ACCOUNTING FOR

NON-PROFIT
ORGANIZATION
 FOUR TYPES OF NOT-FOR-PROFIT
ORGANIZATION

1. The professional Organization

2. The privately organized education
institutions —school, college, university
3. The private organized hospital
4. The cooperative
 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
 Examples of Non-profit
Organization:

• Voluntary health and welfare organizations

• Schools, colleges and universities
• Hospitals
• Cooperatives
• Labor unions
• Performing arts organizations
• Country Clubs
• Professional associations
 Purpose
of Financial
Statements
 PRIMARY PURPOSE
-to provide relevant
information to meet the
common interests of donors,
members, creditors and others
who provide for non-profit
organizations
 What external users assess?

a. The services an organization provides and it's ability to continue

b. Effects or transactions
c. Amount and kinds of inflows and outflows of economic
resouces
d. How an organization obtains and spends cash, it's borrowing
and repayment of borrowing and other factors that may affect
its liquidity
e. Service efforts of the organization
Statement of Financial
Position
-provides relevant information
about the liquidity, financial
flexibility and interrelationships
of an organization's asset and
liabilities
 SEPARATE LINE ITEMS
maybe reported within permanent
restrictions for holding of:

• Assets, donated with stipulations that they may be used

for a specified purpose, be preserved and not be sold

• Assets, donated with stipulations they they be invested to

provide permanent source of income
Statement of Activities

-shows the revenues,

gains and losses
 Provides relevant information
about:

• Effects of transactions
• Relationship of transactions
• How organization's resources are usedin
providing various programs and services
 Statement of Activities helps in:

• Evaluating organization's performance during a period

• Assessing the organization's service efforts and it's ability
to continue providing services
• Assessing how an organization's mangers have
discharged their stewardship responsibilities and other
aspects of their performance
Statement of Cash Flows

-provides relevant information about the

cash receipts and cash payments of an
organisation during a period
-May be direct or indirect
Professional Organization
- more than 40 professional organizations accredited by the
PROFESSIONAL REGULATION COMMISSION
-financed by membership dues that are paid annually.
-Operations atre characterized by having a board of directors
establishing the policies and guidelines based in the vy-laws
which are implemented by means of a set of officers
-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 THAT ARE
COMMONLY ACCOUNTED FOR:
•unrestricted or general
•restricted or special

-Spreadsheet is used to summarize daily transactions in these two types of

assets
-Collections are normally done by chapters and monthly reports are prepared
Educational Institutions
ACTIVITIES
1. Instructional
2. Administrative
3. Auxiliary Services
 6 MAJOR FUND GROUPINGS

• Current Fund
• Load Fund
• Endowment and Other nonexpnadable Fund
• Annuity Fund
• Plant Fund
• Agency Fund
ACCOUNTING FOR
NON-PROFIT
ORGANIZATIONS
-Is essentially "fund accounting"

-Means that the internal accounting for many non-profit

organizations is the fund which isa an accounting entity
with self-balancing set of accounts recording cash and other
financial resources together with related liabilities and
changes therein
 Funds commonly used by non-
profit organizations:
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
 Restricted Fund/
Restricted Current
Fund/ General Fund
-are the receipts of resources that are to be
used in special activities
 Unrestricted
Fund/General Fund/
Current Fund
- also known as general fund 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
ACCOUNTING FOR CASH
CONTRIBUTIONS or
DONATIONS
Cash contributions or
donations
-reported as revenue in the year received
even though there are donor-imposed
used or time restrictions on the donation
Entry to record Cash Contributions
or Donations:
Cash xxxx
Contributions revenue xxxxx
ACCOUNTING FOR "CONTRIBUTED
MATERIALS"

To record the transaction at fair value:

Inventory xxxxx
Contributions revenue. xxxxx
 ACCOUNTING FOR
"CONTRIBUTED SERVICES"
-recognized in the statement of activities if either of the
following conditions is met:

1. The services create or enhance a non financial asset

2. The services require specialized skills, are provided by
individuals possessing those skills and would typically need to
be purchased if not provided by donations
To increase expense and increase unrestricted
revenue:

Salaries expense xxxxxx

Contributions revenue xxxxx
 ACCOUNTING FOR
"CONTRIBUTED FACILITIES"
-recognized at fair value either to an
smasset or expense account

Entry:
Building. xxxxx
Contributions revenue. xxxx
CLASSIFICATION OF EXPENSE
FOR A NON-PROFIT
ORGANIZATION
1. Program Services- organization's activities
that results in the distribution of goods and
services to beneficiaries, customers or
members that fulfills the purpose of the
organization.
2. Supporting Services - other expenses that
include al activities of the organization other
than program
 Life Income Fund- stipulated payments to a named
beneficiary during the beneficiary’s lifetime.

(6) Loan Fund- granting loans to students to satisfy their

school needs.

(7) Plant Fund- established for land, building, and

equipment. 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

• Statement of Financial Position

• Statement of Activities

• Statement of Cash Flows

• Notes to Financial Statements

• Statement of Functional Expenses

 Classifications of Net Assets

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”
Treatment of Re classifications of Net assets

Example: In prior year, a benefactor made a contribution to a

private nonprofit university with the stipulation that the
donation be used for faculty travel during the current year.

• “reclassification” – “net assets released from restrictions”

• negative amount for temporarily restricted net assets and
positive amount for restricted net assets.
• decrease in unrestricted net assets.
• use of the contribution for faculty travel has no effect on
unrestricted net assets at the current year
 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
Endowment and other non
expendable 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 the 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 fund income is limited to
certain objectives. Income is transferred to the appropriate restricted
current fund or to the plant fund.
• Endowments ae 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.
 Transactions related to endowment fund

1.Receipt of cash from donor in establishment of Endowment Fund A,

1,000,000. No restrictions are made as to use of endowment income.
* Cash 1,000,0000
Endowment Fund A balance 1,000,000

2.Receipt of securities from 2 donors in establishment of endowment

Funds B and C. Endowment Fund B- 10,000 shares of X Co. Ordinary
shares, value on the date of transfer 715,000. Endowment fund C- 2,500
shares of Y Co. preference shares, value on the date of transfer- 245,000.
No restrictions are made as to use of endowment income.
*Investment- ordinary shares 715,000
Investment- preference share 245,000
Endowment Fund B balance 715,000
Endowment Fund C balance 245,000
3. Pooling of Endowment Funds A,B,C. Endowment fund balances were
restated in terms of market values of securities as date of pooling as
follows: Ordinary share market value, 750,000 and preference shares
market value 250,000.
* Pooled Cash 1,000,000
Pooled investments- ordinary 750,000
Pooled investments- preference 250,000
Cash 1,000,000
investment- ordinary 715,000
investment- preference 245,000
endowment fund B balance 35,000
endowment fund C balance 5,000

4.Purchases of 900,000 of Z Co. bonds at a price of 105

*Pooled investments- bonds 900,000
Pooled investments- unauthorized bond premium 45,000
Pooled Cash 945, 000
 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 subjects to annuity
agreements, gains on the sale of annuity fund assets,
payments to annuitants and assets transfers.
 NPO University
Endowment and other Nonexpendable Funds
Statement of Financial Position
June 30,200x

ASSETS
Cash 50,000
Due from restricted currents funds 10,000
Pooled cash 317,500
Pooled investments:
ordinary shares 750,000
Bonds 900,000
Unamortized bond premium 2,500 1,692,500
Land 125,000
Buildings 175,000
Less: Accumulated Depreciation 10,000 165,000
Funds held by trustee 400,000
TOTAL ASSETS 2,760,00
 LIABILITIES AND NET ASSETS
Gains and losses on pooled investments 10,0000
Net assets
Unrestricted
Endowment fund A 1,000,000
Endowment fund B 750,000
Endowment fund C 250,000
Endowment fund F 400,000
Total 2,400,000
Restricted
Endowment fund D 300,000
Principal temporarily as endowment Fund E 50,000
Total 2,750,000
TOTAL LIABILITIES AND NET ASSETS 2,760,000
Transaction related to annuity fund
of NPO university

• Receipt of cash of 125,000 subject to condition that 5,000 per year to be

paid to the donor during his lifetime, any balance available for
educational and general purposes.
*Cash 125,000
Annuity net assets 125,000
• Purchase of Securities for 120,000 that includes accrued interest of 2,000
*Investment 118,000
Accrued Interest 2,000
Cash 120,000
• Collections of income for the year ended June
30, 20xx 9,500.
*Cash 9,500
Accrued Interest 2,000
Annuity Net Assets 7,500
• Recognition of Amount payable to annuitant,
5,000
* Annuity net assets 5,000
Due to annuitant 5,000
• Amount becoming available for educational
and General purposes according to annuity
agreements 2,500
*Annuity net assets 2,500
Due to Unrestricted current fund 2,500
 NPO University
Endowment and other Nonexpendable Funds
Statement of Financial Position
June 30,200x
ASSETS
Cash 14,500
Investments 118,000
Total Assets 132,500
LIABILITIES AND NET ASSETS
Due to annuitant 5,000
Due to unrestricted current fund 2,500
Annuity net assets 125,000
Total Liabilities and Net assets 150,750
Transactions related to
that Investment In
Plant Funds of NPO
University:
 7. Agency

When agency operations are:

• simple and limited duration
• involved and continuing
 Agency funds may be established for
pension and retirement resources,
special organization resources, student
deposits, and tax withholding amounts.
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
 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.
1. Charges for services to patients for year
ended December 31, 20B, 580,000 of which
45,000 is still due: adjustments and
allowances of 60,000 apply to charges.

Cash 475,000
Accounts Receivable 45,000
Free serv. and adj-cont. patients 40,000
Free serv. and adj-gen. patients 16,500
Courtesy and misc. allow. 3,500
EFRS-inpatients 320,000
EFRS-outpatients 50,000
EFSS 210,000
 2. Other hospital revenues, 420,000 of
which 10,000 is still due from temporary
fund in reimbursement of research
expenses.
Cash 410,000
Due from temp. fund 10,000
General contribution,
donations, legacies and bequests 180,000
Grants from community
chests, foundations 122,000
Donated serv. and commodities 10,000
Inc. transfers from temp. funds 57,500
Misc. revenues 50,000
 3. Collections of interest and
dividends on endowment funds
securities, 85,000 of which 5,000
is due from endowment fund #1
representing bond premium
amortization.
Cash 85,000
Due from Endow. Fund #1 5,000
Income from inv. 80,000
 4. Expenditures for hospital
supplies, 200,000 of which 25,000
has not been paid.

Inventory supplies 200,000

Cash 175, 000
Vouchers payable 25,000
5. Hospital supplies charged put, 170,000

Administrative and general 5,000

Household and property 10,000
Professional care of patients 15,000
Dietery 120,000
Outpatient and emergency 5,000
Other expenses 15,000
Inventory of supplies 170,000
6. Payment of hospital salaries and
wages, 490,000

Administrative and general 85,000

Household and property 45,000
Prof. care of patients 220,000
Dietery 60,000
Outpatient and emergency 30,000
Other expenses 50,000
Cash 490,000
 7. Payments of interest on mortgage,
60,000 and of installment due on
mortgage carried as liability in the
plant funds, 50,000.

Interest expense 60,000

General fund balance 50,000
Cash 10,000
 8. Adjustments required on
December 31,20B;
• Allowance for uncollectible accounts,
2,500
Bad debts 2,500
Allow. for doubtful acct. 2,500
• Accrued salaries and wages, 5,000
Administrative and general 1,000
Household and property 250
Professional care of patients 1,250
Dietery 750
Outpatient and emergency 250
Other expenses 1,500
Cash 5000
• Charges for depreciation on properties
carried as assets by plant funds,
85,000

Depreciation 85,000
Gen/current fund bal. 85,000

• To recognize amount to be paid to plant

funds equal to depreciation on
properties.
Gen/current fund bal. 85,000
Due to plant funds 85,000
 B. TEMPORARY FUNDS
• Composed of current resources that, while available for current
purposes, are subject to certain limitations in their use
• Temporary funds are identical in nature and functions to the
restricted current funds of the educational institution.
• 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 fund transactions of NPO
Hospital and the entries to summarize
these are listed below:
 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.
 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.
Funds are balanced by two plant fund balances:
1. Investment in plant
2. Reserve for plant improvement and expansion
Entries of Transactions affecting the plant funds of NPO Hospital
 COOPERATIVES
• A cooperative is a business organization owned and operated
by a group of individuals for their mutual benefit
• Cooperatives are defined by the International Co-operative
Alliance's Statement on the Co-operative Identity as
autonomous associations of persons united voluntarily to meet
their common economic, social, and cultural needs and
aspirations through jointly owned and democratically
controlled enterprises.
• also be defined as a business owned and controlled equally by
the people who use its services or by the people who work
there.
A credit cooperative is financial organization owned and operated by its
member with the following objectives:
• to encourage saving among its members
• to create pool of such savings from which loan for productive purpose
may be granted to its member
• to provide related services to its members to maximize the benefit
from such loan.
As a general rule, a good accounting system includes the
following:
1. A well-conceived chart of accounts and general ledger system.
2. Clearly laid out procedures for keeping accounting records
accurate and up to date.
3. Skilled personnel whose primary responsibility is to track, update
and report financial information
4. A sound system for monitoring loan disbursements, collection and
5. Deposit transaction.
6. Appropriate accounting safeguard and control to provide
reasonable assurance that accounting books are complete and accurate.