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Chapter 21:Accounting for Not-for-Profit Organizations
by Jeanne M. David, Ph.D., Univ. of Detroit Mercy
to accompany
Advanced Accounting, 10th editionby Floyd A. Beams, Robin P. Clement,
Joseph H. Anthony, and Suzanne Lowensohn
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Not-for-Profits : Objectives
1. Learn about the four main categories of not-for-profit organizations
2. Differentiate between governmental and nongovernmental not-for-profit organizations.
3. Introduce FASB not-for-profit accounting principles.
4. Apply not-for-profit accounting principles to voluntary health and welfare organizations.
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Objectives (cont.)
5. Apply not-for-profit accounting principles to hospitals and other health care organizations.
6. Apply not-for-profit accounting principles to private not-for-profit colleges and universities.
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1: Categories of NFPs1: Categories of NFPsAccounting for Not-for-Profit Organizations
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Characteristics
Not-for-profit characteristics– Contributions without expected
commensurate returns– Purpose is other than providing goods or
services– Lacks ownership interests
Accounting for not-for-profits– Governmental: follow GASB– Nongovernmental: follow FASB
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Categories of NFPs
1. Voluntary health and welfare2. Hospitals and health care 3. Colleges and universities4. Other not-for-profits
• Churches, museums• Other NFPs are similar to voluntary
health and welfare, without requiring a statement of functional expenses
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2: Governmental and 2: Governmental and Nongovernmental NFPsNongovernmental NFPs
Accounting for Not-for-Profit Organizations
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Governmental NFPs
Governmental not-for-profits are NFPs with– Officers elected or appointed by government– Government can unilaterally dissolve and
assets revert to government– Has power to enact/enforce taxes
Follow GASB
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Nongovernmental NFPs
NFPs that lack the governmental element
Follow FASB
• FASB Statement No. 116– Contributions
• FASB Statement No. 117– Financial statements
• 2007 AICPA Audit and Accounting Guide: Not-for-Profit Organizations
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3: Accounting Principles3: Accounting PrinciplesAccounting for Not-for-Profit Organizations
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Financial Statements
Statement of financial positionStatement of activities
• Replace with "Statement of operations" and "Statement of changes in net assets" for hospitals and health care
Statement of cash flowsStatement of functional expenses
• Required only for voluntary health and welfare organizations
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Net AssetsThree categories
1. Permanently restricted net assets• Asset use is limited• Donor imposed stipulations that do not
expire/ cannot be removed by entity2. Temporarily restricted net assets
• Donor imposed restrictions that expire (time restrictions)
• Can be removed by entity fulfilling stipulations (purpose restrictions)
3. Unrestricted net assets
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Statement of Activities• Changes in net assets shown separately for
– Unrestricted net assets – Temporarily restricted net assets– Permanently restricted net assets
• Revenues and contributions in all three areas• Expenses only in unrestricted net assets• Reclassifications
– Move amounts from temporarily restricted to unrestricted net assets
• Expiration of time restrictions• Fulfillment of purpose restrictions
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Expenses
Expenses are classified into one of two major categories
Program servicesThese are the activities the NFP provides
Examples: Research expense, Educational expense, Food bank expense, Recreational expense
Supporting servicesManagement and general expensesFund-raising expenses
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Contributions
• Contributions of cash • Contribution revenue
• Conditional promise to give • Will be contribution revenue and receivable
when conditions are substantially met• Unconditional promise to give
• Contribution revenue and receivable when pledged, but is temporarily restricted (time)
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Contributions (cont.)• Contributions (cash, pledge, other assets) with
donor imposed restrictions• Contribution revenue as temporarily
restricted (time or purpose) or permanently restricted
• When temporary restriction is met, reclassify temporarily restricted net assets as unrestricted net assets
• Contributions of fixed assets• Temporarily restricted net assets if donor
imposed or board designated as such
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Transfers (Non-contribution)• Exchange transactions: Revenues
– Sales of products or services– "Donations" with gift of same approximate value
• Exchange is unrestricted• Agency transactions
– No revenue or contribution– Increase (decrease) both assets and liabilities
• Gifts in kind– Contribution revenue (restricted or unrestricted)
• Create or enhance nonfinancial assets• Specialized skills that would otherwise have been
purchased
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Other Accounting Issues• Measurement
– Contributions at fair value – Fair value at time of pledge
• Don't recognize increases• Decreases change net assets
• Collections (art work, historical treasures)– Capitalization encouraged
• Contributions are revenues• Fund accounting
– Not required– Fund financial statements may be presented as supplemental
information
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4: Voluntary Health and Welfare4: Voluntary Health and WelfareAccounting for Not-for-Profit Organizations
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Fund Raising
• Pay general fund raising expenses• Special event fund raisers (two entries)
– Receive $1,950 in contributions: gains– Pay fund raising costs of special event $250
• Special events are disclosed net of costs• Therefore, the term "gain," not revenue
Expenses - supporting services - fund raising 145 Cash 145
Cash 1,950
Unrestricted gains – special event 1,950
Unrestricted gains – special event 250
Cash 250
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Cash Donations and Pledges
• Receive cash and pledge (no purpose restrictions)– Cash is unrestricted– $1,800 of $6,000 pledges are to be collected next year: creates a
time restrictionSupport – contributions (restricted or not) is revenue
– Revenue accounts are closed to net assets (temporarily, permanently or unrestricted)
Cash 4,000 Contributions receivable 6,000
Allowance for uncollectibles 600 Unrestricted support – contributions 7,600 Temporarily restricted support - contributions 1,800
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Collect a Time-Restricted Pledge
• Two entries• Cash collection• Reclassification for expiration of time
restrictionReclassification accounts are temporary accounts
closed to their respective net asset accounts
Cash 1,800
Contributions receivable 1,800
Temporarily restricted net asset - reclassification out 1,800
Unrestricted net assets - reclassification in 1,800
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Receive Equipment and Use It
• Contribution of equipment is temporarily restricted (in the sense that it gets used up)
• As depreciation is recorded, net assets are reclassified from temporarily restricted to unrestricted
Equipment 1,500 Temporarily restricted net assets – contributions 1,500
Depreciation expense - program services - community service 500
Accumulated depreciation – equipment 500 Temporarily restricted net asset - reclassification out 500
Unrestricted net assets - reclassification in 500
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Receive Cash with Purpose Restriction
• Receive cash for research• Pay research costs – fulfills purpose restriction
– Two entries: record expenses, reclassify net assets
If cash was for buying equipment, reclassify as it is depreciated
Cash 1,000 Temporarily restricted support – contributions 1,000
Expenses - program services – research 900 Cash 900
Temporarily restricted net asset - reclassification out 900
Unrestricted net assets - reclassification in 900
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• Accounting, specialized services that would have to be purchased: record as both expense and revenue
• Services of general labor (non-specialized) that result in nonfinancial assets: record asset and revenue
Services of other general labor (door-to-door collections): not recorded
Expenses - support services - management and general 500
Unrestricted support - donated services 500
Construction in process 1,200
Unrestricted support - donated services 1,200
Receive Donated Services
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Statement of Financial Position
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Statement of Activities
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Statement of Activities (cont.)
• Changes in unrestricted net assets: revenues, increases from reclassifications, and all expenses
• Changes in temporarily restricted net assets: revenues and resources released and reclassified to unrestricted
• Changes in permanently restricted net assets: revenues
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Statement of Cash Flows
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Statement of Functional ExpensesExpenses as reported on
the Statement
of Activities
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5: Hospitals and Other Health Care5: Hospitals and Other Health CareAccounting for Not-for-Profit Organizations
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Hospitals and Health Care
• Applies to nongovernmental, not-for-profit hospitals and health care agencies
• Governmental: GASB• Private, for-profit: FASB as for businesses
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Revenues and Other ReceiptsUnrestricted:• Patient revenues is net of
– Courtesy discounts– Contractual adjustments
• Premium (subscriber or capitation) fees• Other operating revenue, tuition, cafeteria, gift shops, in-
room TV/phone• Non-operating gains, gifts and bequestsTemporarily or Permanently restricted:• "T" or "P" restricted support, donated assets, investments,
gifts, bequests
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Hospital Expenses
Classify by function– Nursing services expense– Other professional expense– General services– Fiscal services– Administrative services– Medical malpractice costs– Provision for bad debts– Depreciation expense
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Patient Revenue
• The full amount is charged to the patient bill• Upon approval, the bill is reduced for courtesy
discounts and contractual adjustments• Contra-revenue accounts
• Uncollectibles are estimated and written off as needed, like businesses
Patient accounts receivable 1,300 Patient service revenues – unrestricted 1,300
Courtesy discounts 9 Contractual adjustments 300
Patient accounts receivable 309 Provision for bad debts 26
Allowance for uncollectibles 26
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Cash Contributions
• Cash contributions can be unrestricted, temporarily or permanently restricted
• "Support" accounts are revenues/gains• When cash restricted for nursing services is spent in
that manner• Reclassify net assets as unrestricted
Cash 275 Unrestricted support - nonoperating gains 25 Temporarily restricted support 250
Nursing services expense 250 Cash 250
Temporarily restricted net asset - reclassification out 250
Unrestricted net assets - reclassification in 250
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• Donated supplies are unrestricted support• Record as inventory and expense as used
• Donated specialized services that would otherwise be purchased
• Record as both expense and revenue
Nursing services expense will be the full cost of running the hospital whether services are donated or purchased. The
donated services are clearly definable.
Inventory of materials and supplies 130
Unrestricted support - donated supplies 130
Nursing services expenses 70
Unrestricted support - donated services 70
Receive Donated Assets/Services
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Hospital Statements• Statement of net assets• Statement of operations• Statement of changes in net assets• Statement of cash flows
The NPF "Statement of activities" includes changes to unrestricted, temporarily and permanently restricted net assets
The Hospital's "Statement of Operations" and "Statement of changes in net assets" together, provide that information
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Statement of Operations: Hospital
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Statement of Changes in Net Assets: Hospital
• Shows the net changes in unrestricted net assets from the Statement of operations
• Shows the details on temporarily and permanently restricted net assets
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6: Colleges and Universities6: Colleges and UniversitiesAccounting for Not-for-Profit Organizations
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Colleges and Universities
• Applies to nongovernmental, not-for-profit colleges and universities
• Governmental: GASB• Private, for-profit: FASB as for businesses
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Tuition and ScholarshipsTuition and fees: revenue at gross amount• Tuition waivers: contra revenueReported tuition revenue is reduced by employee
discounts and non-employment fellowships
Scholarships• From outside sources: collect the account
receivable from the donor• Awarded by the college itself: reduce accounts
receivable and record "Expenses – Educational and general – student aid"
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College Expenses
Expenses are only in the unrestricted net assetsClassify by function:
– Instruction expense– Research expense– Public service expense– Academic support– Student services– Institutional support– Operation and maintenance of plant– Student aid
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Tuition Revenues
• Tuition is recorded at gross amount• Tuition waivers are contra-revenues
• Bad debts are recorded as for businesses• Grouped with institutional support expenses
Accounts receivable 1,000 Unrestricted revenues - tuition and fees 1,000
Tuition reduction: unrestricted - student aid 50 Accounts receivable 50
Expenses - educational and general - institutional support 30
Allowance for uncollectibles 30
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Receive Appropriations
• Appropriations received from governments and other sources are support revenue– Unrestricted
• For general operations• College board has ability to designate as
unrestricted– Restricted
• Temporary or permanently restricted
Cash 700
Unrestricted support - state appropriation 700
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Funds Held for Students
• Receive cash that is to be distributed to students– Grant funds held for students is a liability
• Distribute cash to appropriate students
If some of those funds are applied to student accounts, the second entry would credit accounts receivable rather than cash.
Cash 150
Grant funds held for students 150
Grant funds held for students 150
Cash 150
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Endowments
• Receive cash for permanent endowment, with income restricted to student aid
• Receive income on endowment• Classify as temporarily restricted
• Spend cash on student aid• Reclassify net assets
Cash 50 Permanently restricted support - endowment contribution 50
Cash 4 Temporarily restricted support - endowment income 4
Expenses - unrestricted - student aid 3 Cash 3
Temporarily restricted net assets - reclassifications out 3 Unrestricted net assets - reclassifications in 3
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Auxiliary Services
• Auxiliary services: residence halls, food services, intercollegiate athletics
• Unrestricted revenues and expenses• Statement of activities: total revenues and total
expenses for auxiliary services• Subsidiary records are maintained
Cash 61
Revenues - auxiliary enterprises 61
Expenses - auxiliary enterprises 28
Cash 28
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Statement of Activities: College
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State. of Activities: College (cont.)
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