Professional Documents
Culture Documents
This chapter will focus upon for four types of not-for-profit / service organizations, namely:
1. The professional organization
2. The privately organized education institutions – school, college, university
3. The private organized hospital; and
d. How an organization obtains and spends cash, its borrowing and repayment of
borrowing and other factors that may affects its liquidity
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, be preserved 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:
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
b. assess an organization’s service efforts and its ability to continue provide services, and
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
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
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
4. Annuity funds
5. Plant funds, divided into unexpended plant funds, retirement of indebtedness funds
and an investment in plant section
6. Agency fund
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.
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
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.
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.
• 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
Contributed services are recognized in the statement of activities if either of the following
conditions is met:
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.
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:
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.
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.
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”.
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.
• 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
• 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.
1. Statement of Financial Position – reports that “ assets should equal liabilities and
net assets”
- 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.
2. Temporarily restricted net asset – assets in the restricted fund, loan fund, term
endowment fund, annuity fund, life income fund and plant fund.
• 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.
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.
• 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”.
• 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.
2. Investing activities – includes cash flows from acquisition and disposal of property,
plant and equipment, investments, and other long-term assets.
XXX Organization
Statement of Financial Position
December 31, 20x1 and 20x2
(In thousands)
ASSETS 20X1 20X2
Cash and cash equivalent P xxx P xxx
Receivables xxx xxx
Inventories and prepaid expenses xxx xxx
Assets restricted to investment in building and equipment xxx xxx
Land, building and equipment xxx xxx
TOTAL ASSETS P XXX P XXX
STATEMENT OF ACTIVITIES
XXX Organization
Statement of Activities
For the year ended December 31, 2ox1
Temporarily Permanently
Unrestricted Restricted Restricted Total
Revenues, gains and other support:
Contributions P xxx P xxx P xxx P xxx
Fees xxx xxx
Total P xxx P xxx
Expenses and losses
Program A P xxx P xxx
XXX Organization
Statement of Cash Flow
For the year ended December 31, 20X1
LOAN FUNDS
Resources are balanced by the account Loan Fund Balance/ Loan Fund Net Assets.
Note: The Accounts are hypothetical In nature to illustrate the entries.
NPO University
Loan Fund
Statement of Financial Position
June 30, 20B
ASSETS
Cash P13,550
Investments 25,000
Notes Receivable 12,200
TOTAL ASSETS P 50,750
NPO University
Loan Fund
Statement of Activities
For the year ended June 30, 20B
Revenues:
Interest on investments P900
Interest on loans 150 1,050
Less: Expenses/ losses:
Uncollectible loans written 300
off P 750
Excess of revenue over
expenses
NPO University
Endowment and Other Nonexpendable Funds
Statement of Financial Position
June 30, 20B
ASSETS
Cash P 50,000
Due from restricted current funds 10,000
Pooled cash 317,500
Pooled investments:
Ordinary shares P 750,000
Bonds 900,000
Unamortized bond premium 2, 1,692,500
500
Land 125,000
Buildings P 175,000
Less: Accumulated depreciation 10,000 165,000
Fund held by trustee 400,0
1. Receipt of cash of P125,000 subject to condition that P5,000 per year be paid to the
donor during his lifetime, any balance available for educational and general purposes.
Account Titles Debit Credit
Cash 125,000
Annuity net assets 125,000
3. Collections of income for the year ended June 30, 20B, P9,500.
Account Titles Debit Credit
Cash 9,500
Accrued interest 2,000
Annuity net assets 7,500
NPO University
Annuity Fund
Statement of Financial Position
June 30, 20B
ASSETS
Cash P 14,500
Investments 118,000
TOTAL ASSETS P132,500
LIABILITIES AND NET ASSETS
Due to annuitant P5,000
Due to unrestricted current fund 2,500
Annuity net assets 125,000
TOTAL LIABILITIES AND NET ASSETS P 50,750
NPO University
Annuity Fund
Statement of Charges in Equity
For the year ended June 30, 20B
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.
1. Receipt of gift of land, buildings, and equipment for educational and general purposes
valued at P4,000,000; properties are subject to mortgage for P1,000,000.
Land 850,000
Improvements other than buildings 150,000
Buildings 2,500,000
Equipment 500,000
Mortgage payable 1,000,000
Investment in plant- from gifts 3,000,000
2. Addition to buildings financed by gifts reported in unexpected plant funds, P85,000.
Buildings 85,000
Investment in plant- from gifts 85,000
3. Issue of bonds to be used for construction of buildings, P1,500,000
Buildings to be acquired 1,500,000
Bonds payable 1,500,000
4. Completion of buildings financed by bond issue
Buildings 1,500,000
Buildings to be acquired 1,500,000
5. Payment by retirement of indebtedness funds of current installment due on mortgage,
P25,000
Mortgage payable 25,000
Investment in plant- from current funds 25,000
6. Acquisition by general current fund of equipment, P15,000
Equipment 15,000
Investment in plant- from current funds 15,000
7. Acquisition by endowment fund of a dormitory valued at P300,000
Land 125,000
Buildings 175,000
Investment in plant- from endowments 300,000
8. To record depreciation on buildings represented by endowment, P10,000
Investment in plant- endowments 10,000
Accumulated depreciation 10,000
9. Retirement of equipment carried at P5,000
Investment in plant- from gifts 5,000
Equipment 5,000
ASSETS
Unexpended Plant Funds:
Cash P 15,750
Investments 30,000 P 45,750
Retirement of indebtedness funds:
Cash 75,000
Invested in Plant:
Land P975,000
Improvements other than 150,000
Buildings P4,260,000
Buildings 10,000 4,250,000
Less: Accum. Depreciation 510,000
Equipment P5,885,000
Total 290,000 5,595,00
Less: Items carried in Endowment 0
funds P
TOTAL ASSETS 5,715,750
7. Agency
- 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
- major activities center about inpatients, but frequently render outpatient care and
emergency services
hospital staffing
food
accounting
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.
- Accounting for hospitals are similar to educational institutions that acquires a revenues
that must be applied to specific objectives.
- 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
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
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.
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.
1. Charges for services to patients for year ended December 31,20B,P580000 of which
P45000 is still due: adjustments and allowances of P60000 apply to charges.
Cash P475000
Accounts Receivable 45000
Free service and adjustment-contractual patients 40000
Free service and adjustment-general patients 16500
Courtesy and miscellaneous allowances 3500
Earnings from routine services-inpatients P320000
Earnings from routine services-outpatients 50000
Earnings from special services 210000
2. Other hospital revenues, P420000 of which P10000 is still due from temporary fund in
reimbursement of research expenses.
Cash P410000
Due from temporary fund 10000
General contribution, donations, legacies P180000
and bequests
Grants from community chests, 122000
foundations
Donated services and commodities 10,000
Income transfers from temporary funds 57,500
Miscellaneous revenues 50,000
4. Expenditures for hospital supplies, P200000 of which P25 has not been paid.
Depreciation P85000
General or current fund balance P85000
10. To close general operating revenue and expenses accounts at the end of the period.
11. To close other revenue and expenses accounts at the end of the period.
*In considering the presentation of hospital revenues for statement purposes, the following
classifications are used;
revenue sources
dietery
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:
Cash P23500
Temporary fund A balance 1500
Temporary investment -fund A P25000
5. Collections of interest and dividends
Cash P5000
Temporary fund A balance P5000
6. Expenditures during year by general fund for research chargeable to temporary fund A,
P50000; cash transferred to general fund, P40000.
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.
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.
Cash P250000
Endowment fund #1 balance P250000
3. Purchase of 1000 shares of Co.T preference shares, P240000.
Cash P250000
Investments-unamortized bond discount (Endowment 15000
fund #1)
Investments-at bonds at fair value(Endowment fund P250000
#1)
Endowment fund #1 balance 15000
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
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.
1. Investment in plant
Transactions affecting the plant funds of NPO Hospital and the entries to record these
transactions are shown below:
1. Acquisition of land construction of hospital financed by gifts of cash, P1500000 and cash
raised through a mortgage, P1000000.
Land P250000
Building 1750000
Equipment 500000
Mortgage Payable 1000000
Investment in Plant 1500000
2. Receipt of gifts of cash of P50000 and securities valued at P100000 for plant improvement
and replacements
Cash P50000
Investments 100000
Reserve for plant improvement and replacements P150000
3. Acquisition of equipment, P30000 mortgage, P1000000.
Equipment P30000
Investment in Plant P30000
4. Payment by general fund of mortgage installment, P50000.
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 accounts, 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.
COOPERATIVES
A credit cooperative is financial organization owned and operated by its member with the
following objectives:
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.
Current accounting policies and procedures adopted by credit cooperatives were used
as basis in development of this manual. Key officers of cooperatives were interviewed and
financial statements and relevant reference materials were gathered from organizations
during capacity building for cooperatives.
2. Clearly laid out procedures for keeping accounting records accurate and up to date.
5. Deposit transaction.
1. Separate Enterprise
Each cooperative is a separate business enterprise requiring the maintenance of
comprehensive accounting records and financial reporting practices to provide meaningful
information to members, officers, directors and audit committee of cooperative, government
agencies, the apex organization and other interested third parties.
2. "Going Concern" Concept
Each credit cooperative should normally maintain its account s as "going concern: on
the basis that its operation will continue definitely. Therefore , Assets and liabilities should be
presented in the financial statement at historical cost and not as liquidation value.
3. Monetary Basis of Accounting
Financial Statements in the Philippines are expressed in terms of Philippine Peso (Php),
hence, accounts of credit cooperative should be stated in peso amounts involve at the time
the transaction occur
4. Consistency in Accounting Practice From Period to Period.
Consistent accounting practices should be followed by each cooperative from one
accounting period to the next.
5. Timely Recognition in Accounting Records
Accounting record should be recorded on a timely basis so that all material information
applicable to each accounting period will be shown in the record. To properly recognize in
accounting record and financial reports the reasonable value of assets, liabilities, equity
revenues and expenses, each credit cooperative should make provision for losses that may
be sustained I the collection or conversion of loans and other assets by charge against current
operation.
6. Materiality
Material fact relating to the credit cooperative's activity must be recognize in the
accounts of said cooperative and reports in its financial statements. A statement, fact or item
is material if, fiving full consideration to the surrounding circumstances as they exist at the
time, it is of such a nature that its disclosure would likely influence or "make a difference" in
the judgment and conduct of a reasonable person.
7. Principle of Disclosure
This accounting principle requires that the members of the cooperative and other users
of the financial statements should be informed of material and relevant information about
economic and financial affair of the cooperative. This can be done either in the financial
statements or in the notes that company the statements of supplementary schedules and
other presentation. Full disclosure requires reporting of all facts that can make a difference in
the decision of the users and that the accounting information reported must be
understandable and not susceptible to misinterpretation. Such disclosure makes the financial
statements more relevant and useful and less subject to misinterpretation.
Adequate information to be disclosed in the financial statements may not be
presented in detail provided that important and relevant facts are revealed and made clear.
The full-disclosure principle requires the financial report to give more emphasis to substance
over form. This means that the substance should not be made less clear or hidden.
g. plan
h. Significant events affecting financial position, including major contracts for sale
of services and pending legislation which mat affect significantly the
operations of the cooperative
i. Other materials and significant events which will occur after the end of
accounting period and before the financial statements are released and which
are relevant to users.
8. Principle of Conservatism
Each credit cooperative should maintain its accounting records on a conservative basis.
It should make reasonable provision in the accounts for probable losses on assets and for the
settlement of liabilities. It should not materially overstate nor understate its asset, liabilities,
revenues or expenses.
9. Accounting Basis
Modified Cash Basis is the prescribed accounting basis for a cooperative. This is a
combination of cash basis of accounting and accrual basis of accounting. Under the modified
cash basis, the accounting is based on actual receipt s and disbursements of the credit
cooperative except that provision should be made to reflect:
a. Liabilities which are not paid when due;
b. Unpaid interest on share capital and patronage refund applicable to the accounting
period;
c. Deferred credits and charges that are applicable to future periods;
d. Estimated losses on loans outstanding and other risk assets; and
e. The depreciation of property and equipment