non-profit organization strives only to obtain revenue sufficient to cover its expenses. Thus, the concept of income is not meaningful. Non-profit organizations constitute a significant segment of our society. Some examples are: 1. Voluntary health and welfare organizations: 2. Schools, colleges and universities 3. Hospitals 4. Cooperatives 5. Labor unions 6. Performing arts organizations 7. Foundations.
8. Religious organizations 9. Country Clubs 10. Professional associations Purpose of Financial Statements The primary purpose of financial statements is to provide relevant information to meet the common interests of donors, members, creditors and others who provide resources to not-for-profit organizations. Those external users of financial statements have common interests in assessing. a. The services an organization provides and its ability to continue to provide those services and b. How managers discharge their stewardship responsibilities and other aspects of their performance.
More specifically, the purpose of financial statements, including accompanying notes, is to provide information about: a. The amount and nature of an organization’s assets, liabilities and net assets b. The effects of transactions and other events and circumstances that change the amount and nature of net assets. c. The amount and kinds of inflows and outflows of economic resources during a period and the relation between inflow and outflow. d. How an organization obtains and spends cash, its borrowing and repayment of borrowing and other factors that may affects its liquidity. e. The service efforts of an organization
STATEMENT OF FINANCIAL POSITION This statement provides relevant information about the liquidity, financial flexibility and interrelationship of an organization’s asset and liabilities in order to let the external users of such be able to assess the organization’s ability to continue providing the services, to meet obligations, and needs for external financing. Information about the nature and amounts of different types of permanent restrictions or temporary restrictions shall be provided either by reporting their amounts on the face of the statement or by including relevant details in notes to financial statements.
Separate line items maybe reported within permanent restrictions for holding of : a. assets, such as land or works of art, donated with stipulations that they be used for a specified purpose, bepreserved and not be sold or; b. assets donated with stipulations that they be invested to provide permanent source of income such as gifts that create permanent endowment funds. Separate line items may be reported within temporarily restricted net assets or in notes to financial statements to distinguish between temporary restrictions for: a. support of particular operating activities,b. investment for a specified terms, c. use in specified future period, or d. acquisition of long-lived assets.
Donors’ temporary restrictions may require that resources be used for specified purpose as purpose restrictions or both. Gifts called term endowments such as gifts of cash or other assets with stipulation that they be invested to provide source of income for a specified term and that the income be used for a specified purpose are both time and purpose restricted. STATEMENTS OF ACTIVITIES This statement shows the revenues, gains, expenses and losses.
The primary purpose of this statement is to provide relevant information about: a. the effects of transactions and other events and circumstances that change the amount and nature of net asset, b. the relationships of those transactions and other events and circumstances to each other, and c. how the organization’s resources are used in providing various programs or services.
The information in this statement used with related disclosures and information in other financial statements, helps donors, creditors and others to a. evaluate the organizations performance during a period, b.assess an organization’s service efforts and its ability to continue provide services, and c. assess how an organization’s managers have discharged their stewardship responsibilities and other aspects of their performance. This statement use the descriptive term – change in net assets or change inequity of the entity as a whole. STATEMENT OF CASH FLOW This statement provides relevant information about the cash receipts and cash payments of an organization during a period. Although this statement may be using either of the two methods, direct and indirect, only the direct method is illustrated below.
PROFESSIONAL ORGANIZATION There are more than 40 professional organizations accredited by the Professional Regulation Commission. These associations or institutions have their head offices in Metro Manila, but their chapters are found all over the country. Their operations are generally financed by membership dues that are paid annually. Sharing of these membership fees among the different chapters, regional councils and head office are provided for in their by-laws. Bigger organizations have established regional councils which oversee the chapters.
Each organization has its own mission and vision and its activities shall be towards the attainment of these goals. Their operations are characterized by having a board of directors establishing the policies and guidelines based in the by-laws whish are implemented by means of a set of officers elected from among the members of the board. Every year elections are conducted nationwide. Various committees are created with a chairman and members who give their time and effort voluntarily to achieve the objectives of the organizations.
Full accrual basis is used whenever practicable, depreciation is provided but is not considered in determining the excess of receipts over disbursements. Two kinds of net assets are commonly accounted for, unrestricted or general and restricted or special net assets. The spreadsheet is used to summarize daily transactions in these two types of assets. An updated list of members is a requirement for the sure accounting of annual dues in arrears to support the receivable accounts. Collections are normally done by the chapters and monthly reports are prepared to account for the remittances due to the head office and the regional councils.
Restricted net asset are created every time collections would include receipts for subscription to the periodic journal or for the additions or betterment of the building. EDUCATIONAL INSTITUTIONS The activities of an educational institution may be classified as: a. Instructional – include both resident and extension instruction, public service, organized researched and the operation of libraries. b. Administrative – auxiliary include staffing and promotion, registration and enrollment, operation of the business office, and operation and maintenance of the educational plant c.
Auxiliary services include the operation of the residence halls, dining rooms, college unions and bookstores, health centers, and athletic and cultural programs. Revenues in support of these different activities are provided by such varied sources as contributions ,government appropriations, student fees, endowment income, and revenues from the sale of goods and services. There are six major fund groupings for educational institutions, namely: 1. Current funds 2. Loan funds 3. Endowment and other nonexpendable funds 4.
Annuity funds 5. Plant funds, divided into unexpended plant funds, retirement of indebtedness funds and an investment in plant section 6. Agency fund Explain the accounting for non-profit organizations. Accounting for non-profit organizations is essentially “fund accounting”. This means that the internal accounting for many non-profit organizations is the fund which is an accounting entity with a self-balancing set of accounts recording cash and other financial resources together with related liabilities and changes therein.
Accounting is based on FASB SFAS 116, SFAS 117, SFAS 124 and AICPA Audit and Accounting Guide for health care organizations. Funds commonly used by non-profit organizations include the following: 1. Unrestricted fund 2. Restricted fund 3. Endowment funds 4. Agency fund 5. Annuity fund and life income fund 6. Loan fund 7. Plant fund Unrestricted Fund/ General Fund/ Current Fund This is also known as the general fun which includes all the assets of a non-profit organization that are available for use as authorized by the governing board and are not restricted for specific purposes.
The revenue and gains of unrestricted funds are derived from a number of sources. It is used in fund accounting. Restricted Fund/ Restricted Current Fund/ General Fund These are the receipts of resources that are to be used in special activities such as publication of a periodic journal or construction of a building for the unit. Accounting for cash contributions or donations Cash contributions or donations are reported as revenue in the year received even though there are donor-imposed uses or time restrictions on the donation. The entry for the cash contribution or donation is:
Cash xxx Contributions revenue xxx If the donor imposes use or time restriction, the cash contribution or donation is reported as “temporary restricted revenue” on the statement of activities. Accounting for “contributed materials” recorded at fair value i. e. if a hospital receives free drugs or a university receives free operating supplies, the entry is Inventory xxx Contributions revenue xxx Accounting for “contributed services” Contributed services are recognized in the statement of activities if either of the following conditions is met: a.
The services create or enhance a non financial asset. b. The services require specialized skills, are provided by individuals possessing those skills and would typically need to be purchase if not provided by donations. Contributed services rendered by skilled individuals are recognized at the going rate for comparable employees or contractors of the entity less any meals or other living costs absorbed by the nonprofit organization. To increase expense and increase unrestricted revenue, contributed services is recorded as follows: Salaries expense xxx Contributions revenue xxx
Accounting for Contributed facilities Contributed facilities are recognized at fair value either to an asset or expense account. For example, if a university receives a new building from a generous benefactor to be used as one of its colleges, the entry is: Building xxx Contributions revenue xxx Another example, a building is used by a university on a rental basis. However, the owner waives rental payment. This is recorded at the fair value of the rental as follows: Rental expense xxx Contributions revenue xxx Classifications of Expense of a nonprofit Organization 1.
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 or mission of the organization. 2. Supporting Services– these are other expenses that include all activities of the organization other than program services, i. e. management and general expenses, fund raising and membership development activities. All expense of a non-profit organization is reported as unrestricted in the statement of activities. This means that expenses are deducted only from unrestricted revenue.
What is a restricted fund? This is used to account for assets available for current use but expandable only as authorized by the donor of the assets. The donor may impose either “use” restriction or “time restriction” or both. Assets of the restricted fund are not derived from the operations of the nonprofit organization. Explain endowment of fund. A “permanent endowment fund” is one for which the principal must be maintained indefinitely in revenue producing investment. Only the revenue from the investments may be expended. A permanent endowment fund is also known as “regular endowment”.
A permanent endowment fund or “permanently restricted” but the revenue from the fund is “temporarily restricted”. A term “endowment fund” is one for which the principal may be expended after the passage of certain period or the occurrence of an event specified by the donor. The term is “temporarily restricted”. A “quasi -endowment fund” is a fund established by the governing board of the nonprofit organization. At the option of the board, the principal may later be expended. Accordingly, a quasi-endowment fund is included on “unrestricted net assets” because this is established using unrestricted net assets. Agency Fund.
Used to account for assets held by the nonprofit organization as custodian. Example: A university may act as 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 organizations is reported as liability of the university’s agency fund because the university has no equity in the fund. Annuity Fund Established when assets are contributed to the nonprofit organization with the stipulation that the organization shall pay specified fixed amount to a designated beneficiary periodically during a specified period of time.
At the end of the specified period for the specified payments, the unexpended assets of the annuity fund are transferred to the unrestricted fund, restricted fund or endowment fund as instructed by the donor. Life income Fund Used to account for stipulated payments to a named beneficiary during the beneficiary’s lifetime. Only the income on the fund is paid to the beneficiary’s payment from a life income fund varies form period to period comparing to annuity fund that is fixed. Loan Fund Established by colleges and university for the purpose of granting loans to students to satisfy their school needs.
Students loans funds are generally revolving –as old loans are repaid, new loans are made for the receipts. Plant Fund established for land, building, and equipment It may also include cash and investments earmarked for additions to plant or payments of liabilities collateralized by the plant assets. Sinking fund assets set aside for retirement of debt incurred to acquire plant assets is also included. Components of Financial Statements of Non-Profit Organizations 1. Statement of Financial Position – reports that “ assets should equal liabilities and net assets” 2.
Statement of Activities – reports the “changes in net assets” and their revenue, gains, expenses and losses. This is equivalent to income statement in commercial accounting. – It reports gross amount of revenue and expenses, except that investment revenue may be reported net of expenses, and gains and losses on disposals of plant assets may be reported net. – It reports expenses by functional classification such as program services and supporting services. 3. Statement of Cash Flows 4. Notes to Financial Statements 5.
Statement of Functional Expenses – required only to voluntary health and welfare organizations – this reports expenses both by function (program and supporting ) and natural classification (salaries, depreciation etc. ) Classifications of Net Assets reported in the statement of Financial Position 1. Unrestricted net assets – assets in the “unrestricted fund”. 2. Temporarily restricted net asset – assets in the restricted fund, loan fund, term endowment fund,annuity fund, life income fund and plant fund. 3. Permanently restricted net assets – “permanently endowment fund” Unconditional Promises Treatment.
Reported in the period pledges are made not in the period of cash collection. Contribution will not be received until next year, the contribution will be reported as increase in temporarily restricted net assets for the current year because of time restriction. Conditional promise to give is considered unconditional if the possibility that the condition will not be met is remote. Treatment of Re classifications of Net assets Example: In prior year, a benefactor made a contribution to a private non profit university with the stipulation that the donation be used for faculty travel during the current year.
This contribution is reported under temporarily restricted net assets in the prior year. When the contribution is used for faculty travel in the current year, it is reported as “reclassification” in the current year’s statement of activities. Re-classifications are reported in the statement of activities as “net assets released from restrictions”. This reclassification is reported in the current year as negative amount for temporarily restricted net assets and positive amount for restricted net assets.
The travel expense is reported in the current year’s statement of activities as deduction from unrestricted net assets. All expenses are decrease in unrestricted net assets. The use of the contribution for faculty travel has no effect on unrestricted net assets at the current year end because the effect is offsetting, meaning, increase in unrestricted net assets upon reclassification from “temporarily restricted to unrestricted” and decrease in unrestricted net assets when the contribution is used or expended. Classifications of Cash flow or Non Profit Organizations in the Cash Flow Statements.
1. Operating Activities – includes “unrestricted” cash contributions, unrestricted revenues and expenses. 2. Investing activities – includes cash flows from acquisition and disposal of property, plant and equipment, investments, and other long-term assets. 3. Financing activities – includes temporarily or permanently “restricted” cash contributions and cash flows from borrowings and repayment of borrowings. Financial Statements Pro- Forma Forms STATEMENT OF FINANCIAL POSITION STATEMENT OF ACTIVITIES Statement of Cash Flows LOAN FUNDS Consist of resources that are available for loans to students.
Originate from gifts, they may be built up over a period of years from student fees for such purpose or for transfers from endowment fund whose income is available for such purpose. Can be made with or without interest depending upon the conditions established by those providing loan the loan fund. Nonexpendable uncollectible loans, fund administrative expenses, and losses on the sale of fund investments, and as a result of credits arising from interest on loans, income from fund investments , and gains on sale of fun investment. Transactions related to loan of NPO universities:
1. Receipt of cash gift to be used for loans to students, P50,000 Cash 50,000 Loan Fund net assets 50,000 2. Purchase of securities for P25,000 which includes accrued interest of P600. Investment 25,000 Accrued Interest 600 Cash 25,600 3. Loans to students, P20,000. Notes Receivables 20,000 Cash 20,000 4. Collections of interest on investments, P1,500 Cash 1,500 Accrued Interest 600 Loan Fund net assets 900 5. Collection of loans with interest of P150, P7,650. Cash 7,650 Notes Receivable 7,500 Loan Fund net assets 150 6. Uncollectible loans written off, P300.
Loan Fund net assets 300 Notes Receivable 300 Resources are balanced by the account Loan Fund Balance/ Loan Fund Net Assets. Note: The Accounts are hypothetical in nature to illustrate the entries. ENDOWMENT AND OTHER NONEXPENDABLE FUNDS Formed when cash or other properties are transferred to the institution provided that only income produced by such resources can be used for the benefit of the institution. Unrestricted endowment is undependable; although it may change as a result of the sale of restrictions are placed on the use of fund income by the institution.
Income becomes available to the unrestricted current fund. Restricted endowment is when the use of the fund income is limited to certain objectives. Income is transferred to the appropriate restricted current fund or to the plant fund. Endowments are created by transfer of assets directly to the institution. Funds temporarily functioning as an endowment are resources not currently required by unrestricted current fund may be transferred out of this fund to be administered as an endowment until the resources are required for alternative use.
In maintaining a single set of books for the endowment fund group, investments and other property items should be identified with specific endowments, and separate endowment fund balances should be reported for each endowment. Earnings don’t need to be reflected on the books for the endowment funds that may be entered directly on the books of the funds receiving the earnings. PLANT FUNDS Formed when cash or other properties are transferred to the institution subject to the requirement that specified payments be made to a designated beneficiary during his lifetime.
Sometimes included with endowment funds for accounting and reporting purposes. Balances are increased by gifts subject to annuity agreements, gains on the sale of annuity fund assets, payments to annuitants, and asset transfers. PLANT FUNDS Three groups: 1. Resources that are held for plant expansion and replacement 2. Resources that are held for retirement of long-term debt incurred in the acquisition of the plant 3. The specific physical resources comprising the plant. Three balancing groups of accounts for plant resources:
1. Unexpended plant funds- consist of cash, securities, receivables and other assets that are used for the acquisition of new plant or replacement of existing plant. The difference between the assets and liabilities. This balance is commonly divided into (1) the portion to be applied to plant additions and (2) the portion to be applied to renewals and replacements. 2. Retirement of indebtedness funds- consist of cash, securities, and other assets that are to be used for the retirement of plant indebtedness.
Fund accounts are balanced by a single fund balance reporting total resources available for retirement of indebtedness. 3. Invested in plant- consist of the individual property items that compose the educational plant. Carries any long-term indebtedness relating to plant acquisitions. The difference between plant assets and related liabilities. This balance is commonly divided to show the different sources of plant financing- gifts, current funds, and endowment funds. 7. Agency Educational institution acts as an agent or trustee, holding certain assets on behalf of others.
when agency operations are: simple and limited duration=both asset accounts and accounts expressing the institution’s accountability to others may be carried in the general or current fund. involved and continuing=an agency fund may be recognized and special agency books established for the properties subject to agency control agency funds may be established for pension and retirement resources, special organization resources, student deposits, and tax withholding amounts. accounting for the agency is the same as it would be for a private business.
HOSPITALS *Functions: Provide for reception, care and medical and surgical treatment of the sick or injured rooms are provided and foods are supplied major activities center about inpatients, but frequently render outpatient care and emergency services carry on special activities such as research and nurses training operate number of auxiliary enterprises such as pharmacies for outpatients and cafeterias for staff members and visitors its operations call for important administrative activities like: hospital staffing registration of patients operation of the physical plant food laundry and housekeeping management and budgeting accounting billing and collecting.
The major source of hospital support is normally charges that that are made to patients for services. However, such charges frequently fail to cover the full cost of hospital operations, and significant sums must be sought from contributions and grants from private, public and charitable sources. Funds for Hospital Accounting for hospitals are similar to educational institutions that acquires a revenues that must be applied to specific objectives.
There’s also certain accounting differences that should be pointed out Hospital generally does not require variety of funds required by the educational institution. Differences of the two units are found to their operating summaries.
Educational Institution revenues were compared with expenditures a “modified accrual basis” was employed and depreciation of the educational plant was generally ignored. Hospitals analysis and a summary of operations that comes closer to that of private business is normally warranted sell specific services expectation by patients, group purchasers of insurance protection, and insurance companies selling hospital protection that charges for services will bear a close relationship to the costs of these services. although contributions may be available suggest that hospital revenues should be set at levels that will provide for the ultimate replacements of properties these factors suggest that revenues, be compared with expenses, that a “full accrual basis” be employed, and that depreciation of hospital properties be recognized in arriving at total operating costs.
Four Major Fund Groupings of Hospital A. GENERAL OR CURRENT FUNDS summarized the current resources that are to be used in meeting the obligations arising from general operations resources that can be applied without restriction are reported here Expenditures for which specific funds have not been provided are financed from these resources. This is the same in nature and function as the general or current fund of the educational institution.
*To illustrate the accounting for the general fund transactions affecting the general fund of NPO Hospital and entries to record these transactions are listed below. *In considering the presentation of hospital revenues for statement purposes, the following classifications are used; gross revenues from patients deductions from revenues and revenue sources *In considering operating expenses, it recognizes the following classifications; administrative and general dietery household and property professional care of patients outpatient and emergency other expenses B.
TEMPORARY FUNDS Composed of current resources that, while available for current purposes, are subject to certain limitations in their use For example, resources from gifts on grants and income from endowment funds that can be spent only for specified purposes, such as research, a medical library, or nurses training, would be reported as temporary funds Temporary funds are identical in nature and functions to the restricted current funds of the educational institution.
Temporary fund transactions of NPO Hospital and the entries to summarize these are listed below: In the example, the temporary fund books summarize two temporary fund, and a separate fund balances are maintained to report the respective fund equities. It should be observed that changes in temporary fund balances arising from revenues, expenses and distributions are recorded directly in the fund balances; when there are many changes and these are to be reported in special operating statements, nominal accounts would be established to accumulate profit and loss derail.
C. ENDOWMENT FUNDS represent resources that have been transferred under conditions that limit expenditures to the income that is produced by such resources. Assets may be transferred directly to the hospital, or they may be transferred to a trustee who administers them for the benefit of the institution May also be created by the action of the governing board of the hospital. Terms of it may place no restrictions on the use of the endowment income, or they may specify a particular purpose for which the income is to be used.
In the absence of restrictions, its income becomes available to the general fund; when there are restrictions; income is in a temporary fund. Endowment fund transactions of NPO Hospital and the entries to summarize these are listed below. In the example, Endowment fund books summarize to endowment and separate endowment fund balances summarize their respective fund equities. It should be observed in the example that endowment fund income is reported directly in the fund that in entitled to such income.
When revenue and expense are involved in a determination of net income, revenue and expense can be summarized in the Endowment funds books; the fund net income, when determined is then transferred to the appropriate fund. D. PLANT FUNDS Two Groups of Plant Resources 1. Physical resources comprising the hospital properties 2. Cash and other assets that is available for the improvement and the replacement of the hospital properties. Although the two asset of groups are recognized, hospitals would nevertheless combined these within a single plant funds category.
When there are claims against plant fund resources in connection with original financing of properties, construction in progress, or current property acquisitions, such obligations would be recognized in the plant funds. Funds are balanced by two plant fund balances: 1. Investment in plant 2. Reserve for plant improvement and expansion Transactions affecting the plant funds of NPO Hospital and the entries to record these transactions are shown below: Alternative approaches have been suggested for analyzing and recording plant funds transactions of the hospital.
Probably the best approach would recognize two self-balancing sets of account, one summarizing the existing physical plant and the other summarizing resources that are held for plant improvement and replacement. With such an approach, the analysis of transactions affecting hospital plant assets, liabilities, and fund balances or net assets is the same as that employed for the educational unit. However, the entries relating to existing plant and to improvement and replacement resources are made in self-balancing from within a single set of books instead of in separate sets of books as in the case of the educational unit.