NON - PROFIT

ORGANIZATION
ACCOUNTING
 Learning Outcomes

1. Definition of Not-for-Profit Organizations (NPOs)

2. Characteristics / Features of NPOs
3. Basic Financial Statements required from NPOs
4. Accounting for Contribution
a. Classification
b. Journal Entries to Record
c. Reclassification
i. Use-Restriction
ii. Time-Restriction
5. Net Assets
a. Classification
b. Presentation in the Balance Sheet
6. Sample Financial Statements
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 1 Definition
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 Non-Profit Organizations

● set up for the welfare of the society or for the promotion of

art and culture in the society
● usually set up as a charitable institution with the service
motive
● managed by the trustees. (the members of the organization
elect the trustees)
● raise funds from its members as well as from the general
public for meeting their objectives.
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 2 Characteristics/
Features
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 Features

1. Main Aim is Service:

The basic aim of non-profit organizations is to serve the society. They
are working for the benefit of the society as a whole.

2. Profit is not the Criterion:

Non-profit organizations are formed for some idealistic purposes such
as religious, charitable or providing education etc. Earning of profits
can never be their aim

3. Surplus not Distributed among its Members:

They are adjusted in the capital fund of such organizations.

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 Features

4. Separate Entity: Treated as a separate entity distinct from its members.

5. Unique Names Connoting their Working: The names of non-profit

organizations denote the nature and style of their functioning. For example,
Habitat for Humanity Philippines, Haribon Foundation, ChildHope Asia

6. Management by Elected Persons: These organizations are run and managed by

elected members.

7. Major Funds from Contributions and Donations etc..: They depend upon the
subscriptions, donations and grants received from various government
7 departments.
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 Basic

3 Financial
Statements
Required
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 Statement of Financial
Position

● Assets = Liabilities + Net Assets

● reports the assets, liabilities, and net assets of the organization
● Net assets = equity
● a nonprofit organization does not have owners, the third section
of the statement of financial position is known as net assets
(instead of owner's equity or stockholders' equity)

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 Statement of Activities and
Changes in Net Assets

● Income Statement
● Reports revenues, expenses, gains, and losses for the
period
● Reports the amount of change in net assets
● Amount is the same as net assets on the balance sheet
● Recognized only in the unrestricted classification

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 Statement of Functional
Expenses

● Voluntary health and welfare organizations must report

expenses classified by functions and by natural
classification

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 Statement of Cash Flows

● Same cash flow classifications and definitions as business

enterprises
● The financing activities is expanded to include resources
that are donor restricted for long-term purposes
Reports investing activities permanent endowments as
cash flow of investing activities

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 4
Accounting for Contribution

● Classification
● Journal Entries
● Reclassification

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 CONTRIBUTIONS

▪ A major source of support for NPOs

▪ Unconditional transfers of cash or other
resources
▪ Voluntary and non-reciprocal
▪ Recognized as revenue and at fair value

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 CLASSIFICATION

● As to Nature of Contribution
○ Cash Contributions / Contributed Materials /
Contributed Facilities
○ Contributed Services
○ Cancellation of debt
● As to Restriction
○ Unrestricted Resources
○ Temporarily Restricted Resources
○ Permanently Restricted Resources
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 ● As to Nature of Contribution (Determines what assets to
debit)
○ Cash Contributions / Contributed Materials /
Contributed Facilities

Cash/ Inventory / Building xxx  

Contributions Revenue   xxx

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 ● As to Nature of Contribution
○ Contributed Services – only recognized as revenue
when either of the following are met:

1. Creates or enhances a nonfinancial asset

Fixed Assets . . . . . . . . . . . . . . . . . . . . XX-

Contributions Revenue . . . . . . . . . . XX-

2. Requires a specialized skill possessed by a contributor

that would typically need to be purchased and not
donated.

Salaries Expense . . . . . . . . . . . . . . . . XX-

Contributions Revenue . . . . . . . . . . XX-
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 ● As to Nature of Contribution
○ Cancellation of debt

Rental Expense xxx  

Contributions Revenue   xxx

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 CLASSIFICATION as
to RESTRICTION
Unrestricted Fund or
Resources/ General
Fund/ Current Fund
includes all the assets
available for use as
authorized by the
governing board and are
not restricted for specific
purposes. It is used in
fund accounting.
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Temporarily Restricted Permanently Restricted
Resources Resources
▪ Donor imposed ▪ Asset use is limited
restrictions that ▪ Donor imposed
expire (time stipulations that do not
restrictions) expire/ cannot be
▪ Can be removed by removed by entity
entity fulfilling ▪ Thus, remains
stipulations (use restricted for the time
restrictions) being of the
organization.
 Ex. Land valued at P800,000 subject to a P300,000 mortgage
was donated to Tondo Hospital without restriction as to use.

Entry:

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . 800,000-
Mortgage Payable . . . . . . . . . . . . . . . . . . 300,000-
Unrestricted Fund . . . . . . . . . . . . . . . . . .500,000-

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 CLASSIFICATION as
to RESTRICTION

▪ Donor does not stipulate how the asset should

be used – gift classified as unrestricted

▪ Donor imposes a restriction – gift classified as

temporarily restricted

▪ Others assets may be donated as permanently

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restricted endowments
 ○ A temporary restriction expires when:
• The stipulated time has elapsed
• The stipulated purpose has been fulfilled, or
• The useful life of the donated asset has ended.

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 RECLASSIFICATION

○ Temporarily Restricted - the organization reclassifies a

portion of the temporarily restricted amount each year
as depreciation is recorded.
○ The releasing of donor-imposed restrictions
(reclassification)
○ simultaneous decrease of temporarily restricted net
assets
○ increases unrestricted net assets in order to match the
expenses they support.

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 Contribution of cash restricted for specific use.

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .XX-
Revenues – Temporarily
Restricted Contributions . . . . . . . . . . XX-

Expenses in fulfillment of donor restrictions supported by

restricted resources.

Expense . . . . . . . . . . . . . . . . . . . . . . . . . . XX-
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .XX-

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 Releasing temporarily restricted net assets with a reclassification
entry.

Reclassification Out – Temporarily

Restricted – Satisfaction of Donor
Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XX-
Reclassification In – Unrestricted –
Satisfaction of Donor Restrictions . . . . . . . . . . . XX-

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 5 Net Assets
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 DEFINITION

● Net Assets = Assets -Liabilities

● Funds
● Concept of owners’ equity does not apply
● Instead retained earnings or paid-in capital, FS shows net
assets
● Three categories: unrestricted, temporarily restricted and
permanently restricted.

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 CLASSIFICATION

1. Unrestricted net assets - carry no donor-imposed

stipulations. Used for daily operations
2. Temporarily Restricted Net assets - use is limited by
donor-imposed stipulations. Time restrictions or purpose
restrictions.
3. Permanently Restricted net assets - use is limited by
donor-imposed stipulations; do not expire by time and can’t
be removed by action

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 The net assets section of a nonprofit's statement of financial
position requires at a minimum the following:

Net assets:
Without donor restrictions xxx
With donor restrictions xxx
Total net assets xxx

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 if a nonprofit receives an unrestricted contribution of $800 of
cash:

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 $20,000 with the requirement that the nonprofit use it to
purchase a vehicle that is urgently needed in one of the
nonprofit's programs

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 When the nonprofit purchases the vehicle at a cost of say
$21,000, the purchase and the release of the restriction will
cause the following changes:

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 6 Sample FS
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