Chapter 21:Accounting for Notfor-Profit Organizations

by Jeanne M. David, Ph.D., Univ. of Detroit Mercy

to accompany
Advanced Accounting, 10th edition
by 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-forprofit 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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Accounting for Not-for-Profit Organizations

1: Categories of NFPs

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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.
2.
3.
4.

Voluntary health and welfare

Hospitals and health care
Colleges and universities
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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Accounting for Not-for-Profit Organizations

2: Governmental and
Nongovernmental NFPs
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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-forProfit Organizations

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Accounting for Not-for-Profit Organizations

3: Accounting Principles

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Financial Statements
Statement of financial position
Statement of activities
Replace with "Statement of operations" and
"Statement of changes in net assets" for
hospitals and health care
Statement of cash flows
Statement of functional expenses
Required only for voluntary health and
welfare organizations
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Net Assets
Three categories
1. Permanently restricted net assets
Asset use is limited
Donor imposed stipulations that do not
expire/ cannot be removed by entity
2. 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 services
These are the activities the NFP provides
Examples: Research expense, Educational expense,
Food bank expense, Recreational expense
Supporting services
Management and general expenses
Fund-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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Accounting for Not-for-Profit Organizations

4: Voluntary Health and Welfare

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Fund Raising
Expenses - supporting services - fund raising

145

Cash
Cash

145
1,950

Unrestricted gains special event

Unrestricted gains special event

1,950
250

Pay general fund raising expenses

Cash
250
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
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Cash Donations and Pledges

Cash

4,000

Contributions receivable

6,000

Allowance for uncollectibles

Unrestricted support contributions

600
7,600

Temporarily
supportrestrictions)
Receive
cash and restricted
pledge (no purpose
1,800
contributions
Cash is unrestricted
$1,800 of $6,000 pledges are to be collected next year: creates a time
restriction
Support contributions (restricted or not) is revenue
Revenue accounts are closed to net assets (temporarily, permanently or
unrestricted)

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Collect a Time-Restricted Pledge

Cash

1,800

Contributions receivable

1,800

Temporarily restricted net asset - reclassification

out
1,800
Unrestricted net assets - reclassification in

1,800

Two entries
Cash collection
Reclassification for expiration of time
restriction
Reclassification accounts are temporary accounts
closed to their respective net asset accounts
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Receive Equipment and Use It

Equipment

1,500

Temporarily restricted net assets

contributions
Depreciation expense - program services community service

1,500
500

Accumulated depreciation equipment

Temporarily restricted net asset reclassification out

500
500

Contribution of equipment is temporarily

Unrestricted(in
netthe
assets
- reclassification
in up)
restricted
sense
that it gets used
As depreciation is recorded, net assets are
reclassified from temporarily restricted to
unrestricted
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500

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Receive Cash with Purpose

Restriction
Cash

1,000

Temporarily restricted support

contributions
Expenses - program services research

1,000
900

Cash
Temporarily restricted net asset reclassification out

900
900

Receive cash for research

Unrestricted net assets - reclassification in
Pay
research costs fulfills purpose restriction900
Two entries: record expenses, reclassify net
assets
If cash was for buying equipment, reclassify as it is
depreciated
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Receive Donated Services

Expenses - support services - management
and general

500

Unrestricted support - donated services

Construction in process

500
1,200

Unrestricted support - donated services

1,200
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
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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 Expenses

Expenses as
reported on
the
Statement
of Activities

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Accounting for Not-for-Profit Organizations

5: Hospitals and Other Health Care

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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 Receipts

Unrestricted:
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 bequests
Temporarily 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
Patient accounts receivable

1,300

Patient service revenues unrestricted

Courtesy discounts
Contractual adjustments
Patient accounts receivable

1,300
9
300
309

bad debts
Provision
The fullfor
amount
is charged to the patient bill 26
Upon for
Allowance
uncollectibles
approval,
the bill is reduced for courtesy 26
discounts and contractual adjustments
Contra-revenue accounts
Uncollectibles are estimated and written off as needed,
like businesses
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Cash Contributions
Cash

275

Unrestricted support - nonoperating gains

25

Temporarily restricted support

Nursing services expense
Cash

250
250
250

Temporarily restricted net asset out

250
reclassification
Cash contributions
can be unrestricted, temporarily
or
permanently
restricted
Unrestricted net
assets - reclassification in
250
"Support" accounts are revenues/gains
When cash restricted for nursing services is spent in
that manner
Reclassify net assets as unrestricted
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Receive Donated Assets/Services

Inventory of materials and supplies

130

Unrestricted support - donated supplies

Nursing services expenses

130
70

Unrestricted support - donated services

70

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.
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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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Accounting for Not-for-Profit Organizations

6: Colleges and Universities

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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 Scholarships

Tuition and fees: revenue at gross amount
Tuition waivers: contra revenue
Reported 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 assets
Classify 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
Accounts receivable

1,000

Unrestricted revenues - tuition and fees

Tuition reduction: unrestricted - student aid

1,000
50

Accounts receivable
Expenses - educational and general institutional support

50
30

Tuition
is recorded
at gross amount
Allowance
for uncollectibles
30
Tuition waivers are contra-revenues
Bad debts are recorded as for businesses
Grouped with institutional support expenses
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Receive Appropriations
Cash
Unrestricted support - state appropriation

700
700

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
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Funds Held for Students

Cash

150

Grant funds held for students

Grant funds held for students
Cash

150
150
150

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.
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Endowments
Cash

50

Permanently restricted support - endowment

contribution
Cash

50
4

Temporarily restricted support - endowment income

Expenses - unrestricted - student aid

4
3

Cash
net assets
- reclassifications
out
Temporarily
Receiverestricted
cash for
permanent
endowment,
with3
income
restricted
student aid in
Unrestricted
net assetsto
- reclassifications
Receive income on endowment
Classify as temporarily restricted
Spend cash on student aid
Reclassify net assets
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3

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Auxiliary Services
Cash

61

Revenues - auxiliary enterprises

Expenses - auxiliary enterprises
Cash

61
28
28

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
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Statement
of
Activities:
College

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State. of Activities: College (cont.)

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Printed in the United States of America.

Copyright 2009 Pearson Education, Inc.

Publishing as Prentice Hall
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